Retail Stays on the Evolution and Growth Track

SEATTLE—To be sure, commercial real estate is experiencing one unprecedented change after another, and nowhere is this clearer than in retail. In fact, a recently released report, “Retail e-Volution: Predictions for 2025,” details five predictions for the future of retail that debunk several primary myths behind the glut of bankruptcies and store closings in the past decade. The report was created by CCIM Institute chief economist KC Conway, in partnership with the Alabama Center for Real Estate at the University of Alabama.

“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 outlines several retail predictions:

1. Online retail sales will double by 2025, partly due to online grocery sales. US 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 of current sizes with a more limited, locally curated inventory.
2. Providing experiences and services (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 what the International Council of Shopping Centers calls 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 innovations such as autonomous trucks and new warehouse designs.
4. Adaptive reuse of retail centers and malls will be the most impactful trend for retail between now and 2025.
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?

In this exclusive, Conway discusses the retail evolution, co-retailing, price differentials with brick-and-mortar, adaptive reuse of retail centers and property taxes from retail.

GlobeSt.com: While many categorize retail’s status as an apocalypse, you’re saying it’s an evolution. What’s driving the growth/evolution of retail? Why are predictions of doom so overstated?

Conway: Apocalypse is an overly dramatic term used by some to equate the retail store bankruptcies and closings post-Great Recession to its demise. I couldn’t disagree more. Every 15 to 20 years post-World War II, retail evolves in response to macro changes. In the 1950s, it was the growth of suburbs and malls, and then came big-box stores and lifestyle centers. Now it’s technology and the ability to buy anything, anytime and have it delivered to your home. The fact is, consumer spending isn’t declining. Sales at the physical store are shifting to a more convenient platform. We’re evolving from a “shop-and-pickup economy to an order-online-and-deliver-to-me economy”. It started with books and music with Amazon and now it’s groceries, cars and even meals from your favorite restaurant. Retail is just evolving, and the need for physical retail space is shrinking. Small is the new big in retail real estate–and bigger is the new big in e-commerce warehouses.

GlobeSt.com: How is co-retailing impacting the evolution? What’s behind this retail trend/movement?

Conway: Co-retailing in this context is retail aligning with services–like hospitality and medical–not pop-up retail. Thanks to technology, mobile devices, etc., retail is untethered from a physical location and format–to be anywhere and at any size. Retail is following traffic to where people conduct other daily life tasks and obtain services–and sharing that space and traffic whereby both benefit from the relationship. Hotels are one location worth highlighting. Airports and medical campuses are two others. This alignment of retail with services also allows retail to reimagine how it operates and design loyalty programs that capitalize on these new relationships. These emerging loyalty programs with hotel chains are mimicking what airlines and car rental agencies discovered decades ago.

GlobeSt.com: You mention a myth that’s out there that e-commerce is cheaper. What often overlooked factors can eliminate price differences with brick-and-mortar? What role does last-mile delivery play?

Conway: A popular myth is that e-commerce is growing so quickly at double-digit annual rates because it is a more cost-effective model. The truth is the cost of omnichannel technology, inventory management (where approximately 30% of online purchases are returned) and last-mile delivery cuts deep into margins. In-store retail delivers a 30% margin whereas e-commerce models deliver only mid-teen to low 20% margins. Despite this margin difference, the industry is not reversing course. The convenience of e-commerce is a genie out of the bottle, and retailers are scrambling to figure out solutions to increase margins.

Some of those solutions include more in-store pickup and return models that put transportation costs and burden back on the consumer. Others include weening consumers off free shipping by deploying loyalty programs that provide this perk only to loyal shoppers, like Amazon’s Prime membership. A lot will change–especially as things morph deeper into retail lines like grocery. New metrics are being developed to hold retail suppliers and shippers accountable too like On Time and In Full. This was introduced by Walmart in 2018 and places a penalty on suppliers and shippers if they don’t meet an on-time and in-full (not broker, pilfered, etc.) ratio. Walmart initially set the ratio at 75% and recently increased it to 78%. Other retailers–especially in the grocery and food space–are following Walmart’s lead.

GlobeSt.com: Why do you say that adaptive reuse of retail centers and malls will be the most impactful, powerful trend for retail between now and 2025?

Conway: 20,000 stores closed in 2017 to 2019 (a record 10,000 in 2019). The supply of vacant retail stores is a growing challenge. It’s an eye sore that begets more blight if left vacant and is a drain on local government revenue as vacant stores don’t have the same value for property tax purposes as occupied and going-concern businesses. The US is the most over-retailed place on earth by a multiple of 2:1 or more with 24 square feet of retail per capita. That will shrink to closer to 15 square feet by 2025 as online retail sales double from 10% of total retail sales to 20%. These vacant stores are in good locations–often along transportation corridors–and can be solutions to affordable housing needs and other problems facing cities today. Plus, many of these assets are in opportunity zones. Property owners, retail investors with vacant big-box retailers and local government all have a common interest in using adaptive reuse strategies to put vacant retail back to productive use.

GlobeSt.com: In your final prediction of the top five, you tackle property taxes from retail. Why should this be on everyone’s radar?

Conway: When retail stores go empty, the property owners appeal the property taxes and typically see a 25% to 50% reduction, i.e. a huge hit to local government revenue. The volume of stores closing now through 2025 presents a material local government funding challenge. If adaptive reuse strategies aren’t used to repurpose these empty and functionally obsolete buildings, local government will be faced with raising property taxes on other property types or cutting services. Property tax is a sleeper issue that needs to be addressed before it becomes a material risk to every MSA by 2025.