‘Disruption’: The end of retail as we know it?
It takes a story to tell a story when numbers don’t, so Price Edwards & Co. started its midyear retail property market report with a tale of suspense.
It’s a real retail thriller. Call it: “Disruption.”
With just a nod to statistics, because “numbers matter in real estate” — occupancy up, stores expanding, vacated space readily backfilled, rents for new space at all-time highs — the firm dove into a riveting retail narrative.
“There is a lot out there to be pleased about. The general economy is still holding up even with continued low energy prices. If only we could stop there. The good news has a dark backdrop,” the firm’s Jim Parrack wrote.
The national story so far: “Over 5,000 stores closed so far nationally in 2017 and more on the way,” he wrote, foreshadowing.
The local angle: “Negligible income growth.”
The characters: “Local tenant struggles.”
Conflict: “Fierce competition from internet retailers.”
That last thing? Therein lies the rub for retail. Internet-versus-retail is a 20-year-long narrative, at least.
Is it coming to a climax? Or a cliffhanger?
“Are we in a normal cycle or is it the end of retail as we know it?,” Parrack wrote. “The truth, as it often does, lies in between.”
The numbers at midyear were definitely positive:
•Overall market occupancy at 90.2 percent, up from 89.4 percent at the end of 2016, with nearly 600,000 square feet of store space absorbed.
•Rents still on the rise, with small shop space in new big-box out-parcels and mixed-use projects ranging from $25 to $35 per square foot per year generally, and pushing $40 in some cases.
“But, in this instance, the numbers do not begin to convey the scale of change in the retail industry nor do they reveal the anxiety that underlies the market,” Parrack wrote in the report, which is available at www. priceedwards.com.
The report outlines three strains to the story, trends that will determine how this chapter ends.
•”Retailers are forgetting how to retail.”
The best stores and chains have always kept up with, or just ahead of, what their customers want and how to sell it to them, Price Edwards said.
“In today’s world of big data, that should be easy enough, but many of the problem retailers have failed their customers,” the firm said, pointing a finger at three recent failures. “Does anyone think Gordman’s, Radio Shack or Payless has done a good job of this?”
•”Competition from the internet is real and unremitting, which really means that Amazon is coming for you.”
Amazon’s purchase of Whole Foods — and its nationwide job fairs — made a big splash. But Sprouts revealed Thursday in its second-quarter earnings call that it is planning to expand its partnership with Amazon Prime Now for delivery of its products to 20-plus locations by year end.
Morphing continues between the internet and bricks-and-mortar, Price Edwards noted, with online retailers opening physical locations and traditional stores expanding their web presence.
“This dynamic is changing the way people shop. Virtually everyone browses on the internet, regardless of where they end up buying a product. Convenience and price have increased importance; the experience is more important,” the firm said.
•”We are in the middle of a normal real estate cycle.”
Retail has been growing since the Great Recession, with rents and occupancies up and too much new construction, especially in light of the mergers and buyouts that helped lead the sector out of the dark, Price Edwards said.
Tightening at the top will choke stores during the coming cyclical decline, the firm said.
“It is time for a correction. A correction always involves store closures and reduced tenant activity; the amount of leveraged buyouts over the last 10 years has exacerbated this problem by limiting retailers’ margin of error in a downturn.”
Parrack said it will take two or three years to sort out and start to work through “the level of disruption we are seeing today.”