Retailer bankruptcies, department store struggles and empty malls have dominated recent headlines. The apparent culprit? A massive movement toward online shopping, driven by retail giants such as Amazon and Walmart. The “retail apocalypse,” as it has been named, reflects fears that consumers are abandoning bricks-and-mortar stores in favor of online shopping, potentially spelling disaster for retail malls and shopping centers. Given the outlook, are the fears of a retail demise justified?
We use MSCI data to illustrate that, despite the inexorable rise of e-commerce over the last 20 years, U.S. retail real estate investment performance has been resilient, providing stable returns. With a limited impact on performance to date, recent doom-and-gloom predictions may have overstated the current stresses facing retail asset investors.
That said, not all assets are equal, and the retail sector is undergoing rapid change, facilitated by technology in many cases. Some business models, such as video rentals, have become obsolescent. Others have had to adapt by reducing store counts, changing retail concepts or contracting unit physical sizes, as in the case of some banks and drug stores. This changing retail environment suggests that portfolios must be well managed and positioned for the transition that is underway. Understanding relative performance trends across the various retail sub-segments and their drivers is a key step in this process.
Retail Asset Performance
What has been the impact of online shopping on retail assets? Despite the continued growth of e-commerce, there has been only a modest difference in the total returns of retail versus non-retail assets, as shown in the below exhibit. Over the five years to September 2017, the annualized total return for retail assets was 10.4% versus 10.0% for non-retail assets.
Retail returns have tracked non-retail returns in recent years
Source: MSCI Global Intel PLUS, U.S. Census Bureau
Why Has Retail Been Resilient?
It is difficult to pinpoint any key drivers negatively impacting physical retail stores that could be directly attributed to e-commerce. Why is this, and are there ways to reconcile the continued growth in online sales with the stable performance of retail assets? There are a number of factors, which we outline below:
- Online sales have been growing steadily, but represent only about 9% of total sales, according to the U.S. Census Bureau. Bricks-and-mortar stores continue to account for the bulk of retail sales.
- Expanding retailers operate in thriving segments, while closures are concentrated in segments with declining profitability. Mall managers are adapting to this change by modifying their tenant mix.
- Omni-channel strategies – where retailers adapt their online and offline strategies to be complementary. As these evolve, some retailers are beginning to use retail space as a way to build brand awareness and engagement.
- Technological advancements are helping mall managers improve their assets. Free Wi-Fi and tracking systems allow managers to monitor shoppers’ traffic patterns by identifying where they visit and for how long. This data can then be used to make more informed development decisions, improve center efficiency and enhance the tenant mix.
Overall, we find that e-commerce has made a substantial impact on bricks-and-mortar retail and may continue to do so. The data suggest a rationalization of the over-retailed U.S. landscape, with only the most productive U.S. retail real estate surviving. Tenants may continue to be drawn toward those malls that generate the highest traffic as new concepts are introduced. Meanwhile, the most negative predictions may underestimate the demand for good quality retail real estate, given its ability to attract consumers and cutting-edge retailers alike.
The author thanks Amit Nihalani and Bryan Reid for their contributions to this post.