CREJ

16 / 28

Page 16 — Retail Properties Quarterly — May 2017
Leasing
M uch has been said and
written about the impend-
ing death of brick-and-
mortar retail. E-commerce
is here to stay and its mar-
ket share continues to grow. But this
won’t this be an apocalyptic event
for retail stores and shopping cen-
ters. Let me first debunk a couple of
myths and then discuss where the
opportunities exist.
• Myth 1: Store closings are cre-
ating an imbalance of supply and
demand. This is simply not true.
Retail is the most undersupplied
asset relative to demand. Net
absorption in 2016 was 19 percent.
Rents are below peak values in
most metro areas and retail rent
growth last year was the highest in
eight years.
Offsetting this good story are the
projected closings by tenants such
as Sears, J.C. Penny and Macy’s over
the next two years. New store open-
ings by tenants such as Dollar Gen-
eral, Ulta and TJ Maxx will compen-
sate for those closings.
• Myth 2: Consumers prefer to shop
online. E-commerce growth rate
over the past five years was 15 per-
cent versus 4 percent growth rate
for in-store sales. However, 51 per-
cent of e-commerce sales actually
goes to brick-and-mortar retailers.
The massive infiltration of technol-
ogy (cell phones, tablets, broadband
at home and access to the internet)
enhanced the ability of consumers
to purchase online.
But what we’ve seen is that
omnichannel retailers have had
mixed results. Fewer than half of
the top 250 e-commerce businesses
are profitable. You
still need to dif-
ferentiate product
and provide supe-
rior service. The
role of physical
retail has changed,
but it is not dead.
Far from dimin-
ishing the role of
the physical store,
digital retail has
expanded it. Digi-
tally influenced
physical store
sales are far bigger
than online sales.
The customer jour-
ney also extends beyond the pur-
chase decision with the post-pur-
chase experience, which includes
reviews and returns and presents
the opportunity for retailers to
make further recommendations
and target highly relevant offers to
consumers based on their purchase
history. This approach requires
multichannel retailers to shift from
operating separate retail platforms
toward one, integrated platform.
The International Council of
Shopping Centers reports that a
recent survey solely targeting very
active online consumers found that
the store influenced the customer
journey in up to 60 percent of their
online sales transactions. Success-
ful omnichannel retailers will use
technology to gain a better under-
standing of customers, develop
the retail proposition, select stock,
track inventory, manage merchan-
dise and develop market strategies.
Most importantly, it allows retailers
to clearly identify and retain the
notional 20 percent of consumers
who deliver 80 percent of the profit.
The physical store as part of the
omnichannel presence allows con-
sumers to pick up or return online
orders at the store. This creates an
opportunity to up-sell. It also is
more profitable as in-store sales per
transactions are higher than online.
Most importantly, reverse logistics
have a far more favorable outcome
in store vs. online. Online retailers
send four billion pounds of returns
to landfills, whereas the in-store
return can be more easily repack-
aged and resold.
• Myth 3: Big box is dead. Big-box
retail is far from dead. However,
the landscape is changing toward
off-price and discount. Big-box
retailers like Dick’s, Home Depot,
TJ Maxx, Nordstrom and Best Buy
have successfully integrated their
omnichannel strategies and are
profitable. In addition, traditional
big-box retailers have recognized
that a real need can be fulfilled by
opening smaller-format boxes in
urban locations like the proposed
Target on the 16th Street Mall.
Opportunities
Focus new leasing on tenants that
are profitable, not retailers with
large debt from leveraged buyouts.
Outside of the coastal cities, sec-
ondary metro areas like Denver will
see foreign capital chasing equity
opportunities. In-migration and job
growth are being noticed interna-
tionally, and Denver is now a “must
look” market for most investors.
Look for opportunities to emerge
from value-add investments. Hard
corner locations with the wrong ten-
ant mix can be easily fixed. Retail
vacancies do not mean that the
location wasn’t right, it could be that
the tenant mix wasn’t appropriate
for that submarket.
Embrace those merchants who
have successfully integrated their
omnichannel business plans. Look
for innovative retail concepts that
drive traffic. An example is the Ama-
zon Lockers pick-up stations that
are finding their way into the retail
scene.
Another great opportunity is to
offer e-commerce-only retailers
brick-and-mortar options to cover
that last mile. Web-only retailers
comprise 30 percent of total online
sales. They will likely be seeking
retail locations to round out their
omnichannel business plans.
Strong synergies between sales
channels have been evidenced by
increased online sales in markets
where the retailer opens a physical
store. Opportunities will continue to
develop from larger-format stores
that close, allowing these retail
buildings to be leased as a mult-
itenant facility or the site could be
repurposed.
As an owner, different leasing
strategies may be required, such
as how to measure sales (and per-
centage rent) from an omnichannel
store. The scale and function of pub-
lic spaces takes on a more important
role in centers because these ameni-
ties can enhance the “linger factor”
and drive sales. Change always cre-
ates opportunity. s
Dedicated to Denver.
Through personalized service and unparalleled expertise,
we provide a special kind of banking experience. We offer
commercial and industry lending, SBA loans and commercial
real estate – all with the steadfast focus necessary to help
local business and the community thrive. Stop in and discover
what makes the MidFirst experience truly special.
Cherry Creek – 101 Cook St.
303.376.3800
Downtown – 555 17th St.
303.376.5460
University Hills – 2805 S. Colorado Blvd.
303.376.3840
Michael
Cantwell
Executive vice
president, debt and
structured finance,
capital markets,
CBRE, Denver