The Orange Report – 2018 Q4
THE RETAIL “APOCOLYPSE”
“When is the retail apocalypse coming?” you ask. Keep waiting. Many of the news outlets are citing the end of retail as we know it, and they are right in many respects. Only, it’s not dying…the retail industry is getting smarter and that is ultimately being driven by the consumer. There may not be as many large-scale, ground-up retail developments under construction as there were before the recession, but there is still a very active retail market. In this case the revival is being driven by technology, and the repurposing of older buildings in infill markets.
Over the last few years the most active tenants backfilling vacancies have been restaurants, fitness/wellness uses, entertainment venues, financial services, and medical/urgent care facilities. The common thread to these categories is that they are internet-resistant in many respects.
As we find ourselves entering a new year, the following topics are sure to be storylines into 2019 and beyond.
Retailers and landlords alike are looking for new ways to differentiate themselves from their competition, and one of the best ways to accomplish that today is embracing new technologies. Obviously, the internet has had a tremendous impact on consumer habits, but the influence of technology goes way beyond online sales. Quite simply, there is more data out there today to help influence smarter decisions. Real estate investors have become accustomed to, and expect, more data to prove an investment thesis. Retailers are changing the ways they appeal to consumers based on massive amounts of consumer data, and consumers expect a combination of experience and convenience provided by new emerging technologies.
A direct result of the rise in internet sales, retailers have been reducing their footprints for a more efficient use of space. This has affected how landlord’s plan their investment strategies, and how tenants define their real estate criteria. Over the last few years, retailers have been forced to decide between investment in technology to increase their web presence, versus investment in their brick and mortar stores.
We will continue to see the use of apps and other marketing tools to improve instore and online experiences to solidify market share. While the internet has pulled sales away from brick-and-mortar locations, other technologies have improved sales by providing better in-store experiences, rapid pick-up, and ‘last mile’ deliveries. This combines the ease of internet shopping with the experience provided by a physical location.
Infill markets, which are located in built-up areas with few large tracts of developable land, will continue to see activity in 2019 and beyond as they have over the last few years. The central Kansas City submarket has seen a significant amount of growth led by ground up multifamily developments which are, in turn, strengthening retail opportunities. This trend is consistent across the county in second tier cities as residents look to move out of major metropolitans like NYC, San Francisco, and LA, into more affordable urban areas that host the amenities of a big city, but on a much smaller scale.
In direct opposition to previous Retail Reports that cited ‘cautious optimism,’ we are now seeing ‘cautious pessimism’ to a certain degree. Rather than seeing investors trickle back into the retail markets as we pulled out of the Great Recession, real estate professionals are now starting to feel that we may have reached the top of an economic cycle. Transaction volumes remain strong, but many decision makers are waiting to see how interest rates and rising construction costs will squeeze profit margins.
With three interest rate increases in 2018, and the expectation for more in 2019, most investors are preparing for the impending hikes and a softening of the economy. Depending on the asset class, cap rates are generally starting to increase to absorb the higher cost of capital.