Retail real estate and sales trends excerpt from my book “Pardon the Disruption. The Future You Never Saw Coming”, published in November, 2013. This abbreviated section describes the change agents that have disrupted retail sales to do and the impact social trends and rapidly advancing technological changes will have on the sector in the future.
Months ago, I took a drive up Battleground Avenue in Greensboro. Battleground Avenue is a major retail corridor that includes auto dealerships, restaurants, strip center retail and some small offices and residential spaces. It’s not much unlike any four-mile stretch of five-lane commercial development across the United States. Battleground Avenue is just an easily accessible example to illustrate my point. Several new retail buildings (especially on cross streets) have been built recently, providing a reasonable mix of old and new structures.
What I found amazing was the extremely high number of properties for lease and sale, with many spaces never having been occupied after being on the market for months. No doubt there are hundreds of retail opportunities on this stretch (including cross streets), but I counted 60 empty storefronts and buildings along my route. Since that time, several spots have been filled, but inevitably the silent killer that is vacant real estate will take its toll.
At face value it doesn’t look much different than past downturns. Stores have closed before – or spaces never occupied – for a variety of reasons. People have experienced cyclical recessions, and they understand that sometimes unfortunate things happen in tough times.
I contend that we are currently seeing something different. This isn’t about a temporary real estate imbalance. This isn’t about a nice city like Greensboro and a significant business corridor. It isn’t all about poor management (poor stocking, wrong layout), a city in decline, a new transportation corridor rerouting traffic from the area, a shift in the economic or demographic composition of the area, or general economic malaise. But because those are about the only reasons we have ever known for a stretch of empty stores to stand as these do, these old reasons are the only historical vantage points to guide our assessment of the principal cause. And it has changed the business of retail and retail real estate values forever.
The disruptive technology here is simply the growing impact of internet sales on America’s commercial landscape. It took years for online retailers to reach the scale of business they needed to make this new means of retailing viable. A critical mass of Americans needed to be online, online shopping carts had to be developed, shipping costs had to fall, and, probably most importantly, there had to be a trustworthy, secure means of payment that gave shoppers confidence they wouldn’t suffer nightmarish repercussions from their shopping experiences.
Though intellectually people understand that more products are being sold on the internet, it is very difficult to visualize the extended impact that those sales have on real estate. The cause and effect seems somehow clouded, so we throw traditional explanations at the question to provide the answers.
The technologies that made internet sales possible, and a lack of awareness of these trends as they were emerging, have converged to create a retail real estate bubble that the US may not overcome for decades – if ever. Amazon.com currently represents a sales juggernaut that is the online equivalent of Walmart – yet still in a high-growth mode. US retail sales are growing at a 0-2% annual rate. Internet sales are growing at 10%. It’s clear that all of the growth, and a growing percentage of existing sales, are being done online.
Buyers’ abandoning the only means of acquiring things they’ve ever known was no accident. Traffic and parking hassles, poor customer service, and a perceived lack of security are less tolerated in a world where comparative shopping, immense selection and preferred pricing are only a click away.
Pair that with the massive overbuilding of retail spaces in the US, especially big box stores, and there’s a real estate bubble – with the concomitant bust and depression – in the making. In my small world, I have seen malls once filled with department and specialty stores close and even be leveled. Of the four malls that once stood in Guilford County, North Carolina, a county of 500,000 people, one was sold to a church, one to a private college, one has been razed, and one is still in operation. General Growth Properties, the owner of Greensboro’s Four Seasons Mall (the one still there) and nearly 200 other mall properties, filed in 2009 for Chapter 11 bankruptcy protection on over $27 billion of debt, its stock price having fallen 97% from the previous year.
Remember Circuit City? Borders? Ames? Zayre’s? Service Merchandise? Montgomery Ward? Any Kmarts or CompUSAs nearby? Sears? Toys “R” Us? Blockbuster Video? Talbots? Pier 1 Imports? And now Best Buy has announced the closing of 50 stores and its majority stockholder is taking the company private. Think America’s buying habits have changed?
All of this is not terribly surprising because not only is America migrating to online purchasing, but the overbuilding reflected in all the preceding is only the tip of a very ominous iceberg. An apples-to-apples comparison of US retail spaces to those of other countries is difficult because the measurements come in “retail space” and “shopping center” formats and are not in a consistent, measurable format.
According to the 2007 Economic Census, there were 1,122,703 retail establishments in the United States, and a total of 14.2 billion square feet of retail space. That equates to approximately 46.6 square feet of retail space per capita in the U.S. Undoubtedly the depressed economy took its toll on the amount of operating retail space and the distinction between retail and shopping center measurement may be in play.
But according to The New Rules of Retail by Robin Lewis and Michael Dart, the US contains 22 ft.² per person in operating retail real estate. Number two in the world is Sweden, with 3 ft.² per person. Internet sales are growing; sales at retail sites are not. The U.S. has over seven times the per capita square retail footage of the country in second place. This trend is headed one way – and it’s not towards increased retail real estate sites or construction.
Technology has changed the way we buy in other ways, too. Time was, we did our shopping at local stores – the proverbial Main St. retail district with a hardware store, a department store, pharmacy, and so forth. The advent of suburban strip centers and shopping malls shifted where we made the same types of purchases. When there were more options, we did a simple price comparison among a couple of options and tended to make the cheapest choice.
Now, when we consider a purchase, we do what first? Most of us don’t consider even a modest purchase of an unfamiliar item without checking the internet for pricing and availability. The development of this trend has had a huge impact on the retail trade. Once upon a time, we walked into Sears or a local department store and bought what we needed. We were cognizant of the price – certainly looking for the best deal and keeping an eye peeled for sales – but true comparison shopping on a large scale was virtually impossible. Retail margins were much higher under that system, which made retailing a much more profitable industry. Blanket consumer ignorance of the best prices made us less knowledgeable shoppers. Profit margins were boosted by that. The stores listed above, which have now closed or are under duress, used to be “price busters.” When price became the only purchasing decision differential, and people became empowered to find the lowest price, margins fell under siege – and that led to company and store closures. In short, when Walmart beat Kmart on price, Walmart won.
Now, electronic retailers like Best Buy and Fry’s Electronics are regarded as “showrooms,” where shoppers check out the product and pricing at the store, occasionally buying on the spot, but mostly using a smartphone app or internet search to comparison shop for the best price. Store traffic hasn’t dropped considerably, but the percentage of store visitors who leave with a purchase has.
As a futurist, I am trained to look beyond the obvious and search for other possible contributions to any outcome from other sources and must take them into account. From the perspective of local government, there remain calls for increased retail building among town councils and county commissioners (small towns especially like the addition of fast food and chain restaurants). These buildings and their operations provide a bump in property tax revenues and one of the few new sources of sales tax. But a greater desire for more buildings and retail sites to build a tax base will never successfully intersect with declining demand for retail space.
As a Certified Economic Developer (CEcD), having developed Guilford County’s Economic Development Strategic Plan as well as its Economic Development Policy, and having handled dozens of economic development projects involving financial incentives, I have a good handle on what the impact these projects have on local economies. In March of 2009, the Chairman of the Guilford County Board of Commissioners proposed that the County give 100% tax rebates to anyone who built any commercial real estate improvements – new, expanded or upfit. The intent was to invigorate the local economy through investment in real estate development by removing the local property taxes on those structural improvements for the first three years. It was such a sweet gesture for developers and builders – and oh-so-wrong on so many levels.
First, North Carolina, though it allows economic development incentives, statutorily prohibits tax rebates. The Commissioners themselves could possibly have been held personally liable for these rebate payments. Secondly, the incentive went to the builder and developer – not any lessee who might rent any property. So it was no help to the small businesses that it was intended to attract. Thirdly, the concept of subsidizing the development companies who might build the big box stores that put small retailers out of business was abhorrent. Lastly, the glut of office and retail space that exists today already existed then. Piling more office and retail space into an already oversaturated market would drive down rents, push builders, developers, and site owners into bankruptcy because of the lack of tenants and low lease rates, and perhaps even threaten the solvency of local lenders. No legal counsel from any level of government would green-light the proposal, a point I repeated in a guest editorial for the News & Record. The concept died a quiet death.
“The fundamental terror that capitalism exploits is that we might not want anything” – Adam Phillips
One other macroeconomic factor that has been largely overlooked but will meld compatibly with sections later in the book is this: Up to 70% of the US GDP has been based on consumer-based spending. 70%! That is a fundamentally flawed and patently unsustainable economic model. People are now figuring out – outside of a lousy economy – that it just doesn’t make sense to spend money the way we have in the past. Until 2008, savings rates declined for decades as we spent and borrowed our way into acquiring more junk than we could ever use. Families have yard sales every year to cash out on all the stuff they’ve bought, and use the proceeds to take a vacation or simply buy more stuff for next year’s yard sale. Can you imagine your grandparents spending money that way? Hardly. Consumption bling is out; frugality is coming back in. Not good news for retailers.
As I said before, on-site retail sales are not growing. Except for neighborhood pockets of need or opportunity, only in rare cases have new stores not meant the demise of others. Open one; close one.
Another new frugality mindset is going to land in other industries as well. Somewhere along the line, Americans fell into the emotional trap of keeping up with the Joneses, for example owning automobiles that far exceeded basic, reliable transportation needs. In one of the greatest behavior-changing value-system-altering marketing perversions in history, we bought into a mindset that ignored common sense – going into debt to make purchases in the second largest category of expenditures in our lives, financing a household asset that we know ahead of time will depreciate rapidly, lose utility, and, in time, become worthless.
Financing a high-priced new automobile knowing full well it will depreciate to near worthlessness is the near-equivalent of planning a $15,000 funeral and fretting over the style, quality, and price of a casket – gotta have the satin lining. But funerals at least have a huge emotional investment and deep personal attachment associated with them, and for that we may somewhat forgive the extravagance. But cars? A commodity that loses $5,000-$10,000 in value the minute you drive it off the lot? And $2,000-$5,000 lost in depreciation every year? And two or three of them in every driveway? For mostly casual use of less than two hours per day? In the new world of frugality, we’ll bury this concept and regain our financial senses –because we’ll need to.
One off-topic observation: Has anyone else noticed that where there were once two to four gas stations at every major intersection, there are now two to four chain drugstores?
Lower sales on an absolute basis, causing regular store closures, in a low-growth/lower-wealth local economy where purchasing decisions are shifting to the internet is not a formula for success on retail properties or investment.
A concept has evolved that dovetails nicely with this more frugal era we’re entering. It is the idea of “enoughness.” Enoughness represents the thinking that once I have achieved what I need to support my family and myself, when I am happy in absolute terms with that things I have, when I’ve provided for what I believe is a reasonable retirement nest egg, I don’t need to make myself miserable to get more. I don’t need that 15th sweater or 40th pair of shoes. I don’t need to keep up with the Joneses for a larger house, a second house, two new cars sitting in the driveway, and the bragging rights of belonging to more clubs than I could ever visit. Enoughness means I can spend time with my family and do the things that are really important rather than work 18 hours a day to acquire things that truly aren’t important.
Enoughness, a new era of frugality, and a large, steady migration away from fixed-site stores in an over-built environment will continue to put severe stress on retail sales and retail real estate.
Real Estate Extra: Just because the near future of retail real estate doesn’t look very cheery doesn’t mean that migrating to another area of real estate development will be any more profitable. The Great Recession also brought about the Great Homecoming. Elderly parents who were being challenged by health and aging issues, and finding their financial resources had dwindled in stock market drops, pension challenges, and increased healthcare and retirement costs, are increasingly moving back in with their kids. The recession also brought to light that huge numbers of Millennials, unable to find work, are moving back in with their parents. Today’s re-entanglement of the nuclear family took three households and melded them into one. Increased apartment construction to handle those displaced by the Great Recession itself has been a hot market in some places, but at some point the risk of building more units appropriately diminishes the willingness to do it. With all that said, the outlook for single-family housing on a broad scale is not great.
Office space will be equally challenged. Time Warner Cable ran a series of ads not long ago that said “you don’t need an office.” And in many cases, they are right. Small companies without great need for storefront exposure are making money the old-fashioned way: by significantly reducing costs, in this case by moving the office home.
Next we’ll cover industrial space, but suffice it to say that new projects following the old industrial footprint model with plants exceeding 200,000 ft.² are going to become a rarity.