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The Demise of Retail? Not So Fast, We See Opportunity

by Norman V. Nichols, SVP KeyBank Commercial Real Estate 07.20.2017

If you only read the headlines, you may think the sky is falling on retail. We challenge you to read a little deeper into the data because there’s still plenty of opportunity in the retail sector for savvy owners and developers. Deals are happening and there’s growth in specific sectors of retail real estate. Retailers are quickly becoming wiser with their growth and engagement strategies where there’s trouble. That’s what retail real estate owners, developers, and investors told KeyBank Real Estate Capital® at the 2017 International Council of Shopping Centers (ICSC) RECon, the largest annual gathering of retail real estate professionals. The results of a survey asking their views on the current market and their opportunities and concerns for the future suggest that industry professionals are optimistic, but aware of the challenges they face.

Actively Seeking Deals

When asked about their plans for their deal volume over the next three years, most respondents expect to be busy– more than 40% think it will increase from 11 to 20%, while another 30% see their deal volume increasing 5 to 10%. The respondents are active in all retail segments except malls – with 80% developing or investing in anchored community or neighborhood developments, nearly 40% active in unanchored community or neighborhood developments, more than 40% in big-box retailers, and 25% in lifestyle developments. The gross asset value for the majority of our respondents’ portfolios was under $500 million.

Q4 Graph about Deal Volume

Do you expect your current deal volume (acquisitions and/or development to increase or decrease over the next three years?

Increase 5-10%
31.25% of respondents
Increase 11-20%
43.75% of respondents
Decrease 5-10%
6.25% of respondents
Decrease 11-20%
6.25% of respondents
Flat/no change
12.50% of respondents
Q7 Active Retail Segments Chart

Which of the following retail segments is your organization active?

Unanchored community/neighborhood or strip
37.50% of respondents
Anchored community/neighborhood
81.25% of respondents
Big box
43.75% of respondents
Lifestyle
25.00% of respondents
Mall
0.00% of respondents
Other
18.75% of respondents

When thinking about just the next 12 months, the respondents see opportunity. More than 50% said they are somewhat optimistic about the retail real estate industry and another 6% are very optimistic, while less than 20% are somewhat or very pessimistic. Answers varied about where the greatest opportunities for growth lie over the next year, with about 40% choosing property disposition, 30% property acquisition, 30% new development and 25% redevelopment.

Q5 Optimism Next 12 Months Chart

How optimistic or pessimistic are you about our industry over the next 12 months?

Very optimistic
6.25% of respondents
Somewhat optimistic
56.25% of respondents
Neither optimistic nor pessimistic
18.75% of respondents
Very pessimistic
6.25% of respondents
Somewhat pessimistic
12.50% of respondents
Not sure
0.00% of respondents
Q6 Growth Opportunity Chart

Where do you see the greatest opportunity for growth over the next 12 months?

Property acquisition
31.25% of respondents
Property disposition
43.75% of respondents
New development
31.25% of respondents
Expansion or rennovation
18.75% of respondents
Redevelopment
25.00% of respondents
Refinance
0.00% of respondents
None / N/A
0.00% of respondents

eCommerce Challenges

All that said, retail real estate professionals are not just wearing rose colored glasses, the growth of online retail is a major reason for concern. Nearly 60% of respondents say the biggest challenge or obstacle to their organization is managing to the decreasing tenant demand due to e-commerce. Many also indicated that competition is the greatest challenge they are facing along with e-commerce and increasing interest rates were top of mind for about 18% of those surveyed.

Biggest Challenge Chart

What's the biggest challenge or obstacle facing your organization over the next 12 months?

Decreasing tenant demand due to eCommerce
56.25% of respondents
Increasing interest rates
18.75% of respondents
Refinancing or working out expiring loans
6.25% of respondents
Competition
31.25% of respondents
Real estate or financial bubble
6.25% of respondents
Governmental policy changes or regulatory uncertainty
0.00% of respondents
Other
18.75% of respondents

When asked what keeps them up at night related to the retail industry, it is not surprising that similar themes emerged. Respondents named issues such as “tenants losing market share to online shopping”, “decreasing productivity of brick and mortar as internet sales grow” and “how retailers are going to respond to the internet.” Others said store closings, the lack of anchor tenants, and rising cap rates were troubling them.

Based on their knowledge of their tenants’ online versus in-store sales, the majority of the respondents replied that online sales account for 5 to 10% of their tenants’ business. About 12% said 11 to 20% of sales are online, and 18% say more than 20% of their tenants’ sales are online.

The Big Picture View

As the retail sector addresses the migration of shoppers from bricks-and-mortar stores to e-commerce, the retail real estate profession is preparing for change too. However, in the near-term, most of the respondents don’t expect a huge shift in the fundamentals of their business – vacancy and rental rates. Nearly 70% of those surveyed said they expect retail fundamentals to stay the same in 2017, 12% said they’d improve, and 18% believe they will deteriorate.

Q9 Retail Fundamentals Chart

How do you expect the retail fundamentals (vacancy rates and rental rates) to perform in 2017?

Improve
12.50% of respondents
Remain the same
68.75% of respondents
Deteriorate
18.75% of respondents
Not sure
0.00% of respondents

Addressing what point of the cycle the retail sector of commercial real estate is in, the respondents don’t see a major shift either. Half of respondents said retail real estate is not in a bubble, while an additional 25% said it is not in a bubble, but heading in that direction.

Changing consumer behaviors continue to affect retail real estate demand, but owners, developers and investors are still actively looking for deals, whether in acquisition, disposition, new development or redevelopment. Understanding the factors shaping where we are in the real estate cycle is essential in making the right moves now and in the future.


To discuss all the insights retailers need to grow their businesses in the face of ecommerce, contact Norm Nichols at Norman_V_Nichols@keybank.com or 518-257-8576

For more e-commerce insights and the latest news and information from Key, visit www.key.com/knowledge-center

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