What’s Next for Retail Real Estate in the New Economy?

Our world has changed a lot.  People keep asking when will the market return to normal.  Our view is that what we are experiencing is not just another real estate cycle.  This is a fundamental re-set.  The old rules have changed but the new rules have not been written yet.

Key Trends
There are three key trends that we are watching as the retail world evolves:

1. The Economy  – from abundance to scarcity

After nearly two decades of a mindset of abundance, we are now firmly entrenched in a mindset of scarcity.  The post-RTC period leading up to the market crash of 2008 was characterized by huge economic expansion fueled by ever-increasing personal wealth, driven by rising home and financial asset values, low fuel costs, falling interest rates and falling capitalization rates.  This contributed to tremendous consumption, which fueled a vast retail expansion.

That is over.  While the economy is in recovery, it has been very slow going.  Considerable uncertainty exists about the availability of credit.  The recovery is not producing enough new jobs to fuel significant expansion.  Residential property values remain very low.  Most property markets are now overbuilt and absorption of space is very slow.   The investment market has become bifurcated.  The very best properties are doing very well and are trading at the highest values ever.  Everything else is struggling and is generally worth less than it cost to produce.

This will not likely change quickly.  Much of the existing space will need to re-purposed as the retail business evolves.  This will need to be done within an environment of rising energy costs and infrastructure deficits.

2.     Demographics – our customers are changing

The increasing complexity of our social composition is changing our communities.  This will trigger new opportunities, new products and new services but also new challenges as long-term challenges become short-term problems.

For the first time in a very long time, the baby boom is not the dominant age cohort.  It is now the second-largest age cohort and is both shrinking and moving into a lower-consumption stage of life.  At the other end of the spectrum, Gen Y is now the largest age cohort.  This group, comprised of those in their teens through early 30s has very different values and faces entirely different prospects.  With many older workers extend their employment and few new jobs are created, this group is being squeezed.  It remains to be seen what their consumption patterns will be and how it will impact retailing.

3.     Technology – changing retailing and shopping

Technology is diminishing the need for space in a variety of ways.  Retailers are able to operate with less space due to improved throughput and the ability to share inventory between locations.  Physical stores are but one of the channels that today’s retailers use to reach customers.  If you are willing to wait a day or two for shipping, you can shop, order and receive just about anything you need from any web-connected computer.

This dramatically changes the buyer’s journey.  We used to start the buying process by visiting a store.  Improved access to information and recommendations, mean that the role of the store is fundamentally changed.  Today’s shopper now often arrives only at the end of the journey, with a list of open questions, a price in mind and a desire to interact with experts, products and services.

The Power of Place – from the ubiquitous to the local
Remember that old axiom about the three most important factors – location, location, location?  It is true again.  After decades of trying to make every place more alike, the repetitive retail landscape is beginning to give way to a desire for a stronger sense of place.  We live in a world where there is no shortage of goods.  Retail environments are being redesigned to engage customers on their own terms in ways that reflect the uniqueness of their communities.

Store 3.0 – toward a new purpose
We do not see the importance of physical stores diminishing but their role is changing from a purely transactional model to an experiential one in which customers seek a personalized experience.  The best retailers view the store as but one of many integrated retail channels in an always-on omni-channel world.  Consider the following evolving models:

  • For many goods and services, the most compelling customer motivation is still convenience.  This has always been true of necessity goods.  Now, it is also true of many shoppers’ goods.  We expect to see many large format stores continue the trend of reducing footprint size in favor of more, smaller stores located closer to where people live and work.
  • Many customers still need personalized service.   This can mean many things from custom configuring a product to meet a specific need to simply helping to repair or maintain a product.
  • For most shoppers visiting a store is also about experience.  The store is a place to interact with brands, to get advice and learn.  The best brands will take advantage of retail stores to gain the insights needed to shape their futures through customer interaction.  Even the pure-play Internet retailers are beginning to open stores to exploit this advantage.
  • The best retail projects will continue to contribute to a sense of community, providing attractive and inviting places for people to gather and interact with others.

 Location Analytics – site-specific awareness
Success in this more complex environment requires site-specific awareness. The amount of location data now available is staggering.  That is where the need for better information systems and workflows come in.  GIS provides a rich environment for aggregating information from many sources so that it can be made sense of and visualized in more engaging ways.

Retailing is a very local business.  You need to understand many nuances of local competition, culture, tradition, geography and taste.  The local competitive environment and property market conditions in particular, require on-the-ground observation.  Our team can help you develop simple, repeatable and scalable workflows that will allow you to quickly and cheaply obtain the information you need to generate the insights you need to drive your success at the local level.

We configure integrated enterprise-level market information systems to help you gather, analyze and manage location information. We pre-configure GIS to support your work, creating standard output to accelerate analysis, often suggesting a course of action.

The good news is that it is possible for individual properties and stores to outperform the market.  We see objective evidence of this every day.  In market after market, we see an increasingly wide range of performance, even among properties of similar quality.   The best shopping center owners and retailers differentiate merchandise assortments to suit local conditions, tailoring offerings both to local tastes and market potential.

About Cushman & Wakefield/NorthMarq

​Cushman & Wakefield/NorthMarq is a joint venture formed in September 2011 by NorthMarq Real Estate Services and the Minnesota operations of global real estate services firm Cushman & Wakefield. By combining the talent of both organizations at the regional level with the global platform of Cushman & Wakefield, we offer clients the best combination of regional strength and global capabilities. The result: the leading commercial real estate firm by all measures in the Upper Midwest.
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