- October 31, 2019
According to the recently released Ten-X Retail Market Outlook, the retail sector is on pace to set a new record in 2019.
By the end of the year, more than 12,000 stores are expected to close their doors, leaving behind empty, cavernous spaces in shopping centers and on street corners. Among the latest causalities are big names like JC Penney, Bed Bath & Beyond, and CVS.
The U.S. retail leasing climate remains weak, but so does the pace of new development, which is holding vacancies in the low 10% range. Property owners have seen effective rents increase modestly—a positive note tempered by the fact that rents haven’t budged much above their prior peak. The sector remains vulnerable, in part because its meager success remains tied to the strength of consumer spending, which was high during this period.
The most recent string of closures reflects just one of the challenges brick-and-mortar retailers face as their customer bases rely more and more on e-commerce and delivery services. They also have to deal with the effects of international trade wars on an already shaky market. Projections for the retail sector remain grim in the shadow of this uncertainty.
Repurposing Existing Retail Space
However, investors willing to embrace shopping trends are finding new opportunities in commercial real estate (CRE). Despite the record number of store closings, vacancies in the retail market remain below their recessionary peak. At the same time, CRE owners are seeing their effective rents increase gradually, due, in part, to changes in how owners and tenants are using the available retail space.
In some parts of the country, property owners and investors are bringing new life to these empty stores by repurposing them. Former big box stores are turning into entertainment facilities that are not affected by inclement weather, or medical complexes where consumers can take care of all of their medical needs at a single location.
One idea that’s gaining popularity is converting shopping centers into hotels. The layout, location, and features, like ample parking, make this a practical—and sometimes more cost-effective—transition. This approach also boosts the economy in the immediate area and brings foot traffic to the other businesses near the property.
Warehouses on the Rise
In a surprising turn of events, the same forces responsible for the demise of brick and mortar stores are creating new opportunities for the spaces they’re leaving behind. Online retailers have virtual storefronts that require tangible inventory. They need places to store their products, and they want them as close as possible to their customers. Not only does this reduce shipping costs, but it lets them offer next-day—and in some cases—same-day shipping services.
As competition in e-commerce grows, companies must find ways to distinguish themselves from their competitors while scaling their businesses down. One way they’re doing that is through optimizing the last mile. With strategic planning, they can position their warehouses in places that help them reduce the wait time between order and delivery.
The CRE Buyer’s Market
Despite the relatively bleak outlook for the retail sector, CRE brokers are still selling retail properties. The top markets for retail space remain in the south, notably in Orlando, Houston, Dallas, and Austin. San Francisco rounds out the list of the top five buy markets. Analysts also noted a slight acceleration in areas between Virginia and South Carolina, where population growth and the local economy remain strong.