An argument could be made that there is no commercial real estate product type with a higher degree of uncertainty than retail CRE. Retail real estate will likely experience a significant evolution as it responds to ever-evolving consumer shopping patterns and preferences. Everyone from landlords to investors to lenders find themselves asking:
With the majority of consumers still reeling from the effects of the “Great Recession,” many find themselves cutting back on non-essential and luxury expenditures. This trend is evidenced by retailers such as Circuit City, which declared bankruptcy in 2008, and Zale Corporation, which has failed to earn a profit since 2008. Not all retailers, however, have been adversely affected by consumer deleveraging. In fact, many retail tenants are benefiting from consumers “trading-down” such as opting for a night at the movies rather than a night out on the town and such as going to the grocery store rather than eating at a restaurant. Grocers such as Whole Foods, Trader Joe’s, and Aldi and entertainment venues such as Alamo Drafthouse and Dave & Busters have expanded since the recent economic downturn.
How will “brick & mortar” retailers respond to e-commerce’s ever-increasing market share?
It is not completely fair to pin Circuit City’s demise solely on consumer deleveraging. The electronics sector has been among the hardest hit by the rise of e-commerce. Consumer frugality has only accelerated this trend. The old cliché has been that Best Buy is Amazon’s showroom, but Best Buy has regained some of its e-commerce market share, posting $1.3 billion in e-commerce sales for the quarter ending Feb. 2, an 11.2% increase over the fourth quarter the year prior. Target, in an effort to curb “showrooming,” has recently announced that it will match the online prices of its major competitors.
Will evolving store formats leave vacant spaces functionally obsolete or requiring significant capital expenditures?
Retailers such as Best Buy have responded to this trend, in part, by reducing the footprint of their new stores from 45,000 SF to 36,000 SF and even going as small as 27,000 SF. Many big-box and junior-anchor retailers are reducing square footages and opting to employ a “clicks-and-bricks” strategy by integrating their retail and e-commerce strategies.
Will the slowdown of suburban housing growth shift retailers’ focus back towards the urban core?
Rising gas prices, limitations on transportation funding, and changing generational preferences threaten to arrest suburban sprawl, thus redirecting growth back towards the urban core. Retailers and developers will have to significantly change their store layouts and site plans to reach a more convenience-oriented consumer. Integrating retail into mixed-used developments and urban/walkable neighborhoods is likely to increasingly become the norm.
These are just a few of the dynamics that investors and lenders will need to be increasingly aware of in order to understand and to mitigate risks when playing in the retail space. Those who are attuned to these trends and are creative and nimble enough to execute investment strategies to capitalize on them stand to reap the rewards. Those who ignore them will be at risk.
At Metropolitan Capital Advisors (“MCA”), a commercial real estate capital intermediary, we have sourced over $9 billion in debt and equity for our clients since 1992, including a significant portion of retail property. Our Senior Directors have the experience necessary to assist our clients in structuring their capital stacks to mitigate these risks. If you have a retail property in need of financing or refinancing, contact one of MCA’s Senior Directors to assist you in locating the best financing source. Or, if you would like, please fill out the form below, and we will contact you shortly regarding your financing needs: