We’re already well into the fourth quarter, and 2019 is just around the bend. Accordingly, it pays to take a look at how this year’s commercial real estate trends are likely to affect the retail industry next year.
Up until recently, the Baby Boomer generation dominated the country. However, the Millennial generation has finally caught up, and they are now officially the largest generation.
This is important news for commercial real estate investors. Millennials spending habits, school debt, and general reluctance to purchase the property will definitely impact the CRE industry.
For example, 63% of Millennials have more than $10,000 in school debt. As a result, they are putting off major life decisions, such as buying a house, getting married, or having children. If you own multi-family housing, this could be good news for you, particularly if you’re located in an area with high numbers of Millennials.
How Millennials Spend Their Money
If you’re an investor with retail properties, then it’s critical you understand Millennials’ spending habits.
In general, Millennials are not impulsed buyers. They deliberate longer before they purchase an item. They spend more time online doing research, checking reviews to ascertain product quality, and getting feedback from those they know.
Even more importantly, they want to make sure they get the best deal. So they may showroom, or use apps or certain websites to get the lowest price. Many will even delay purchasing a product until it goes on sale.
On the other hand, Millennials are more likely to make big purchases. 81% of Millennials said they made a purchase of $500 or more, while only 61% of Baby Boomers said the same thing.
This means that Millennials don’t mind spending, as long as they can see the value in what they are purchasing. For most Millennials, “value” doesn’t just mean price; it also means trading assets for an experience, such as an extreme vacation.
Thus, retail properties owners should make sure to keep in mind that the sales cycle for Millennials may be longer and more comprehensive than for other age groups. Businesses will need to spend time wooing this age group, and connecting with them on a one-to-one level because, in addition to being online 24/7, Millennials want to have a relationship with brands.
Despite these factors, Baby Boomers are not as different from Millennials regarding their lifestyle choices.
Both groups are gravitating towards urban areas, although some older Millennials have started moving to the suburbs to establish families. Both groups are increasingly searching out “lifestyle” apartments that allow them to enjoy various amenities.
If you’re an investor interested in purchasing retail properties, relying on a company’s history may not be enough in terms of due diligence. You also need to evaluate how the business has positioned itself for the future, both regarding competition with e-commerce companies and with regards to their target market, whether it is Baby Boomers or Millennials.
Wages Are Stagnant, And Consumer Debt Is Still Going Up
In 2017 consumers had higher credit scores and higher debt – a contradiction that shows how complicated Americans relationship with debt really is.
Overall, the economy seems to be looking up. Housing prices and foreclosure rates are back to normal, and the unemployment rate is the lowest it’s been in years. Consumer confidence hit a 17-year high, and the average credit score – 675 – is the highest its been since 2012.
On the other hand, wages are still as flat as ever, and consumer borrowing rose 8.8%, higher than its been in the last two years. These facts have hit the retail properties industry hard, with new store closings being announced every day, with big-name retailers reporting declining sales, or shutting their doors.
There have already been 3800 store closures this year, with Walgreen’s, Gap, and Toys R’Us among the fallen. Walgreen’s/Rite-Aid plans on closing 800 stores before the year is up, while Toys R’Us plans on closing all 735 of their stores.
Indeed, competing for the price will be next to impossible for brick and mortar stores. In order to survive, retailers need to pull out all the stops to provide unique experiences that engage consumers and create brand loyalty.
Too Much Retail Space
The amount of retail properties of space per American is higher than anywhere in the U.S., with around 25 square feet per person. That number is nearly 3 times the amount of retail space per person than in Europe. On the other hand, rents in Europe aren’t rising.
As a result, some retailers are downsizing, and investor owners are implementing ways to use this extra retail space, or they risk shutting down altogether. Mixed-use projects are one example of adaptive re-use of space. Other investors have turned to unique uses for empty retail space, such as pop-up stores, indoor climbing zones, fitness centers, supermarkets, or experiential restaurants.
Health Care Will Continue To Affect CRE
As Baby Boomers continue to age, medical services will evolve to meet their growing needs. More medical centers will continue to open in order to deliver care, and virtual care in combination with home and mobile monitoring of patients’ health, will help provide value in a highly competitive field.
Other types of elder care facilities will also be in demand, such as assisted living facilities, retirement centers, or specialized facilities such as memory care units. These types of investment properties require experience; however, some investors will hire a management company to take over the bulk of the work.
Many investors consider the extra effort worth it, however. Medical buildings are fast becoming a lucrative industry, with strong tenant retention (physicians don’t want to move away from their patient base), stable cash flow, and overall excellent long-term value.