Figuring out the health of commercial real estate’s retail sector is probably more complicated than ever right now.
Headlines detailing major department stores, such as Sears, Macy’s and Bon-Ton, closing stores seem to pop up regularly. And it’s hurting landlords. Amazon is killing brick and mortar merchants, but at the same time it is opening bookstores and bought Whole Foods. Meanwhile, there are several expanding chains out there, and experiential retail concepts are making the sector positively evolve.
The problem is that there’s no definitive way to exactly gauge the industry’s health.
A recent Reis report on shopping center vacancy rates would make one think the sector is trending negatively. The fourth quarter saw vacancy hit 10 percent nationally at neighborhood and community centers. This is a 10-basis-point drop from the same year-ago period. Meanwhile, malls saw vacancy rates rise 50 basis points during the same time frame. Rent growth the three property types ranges from 1.5 percent to 1.8 percent, down from the previous year. Development is also at a relative standstill. However, Reis does point out that standalone high-volume retailers, like Costco, and restaurants are performing well.
Marcus & Millichap’s take on the sector in a recent report forecasts 2018 retail from a macroeconomic perspective. The firm expects rents to rise and vacancy rates to lower, due to increased consumer confidence and the possibility of wage growth. Marcus & Millichap also claims that, due to consumer demand and less construction, vacancy rates in the sector are the lowest it has experienced in more than 18 years, hitting around five percent, which puts it at odds with the Reis report.
Part of what is helping retail, Marcus argues, is that experiential retail and more abundant restaurants are becoming the norm and starting the breathe new life into shopping centers, combating online sales.
Another recent report, by two A.T. Kearney executives, calls the shopping centers and malls of the future consumer engagement centers, or “environments where people gather to engage with friends, seek out unique experiences, reaffirm values, and interactively relate to brands.”
They see four distinct types of centers being those of the future. Destination centers will be focused around one major attraction, such as an indoor ski slope, with entertainment and stores surrounding that draw. Innovation centers will be facilities that are used as consumer-test areas where companies can try out new products and get shopper feedback for future planning. Values centers will be anchored by an idea, instead of a specific store, such as healthy living and have tenants directly related to the concept. Finally, “retaildential” developments will have stores and restaurants targeted toward certain demographics, such as senior citizens, or younger urbanites.
One thing we can be certain of, whether it’s going in a direction that’s good or bad, brick-and-mortar retail is undergoing some major changes, and what was once considered typical shopping is rapidly disappearing.
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