Despite the doomsday predictions of news pundits and so-called retail experts, retail is not going away.
In fact, according to research conducted by Jones Lang LaSalle (JLL), demand remains strong in primary markets with the overall vacancy rate stable at 4.9% and rents continuing to rise by 5.0%.
Online stores are also adding physical stores to their virtual ones, as in, for example, Amazon’s brick and mortar bookstore located throughout the country. The stores strengthen the hold Amazon has on the self-publishing market and allow customers a chance to open up, touch, and explore a physical product.
At the same time, brick and mortar stores are being forced to redefine their future in light of customers’ preference for a multitude of product choices and nearly instant delivery.
There are many businesses that are surviving despite the fierce competition, and these fall under two types:
- retail stores that offer services that can’t be offered online,
- and retail centers who’ve transformed from shopping centers to destination centers.
Service-oriented retail is best placed to survive for the long-term. Businesses like indoor playgrounds, climbing centers, check cashing places, restaurants, etc. offer services that cannot be replicated online and therefore have the highest chance of surviving for the long-term.
Repositioning Under-Performing Retail Centers
Savvy investors are seeing opportunities in the spate of retail centers with large vacancies, often due to loss of an anchor tenant. While demand for larger retail spaces over 10,000 square feet is quite limited, spaces less than that can be easily converted for other office or medical use. Be aware, however, that some retail spaces are located in areas that don’t allow for office or industrial properties.
It’s a smart idea not to consider a retail center operating at or close to full potential. Properties that are fully occupied and paying market rents leave little opportunity to cover drops in property value through raising rents.
Location and demographics are important factors as well, but a good anchor store will still be the deciding factor between success and failure for many suburban neighborhoods. Anchors such as a movie theater, major gym, hobby or dollar store, or discount clothing stores have been doing well lately.
Mix in fast and casual restaurants (instead of the standard fast food chains) such as poke bowls or personal pizza parlors to add value to the neighborhood.
Re-Purpose Failing Retail Centers
Other investors have been successful by converting big box stores into self-storage facilities, or industrial/warehouse space.
Self-storage facilities work especially well since properties can be purchased below replacement cost and construction costs are low. As a bonus, most of these retail centers include large swaths of parking lots that aren’t needed by self-storage customers; these can be sold to developers for additional profit.
Some cities are reluctant to allow self-storage facilities to replace retail tenants since the latter bring in additional revenue in sales taxes. You can get around this by adding a few stores to the development, or by converting the space into mixed-use properties that create a center for people to live, work, play, and shop together.
Retail Centers As Destinations
Another trend in the retail segment is the wooing of large entertainment centers. These mega-centers were once considered risky, but with the wealth of empty space available, more and more owners are seeking out indoor playgrounds, skiing or climbing centers, and other types of entertainment-focused businesses.
The hope is that potential customers will be drawn to the mall to do “something,” and that once they get there, will spend their money throughout the mall. Investors are discovering that making space for entertainment can improve the mix of options at a mall, draw foot traffic and encourage visitors to stay longer.
The truth is, consumers expect more from retailers. More personalization, more purchasing options, and more information are just the tip of the iceberg; ultimately consumers expect retailers to put them first above all else.
Investors that encourage retailers to address these issues by twisting the traditional one-channel experience to be more interactive and engage consumers on a meaningful level will ultimately see the results in their bottom line.
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