Retail, at its core, is the exchange of goods – and physical storefronts provide consumers a place to experience products and services in person.
Recently, as consumer preferences have changed and ecommerce has emerged, these storefronts have struggled. But an evolution in retail real estate has started to develop, and if continued, it suggests potential strong performance moving forward.
The need for innovation and evolution
The traditional shopping mall model that consisted of a large, enclosed structure, populated by hundreds of specialty stores and anchored by larger department stores was introduced almost 70 years ago. However, there has been very little change.
Recent tenant mix in many malls no longer matches consumer demand, and is heavily dependent on categories that are no longer growing at an accelerated pace. In the past, shopping malls relied on department and apparel and accessory stores. Together, they are more than three quarters of gross leasable area, but are also the two slowest growing retail categories.1
As a result of not understanding current consumer demand, regional mall and shopping center REITs have performed poorly compared to other sectors.
Thus, in order to increase returns for investors, retail real estate must modify its product and tenant mix to better reflect current sales trends and consumer preferences.
The importance of brick-and-mortar
The emergence of ecommerce over the last decade-and-a-half has changed the way society shops for goods. However, Americans still prefer many benefits of the in-person shopping experience.
According to recent studies, ecommerce only accounted for 8.4 percent of total retail sales in 2016, and 64 percent of shoppers still prefer to shop at brick-and-mortar stores.2