The jump from brick-and-mortar retail to e-commerce has affected the shopping industry in a number of ways. Not only have shopping malls been closing across the country at a record rate, big-box retailers have also been challenged with coming up with new and creative ways to keep traditional shoppers coming back to brick-and-mortar stores.
With companies like Amazon promising same and next-day delivery for all of your shopping needs, it’s no surprise that online sales growth was nearly 7.5x greater than total retail growth in 2016. Because of this, few people predicted that physical retail shopping would make a comeback in 2017 like it has. This begs the question, why are Americans opting for an in-person shopping experience when online retail provides 24-hour access to everything they need?
For starters, many people want instant gratification over convenience. Even when the introduction of Amazon’s fulfillment centers promise speedy delivery, sometimes even on the same day, a lot of people would still prefer to walk into a store and leave 30 minutes later with their purchased item. When RetailDIVE recently conducted a 1,425-person survey on online and physical shopping, they found that 49% of consumers want instant gratification over next-day delivery. They also found that 62% of shoppers prefer the shopping experience over shopping from home.
While this is great for the retail market, how does it affect commercial real estate as a whole?
The surge in online shopping has created a boom in industrial and warehousing properties across the country, especially when fulfillment centers started popping up outside major cities. As brick-and-mortar stores continue to adapt and expand into the online market, we could expect to see a new property type emerge that combines industrial and retail spaces. This means that stores can act as their own fulfillment centers, storing and shipping out products in the warehouse portion of the shop. And with the demand for shopping centers steadily waning over time, this could prove to be a successful move for current investors and owners in the retail sector.
If there’s one city that has been able to prosper from brick-and-mortar retail, it’s Philadelphia. With Market East boasting a 25% rent growth and Walnut Street pushing just over 11%, it’s safe to say that in-person shopping is taking off in the City of Brotherly Love. Alternatively, popular shopping spots in Manhattan like Upper Fifth Ave, Madison Ave, and Times Square all have negative rent growth by 8%.
As physical retail becomes fashionable again, we should be able to see rent growth increase in major retail corridors across the United States. At the moment, only about half of these shopping districts are experiencing significant rent growth, but that may change as brick-and-mortar sales increase over the next couple of quarters.
Despite all of the coverage predicting the death of traditional retail, brick-and-mortar stores aren’t going anywhere. In fact, there have been more retail stores that opened than closed in 2017. If that’s not proof enough, consider this: retail sales have brought in more than $121 billion from January to July this year. What is important to consider when investing in retail is the type of retail. While specialty retailers are closing down, probably due to competition with online shopping, grocery, convenience stores, and dollar stores are some of the fastest growing retail properties in the country.
As long as instant gratification continues to influence customers’ purchasing decisions, there will continue to be a demand for retail properties.