CCIM 3Q19 CRE Insights Paper
Changes in Store: 5 Predictions for the eVolution in Retail
K.C. Conway, Alabama Center for Real Estate director of research and corporate engagement and CCIM chief economist, released a special CCIM Commercial Real Estate Insights report entitled “Retail e-Volution: Predictions for 2025” that details five predictions for the future of retail real estate that debunk several primary myths behind the glut of bankruptcies and store closings in the past decade.
“This report is not another examination of retail’s demise, because quite the opposite is occurring,” says Conway. “With total retail sales increasing at an average annual rate in excess of 4.35%, this is a story of how retail will continue to grow and evolve, fueled by e-commerce, technology, logistics, and innovation.”
The report connects the dots of what’s happening in retail and what to expect by 2025, including:
Debunking Retail Myths
- The real culprit behind retail bankruptcies and closings is overleverage and the U.S. being “over-retailed” – not changes in consumer spending. One in four malls will close by 2022, and retail space will contract by more than 50 percent.
- Online apparel retail is actually less profitable than brick-and-mortar stores despite the proliferation of e-commerce (32 percent profit margin vs. 30 percent), partly because last-mile fulfillment isn’t cost effective (something even Amazon hasn’t figured out).
- 1. Online retail sales will double by 2025, partly due to online grocery sales. U.S. online grocery sales will make up 20% of the total grocery retail sales – some $100 billion – by 2025, with grocery stores shrinking to a third or half their current size with a more limited, locally curated inventory.
- 2. Providing experiences and services (e.g., co-retailing in hospitality and airports) will redefine brick-and-mortar success with hotels becoming the new showrooms for retail. Retail will also benefit from the “halo effect,” whereby online sales result in brick-and-mortar sales and vice versa.
- 3. To make delivery/last-mile fulfillment more cost effective, changes are needed in infrastructure and logistics, combined with innovation like autonomous trucks and new warehouse designs. For example, the new three-story logistics facility at 640 Columbia Street in Brooklyn’s Red Hook neighborhood will offer the tallest and fastest last-mile fulfillment thus far.
- 4. Adaptive reuse of retail centers and malls will be the most impactful trend for retail between now and 2025. For instance, The Howard Hughes Corp plans to transform the Landmark Mall, located in an opportunity zone in Alexandria, Va., into a mixed-use property with a hotel, residential, retail, office, and other public facilities. With capital and debt markets pulling back from retail due to overleverage and record-setting loss severities, this revenue could be replaced by deferred capital gains via qualified opportunity zone funds.
- 5. Property tax is a sleeper issue in retail that will get more litigious by 2025, including recent wins in favor of Disney and Walmart. Where will states make up this revenue deficit to fund an already financially strapped education system?
“Commercial real estate is experiencing one unprecedented change after another,” says 2019 CCIM Institute President Barbara Crane, CCIM. “Our chief economist’s insights and analyses continue to prove invaluable to our members and the industry at large.”
The full 3Q2019 report can be downloaded for free at www.ccim.com/insights.