Retail Real Estate is Dead

[Account Closed]

We are in Transition

Being in real estate, we all know the value of residential and multifamily real estate. The cash-on-cash returns can be great and can provide wealth for generations to come. With that said, what about commercial real estate, specifically retail? I feel we are in a transition period in the United States where there is a lot of questions to be answered by the future. With technology becoming so advanced to the instant gig-economy, where does that leave retail real estate?

Times are Changing

The world is changing, and we must first admit that. We are in an economy where we hit a button and get picked up by some stranger and taken to our destination. We can open up an app and get a mortgage, and no, I’m not kidding. I thought this was a joke until last week where I heard actual friends of mine actually doing it. We have come to a place where people do not want to stand in line anymore for food during their lunch break. They tap a button in an app and the food comes to them. App based food delivery services are booming everywhere. Amazon has taken it a step further and also deliver fresh groceries to your doorstep with a touch of a button. Back in the day, the first thing you looked for when you opened a new business was office space. Nowadays home based businesses are booming everywhere. With virtual assistants and temporary office spaces provided, small businesses simply don’t need a physical office anymore. 80% of business can be done though a cell phone on a golf course and the rest at the dinner table with your client. Offices are becoming obsolete. Times are changing, and we must open our eyes to that.

Retail Real Estate is Dead

So where does that leave retail spaces and commercial real estate. Well JCpenny’s and Sears have been slowly going bankrupt, while Macys has been closing 40 stores every 6 months. The future is not looking bright at all for these types of properties. The one bright side I see is service related businesses are staying around. What I mean by that is barbers, nail places, beauty salons, and other service related businesses are staying in retail spaces. Personally there is only so much time before the next uber-like app for barbers and hair stylist comes around where they go door-to-door like an on demand business.

So if thinking about retail space, think again. Be careful, and always consider the future. 

[Joel Owens]

Kevin,

I find this article to be pretty misleading. From your bio on bigger pockets it appears you do not focus on commercial retail real estate but on other asset classes.

The comments in your post relate to a few different types of retail tenants only. For investors not in the space or other brokers/agents looking into the space they do not have the expertise to fully understand it.

When you do it day in and day out the knowledge level and pulse on what is happening is so much greater.

I will give an example.

A frequent statement is online sales are hurting bricks and mortar retail. Online sales have gone up every year etc.,etc.

The real numbers are online sales have gone up about 2% year over year the last 3 years. So total online market share for retail is at about 8%. A big part of that is existing brick and mortar retailers doing omni channel marketing and increasing online presence to give synergy to their brands. Online only new retail businesses account for only about 3% of all retail sales annually. It's a very small number compared to total retail sales. Many states are adopting a sales tax on online companies selling in their states and they do not have to have a physical store their to be taxed etc.  Amazon is actually in favor of this as it weeds out the little guys trying to take market share from them.

Malls and big box stores have been taking some hits with sales. Upscale open air malls and grocery anchored to un-anchored  neighborhood centers have been doing very well in the right location. Just like any other asset class it is about the location. Those of us in the industry have known for about 4 years now that big box is not doing that great. When my client is buying say a 12 million center I want to see sales per sq ft of those anchors. I then look and see what their national average is to see if they are at,under,or an above performing store. I look at the rent to sales ratio. I look to see if the store has been re-imaged lately ( a good sign when the tenant throws heavy money into modernizing the store ). Macy's are being back filled with other uses such as theaters, entertainment complexes,etc.  

I can show many failed multifamily properties in the wrong location. I used to sell larger apartment  buildings before moving to commercial retail so I know both asset classes pretty well.

Most of the growth is happening in warm belt states and retirees flock to warmer climates. Some cold belt states you have dying areas as net migration is moving away and those who stay tend to be older and die off reducing population levels.

There are still some strong suburban to urban core cold belt state areas that are growing and doing well. There are just not as many as the warm belt states.

I don't want to get too deep on retail real estate as I can write a book on it. I am working on a book actually right now to go over a bunch of misinformation out there. 

Retail isn't dead in fact it is kicking as# in the right areas and locations. There is a new interstate exit that went in where I live and an open air upscale mall was built 3 years ago. It draws about 3 million visitors annually, the 400,000 sq ft is full with waiting list and rents per sq ft into the 60's, and the developer is looking to buy more land buying it to add on more building and parking.