Retail market space is starting to find new footing in a landscape that’s quickly changing and shifting according to the dictates of online shopping. Some categories are finding firmer, higher ground, while others are slowly but surely getting pushed aside altogether. The Washington D.C.-based National Retail Federation tells us retail sales grew 4% in November and December this year over last, while online shopping for the 2016 Holiday season experienced healthy growth with an increase of 12.6% over last year. There’s positive signs for brick and mortar stores, but all signs point away from unchecked optimism. For example, demand for space remains strong, but there’s little new supply lined up to meet this demand anytime soon.
The cloudy future of retail space is borne out by a number of compelling trends, outlined by Shaun McCutcheon in his article, “Six Trends Driving Changes in U.S. Retail”. Here, we get some valuable insight into what’s driving retail, and what it means for commercial real estate.
1. Behind in Construction, Demand Exceeds Supply
Deliveries of new-construction retail space were at historical lows during the 2010s, and remains below the 30-year average in many major U.S. markets. Unlike the lead-up to the Great Recession, absorption of existing vacancies is now surpassing deliveries in most markets.
2. Low Vacancy, But Stable or Rising Rents
Vacancy rates may be decreasing but lease rates are stable in most markets. The exception lies in more expensive coastal metro areas, where rent is climbing.
3. Growing Appetite for the Dining and Health Category
This includes fast food with drive-through and informal counter service, food stores, including health food markets, specialty/ethnic markets, and supermarkets as well as and gyms/specialty fitness facilities.
4. Department Stores on the Decline
Some traditional retail mainstays are having a tough time of things. In 2016, Sport Chalet and Sports Authority both filed bankruptcy, closing a combined 490 stores. Macy’s plans to close 68 of its 750 department stores in 2017 and Kmart/Sears plans to close 150 stores in the near term as select storefronts undergo a real estate liquidation process. Some of these spaces will be added to the real estate inventory and reabsorbed by other retailers, while others will need to be redeveloped and reimagined for new uses.
5. Big-box That Thrives
Some big-box retailers are going where online competition can’t. Best Buy is price-matching their products and focusing on big-ticket household appliances that can’t be shipped from an online retailer quickly or inexpensively. Dick’s Sporting Goods, Cabela’s, and Bass Pro Shops are offering product demonstrations and interactive/virtual-reality experiences online shopping can’t. After forever changing the traditional retail landscape, Amazon is entering the brick-and-mortar world with Amazon Books stores in select markets like Seattle; Portland, San Diego and Chicago. Amazon has plans for eight more of these stores.
These trends highlight the fast and furious pace of change faced by retailers and commercial developers today. There’s lots of bright spots out there, but you have to keep your head on a swivel. Move too slow, and it’s easy to get left behind.