President’s Message: The Death Knell of Retail Real Estate Is Exaggerated

I am sure you have all read attention-grabbing news headlines such as these and share the same concerns regarding the future of retail real estate. In this new era of constant access to millions of digital media streams, dramatic headlines cut through the clutter and generate more attention. Drama sells. But despite all the negativity circulating, I am confident that the retail landscape is solid, and the death knell of brick-and-mortar stores is heavily exaggerated.

While there is no question that technology has disrupted the retail business via e-commerce, mobile devices, virtual shopping, etc., physical stores continue to dominate retail sales. Research shows that 78% of consumers prefer to shop in store and spend significantly more per month in a physical store than online. E-commerce, multiple fulfillment options, omnichannel retailing, and other technological advances are improving the brick-and-mortar shopping experience and boosting sales at physical stores.

Even though e-commerce sales are growing significantly (approximately 15% annually), the in-store vs. online struggle is not quite the battle that it is portrayed to be. E-commerce sales—combined with mail-order sales—account for less than 10% of total retail sales. Furthermore, it is estimated that over half of online sales actually go to brick-and-mortar retailers. Consumers are still buying from stores, but now they have more choices to compare prices, make transactions, and receive their goods. Major retailers such as Anthropologie and Nordstrom are effectively leveraging e-commerce sales to grow their business. Anthropologie notes that 36% of its total revenue is earned online and Nordstrom reports 22%. Successful retailers are learning to integrate online sales and omnichannel retailing.

However, in every industry, there will always be winners and losers. Companies must adapt to an evolving business climate. That includes retailers. Competition and shifting customer habits are hurting more merchants than the internet, and innovative new retail concepts are coming to market daily. Unfortunately, corporations like Blockbuster, Sports Authority, and The Limited did not survive the ever-changing retail industry. But on the flipside, stores such as Best Buy, Dollar General, Ross Dress For Less, TJX Cos. (T.J.Maxx, Marshalls, HomeGoods), ULTA Beauty, and countless others—most of which are in Stirling Properties’ portfolio—are all flourishing and rapidly expanding their physical presence. New-to-market retailers like Filson, Iron & Resin, KENZO, and Woolrich are getting in on the action. Even online retail-giant, Amazon, has taken note of the power of physical stores and rolled out brick-and-mortar expansion plans. Many other merchants with digital roots have followed the same path (i.e. “clicks-to-bricks”), such as Warby Parker, Fabletics, and Bonobos.

Similarly, there will be winners and losers as retail real estate investors and owners. Well located, solidly anchored centers are thriving, while Class-B and -C malls and poorly located centers are continually losing national tenants, struggling to fill empty spaces, and downsizing significantly. Some are failing altogether.

The bottom line is that consumer patterns and expectations have shifted. In this so-called “era of the high-maintenance consumer,” they demand value, convenience, multi-channel fulfillment options, and a unique, entertaining experience.

Well-located retail real estate with strong anchors is still a profitable investment option. Net absorption has been high, demand has been exceeding supply, and rents have been rising. Retail is yielding the best 20-year return of any property type due to a combination of strong fundamentals, favorable demographics, limited new supply, and cash flow growth potential. Secondary and tertiary markets are proving to be especially attractive for investors to buy value-add retail opportunities.

Retail real estate is not dying; it’s disrupted. Anyone with any involvement in the industry must embrace this changing landscape to be successful. We will continue to hear negative news and over-exaggerated headlines as the retail race endures, and more stores announce weak sales forecasts and closures. But disruption creates opportunity and a chance for reinvention. At Stirling Properties, we plan to take advantage of these opportunities to re-evaluate and enhance our portfolio and strategic growth plans.

We must ALL adapt and deliver…or get left behind!

-Marty