Rapid Evolution

The good news is that a retail “apocalypse” is not underway, says K.C. Conway, MAI, CRE, chief economist for CCIM Institute and director of research and corporate engagement in the Culverhouse College of Commerce at the University of Alabama in Tuscaloosa, Ala. “There is retail disruption, but it is not the end of the world for retail.” 

Scarcity of Good Retail Locations

Retail store openings continue to outpace the number of closings in 2017, and vacancies have been holding up under the competitive pressure. At the start of 2018, Reis reported steady average vacancies of 9.9 percent at an annual effective rent increase of 1.9 percent.

“In Houston, as is the case in many places, we are at an all-time high in occupancy,” says Nick Hernandez, managing director of retail services at Transwestern in Houston. The bigger challenge is that there is not much vacancy for tenants who are looking to expand, especially not a lot of good locations, he adds.

Another positive note is that consumers spent 3.6 percent more money on retail and food services sales in January 2018 year-over-year, according to the U.S. Census Bureau. As the transition to e-commerce continues to accelerate, where and how people are buying goods is vastly different today.

“The retail side definitely is going through a transition period and adjusting to shoppers who prefer to shop online,” says Ron Koenigsberg, CCIM, president of American Investment Properties in Garden City, N.Y.

E-commerce makes up about 9 percent of total retail sales and has been growing at a rate of approximately 15 percent annually. In addition, Forbes recently reported that 80 million people in the U.S. - 64 percent of U.S. households -  have Amazon Prime accounts that provide free two-day shipping on eligible items.

That statistic highlights some of the key challenges facing many retailers - how to balance physical stores and online sales and how to get online orders into the hands of consumers as quickly and cost-effectively as possible.

Most retailers, even Amazon, are trying to figure out how to improve on last-mile delivery, with ideas ranging from drones and Uber to in-store pickup stations. “There are certainly opportunities for retailers to get better at how they distribute and how they use their stores,” says Cason Bufe, CCIM, vice president of real estate at Rooker in Atlanta. “But it is really still early innings to see how that all shakes out and how they can do it profitably.”

Stores Versus Shipping

Physical stores do give retailers an advantage over predominantly online retailers because stores are closer to the goal of reaching the customers' last mile. Retailers are still trying to resolve how to use stores to their advantage. Some are attracting customers into stores by transforming the store experience to give shoppers something they can't get online, such as convenience, knowledgeable staff, a try-before-they-buy experience, or in-store entertainment or events.

“E-commerce is the new trend, but it doesn't mean that brick-and-mortar or the department stores are shutting down,” says Ali Asgary, CCIM, associate vice president of investment sales and leasing at Cushman & Wakefield in Toronto. “They are downsizing, rightsizing, and strategically making use of their retail space.”

Retailers are balancing physical stores or showrooms with the development of fast and cost-efficient supply chain for online sales. Some retailers are testing click-and-collect strategies, allowing customers to order online and pick up items in stores. In Canada, for example, major grocery store chains such as Loblaws and Sobeys have systems in place where customers can order groceries online and then drive up to pick up their orders.

Canada also has seen retailers taking advantage of third-party firms that offer convenient pickup locations for online purchases. For example, Walmart Canada has partnered with Penguin Pickup to open several co-branded Penguin Pickup/Walmart locations that allow customers to place orders online and pick up their purchase at a designated location. With 75 locations across Canada, Penguin Pickup can offer free, convenient pickups for online purchases.

Target also paid $550 million to buy the online delivery service firm Shipt in late 2017. In addition to being able to pick up online orders in stores, customers can sign up for same-day delivery service.

Target recently started rolling out same-day delivery service in select markets, including Minneapolis and Houston. The company expects the same-day delivery service to be available at most of its stores and all major markets before the 2018 holiday shopping season.

“Retailers are trying to lure in customers with free shipping and free expedited services, but it is really hurting their bottom line,” Asgary says.

Some research studies show that nearly half of all online orders - 46 percent - are returned, oftentimes with free shipping. “This is something that every retailer or e-commerce company is trying to figure out,” he adds.

Transitioning Online Retailers

The flip side of the retail disruption is that online retailers are expanding into brick-and-mortar stores and showrooms, contributing to positive leasing momentum. The stores can help to boost brand awareness, allow retailers to interact with their customers, and create added efficiencies for distributing goods and devising a drop-off site for returns.

In addition to pop-ups and bookstores, Amazon took a major step into brick-and-mortar retail by acquiring Whole Foods in 2017. Bonobos, Warby Parker, and Indochino are among those leading online retail brands that are expanding their offline presence. Currently, Warby Parker operates 64 stores, with a goal to reach 100 by the end of 2018. Bonobos is approaching 50 showrooms, while Indochino celebrated 24 locations in April.

“In our market, we are seeing a trend of online retailers opening physical stores,” Koenigsberg says. Retailers such as Amazon, Fragrance.com, France and Son furniture sellers, and online jeweler Blue Nile are among those creating a physical store presence in Long Island, N.Y.

“These pop-up stores and display rooms have helped increase online sales for the retailers,” he says.

In Poland, several online apparel and furniture companies are opening showrooms to promote their products and offer an omnichannel experience. Another active category for showrooms is electronics and tech companies, notes Pawel Koltun, CCIM, a senior consultant at Development Consultancy at CBRE Poland in Warsaw.

For example, Samsung is opening showrooms to support and promote its B2B processes and digital signage systems. Product companies also are opening showrooms to introduce customers to 3D printing technology and products, he adds.

In most cases, the growth in new showrooms for online retailers is occurring on a limited basis for its store, with smaller footprints and locations that are very targeted to high-profile, urban locations with heavy foot traffic. That expansion generally is happening in bigger metropolitan statistical areas, with a large population that helps online retailers to maximize exposure and customer reach.

Tackling Last-Mile Solutions

A convergence of retail and industrial space is a big byproduct of the disruption occurring in retail. “The way that we buy today really depends on the supply chain or warehousing of goods that come through e-commerce,” Conway says.

More goods are coming from warehouses and e-fulfillment centers rather than malls and retail stores. “We don't want to drive to get the stuff,” Conway adds, “We want to click and have it brought to us at our homes.”

Retailers ranging from Amazon and Zappos to Macy's and Walmart are all working to solve a common problem - how to improve on the delivery of online purchases. For example, Amazon is testing the Amazon Key concept, which is a lock box that allows Amazon to put the package inside a secure delivery box, so that packages are not stolen.

“I think retailers are going to gravitate more toward figuring out the last-mile solution, and that click-and-collect just won't work,” Conway says. Consumers like the convenience of having goods come to them. They don't want to get in their car, sit in traffic, go into a store, and wait in line to pick up their order, he adds.

Canada Post, which delivers mail, has a creative concept in the works where it rents a 4,000- to 5,000-square-foot building where online orders can be shipped and returned. If the customer likes it, he can keep it. Or if it doesn't work, he can return it easily at the same site.

“They haven't really figured out the best approach, but they are all trying to go through this trial and error to see what works for them and what doesn't work,” Asgary says.

Retailers would love to bring industrial warehouse and fulfillment centers closer to the rooftops. However, several barriers exist before than can happen.

Typically, empty big box stores aren't equipped with the features that would be needed to convert space to a warehouse and distribution use, such as high ceiling heights, loading docks, and truck doors. “Those are really important pieces of the puzzle when you are designing a distribution center or warehouse that you obviously don't have in a retail location,” Bufe says. Zoning is another big stumbling block.

Chasing New Technologies

Consumers still need stores for the offline shopping experience. People don't always know exactly what they want. They do like to browse the latest fashions, try on clothes, demo products, and ask questions.

Yet consumers are visiting physical stores less frequently, and the rise in online sales means more product can be warehoused off site and shipped direct. As a result, many retailers need much less physical space - fewer stores, smaller footprints, and strategic locations.

“The reality is that we're going to continue to see store closings, and we're going to continue to see retailers cut their overhead real estate costs and invest more in technology, giving us a more thorough experience online,” Conway says.

Evolving technology is another challenge for retailers. The race to create omnichannel platforms is old news.

The disruption ahead is expanding into the Internet of Things as retailers not only deliver the convenience of online shopping, but also capture more data from customers on what they are buying, which allows them to make smarter decisions on the type and amount of inventory to stock closer to customers. Based on the data, retailers next decide how much inventory in stores versus in fulfillment centers.

Retailers are figuring out that the more they can learn about customers and their shopping behavior, the more they can customize the product offering and sell more merchandise, according to Conway. That is not good news for retailers who were already behind the curve in introducing new technology, because the consumer is already moving forward and embracing new conveniences, such as voice-activated shopping with Alexa and Google Home.

Retailers and developers are working on new ideas and creative solutions to improve the delivery and return of goods, and the race to capture the last mile is still playing out. “I think there is a lot of testing that is going on right now and a lot of ideas that are being looked at,” Hernandez says. “However, if you are not thinking about technology and how that affects your store - from footprint to customer experience to distribution - you are really behind the eight ball.