Over the past decade, brick-and-mortar stores have seen a steady decline in their growth. After the great recession of 2008, the retail industry witnessed a consistent decline in the sales of brick-and-mortar stores. The trend continued to follow with the rise of e-commerce businesses like Amazon. What was once everyone’s go-to destination for groceries, utilities, and household necessities is now facing extinction. This massive wave of retail stores closing down across the nation is referred to as “The Retail Apocalypse”.
In 2012 e-commerce sales were around 5% of the total retail sales. In 2020, after the COVID-19 pandemic that number blew up to 19%. To maintain social distancing protocols and follow government protocols, retail stores had to be shut down. The entire retail sector was devastated, generally department stores and shopping malls.
Although some exceptions were made for particular retails like wholesalers, drug stores, and convenience stores to remain open during the pandemic. However non-essential stores like apparel and recreational stores took a major hit.
Even after the easing of lockdowns, retail stores’ sales records were still below pre-pandemic levels. People are still afraid to step out of their houses and all their needs are being met by online stores. As a result, over 8000 stores in the US have closed down and big chains like JCPenney, Neiman Marcus, and Payless filed for bankruptcy. Although some of these brands’ reasons for their downfall was their acquisition by private equity firms like Bain Capital and KKR.
Departmental stores and shopping malls are facing severe consequences. Since most of the outlets are mostly retail stores and decreased foot traffic resulted in severe losses. Due to COVID and the trends of stores closing down, malls have seen an increase in vacancy rates and rent defaults. Shopping mall owners’ revenue decreased by around 50% in 2020.
Is Retail Dying?
The number of brick-and-mortar stores closing down every year is quite big. And the pandemic is compelling stores and malls to remain closed to contain the spread. But all this doesn’t necessarily mean the end of retail stores or shopping malls.
According to a report by placer.ai, foot traffic has begun to recover by mid of 2021. The foot traffic of June 2021 showed strong results for outdoor malls. Also, the highest total sale accounted for e-commerce websites and online shopping was one-fifth of total retail sales.
In addition to that, the malls have seen great improvement in the last year compared to 2019 and 2020.
Moreover, with successful vaccination drives and lifting lockdowns, people are gaining the confidence to step outside again. As a result, the number of stores closed in the last year was far less than the stores closed in 2019 and 2020. And even with the majority of the stores closing down, brick-and-mortar stores still managed to maintain positive growth in their profits every year. Also, according to retail apocalypse data from Coresight Research, around 4000 physical stores have opened up in the last year.
Retailers are adapting to new trends and coming up with new strategies. Brands like Walmart and Target are offering new and improved customer service to enhance their in-store experiences. Stores like Macy’s, and Kroger are preferring new and smaller physical stores. And, they are also turning their large physical stores into fulfillment centers or as they call them, dark stores.
Future Retail Predictions for 2022
1. Physical stores are going to stay
In the future, one-third of the total people will be opting for online ordering. However, the rest of the people prefer the old way of shopping. Physical stores allow customers to interact with the product before buying, which is a huge deal for customer experience.
2. Open-air malls/ Outdoor malls
Open-air malls have gained quite a popularity after the lockdown. According to research from JLL, open-air malls have collected 50% more rent than traditional malls. Another data from Placer.ai shows that in August 2021 the foot traffic for open-air malls was 8.1 million. Many traditional mall owners are de-malling their properties and transforming them into open-air mall.
3. Omnichannel Experience
Omnichannel experiences are gaining popularity. With buy-online, pickup in-store features smaller brands are investing in pop-up shops and fulfillment centers.
4. Better Supply Chain
To keep up with the competition and market conditions brick and mortar retailers need to keep deliveries fast and inventory to be always ready. Furthermore, to compete with big e-commerce giants, retailers can use their large space of physical stores to keep inventory ready for quick dispatch.
5. The labor shortage will affect prices
After COVID-19 employees are not willing to return to their jobs, specifically in the retail industry due to low wages and higher-risk environments. As a result, this will eventually lead to a hike in the prices of goods.
Based on these studies, performances, and future retail predictions it is quite clear that the retail apocalypse is not going to happen anytime soon. Experts believe that this was just a mere shakeout that was crucial to bring change to the retail industry.
Effect of retail apocalypse on Retail Commercial Real Estate
It is quite obvious that the retail apocalypse would surely be bad news for the commercial real estate sector as well. 2020 was the year in which the retail industry, especially apparel and commodity markets suffered greatly.
Furthermore commercial real estate properties like malls rely on the rent of these types of retail and department stores. Therefore vacant spaces and rent defaults due to poor sales and store closure had a huge negative impact on commercial real estate.
But, we can’t put 100% blame on the COVID-19 pandemic for the fall of retail real estate. The retail industry has been at its demise long before COVID. E-commerce websites had to play a huge role in this. With the increase in online sales, physical store sales were bound to fall.
As a result, gains of physical stores decreased by a significant margin leading to reduced income, and loss of jobs, which ultimately affected the commercial real estate industry. According to Geophy, regions, and cities that have a higher rent-to-income ratio, were strongly affected by the pandemic.
However, despite poor sales performance and higher vacancy rates, the retail industry is still not dead yet. Retailers took to different kinds of approaches and strategies to keep their business afloat in this environment. Concepts like dark rooms are allowing retailers to stay in business rather than closing stores. Thereby, it eliminates the risk of tenant vacancy for investors.
Real estate investors with a diversified portfolio do not have to worry much about the retail apocalypse, even if it were to come true. Investment in warehouses and storage spaces will offset the damage caused by physical stores closing down.
Bottomline
We can pretty much see that instead of falling to its demise the future of the retail industry and physical stores look good enough. With stores still being relevant and in business, there is no need for real estate investors to shy away from this market. With a little bit of change in its operation, the retail industry can surely make a strong comeback in 2022. You should consider all these points before jumping into retail properties and make sure to study the retail real estate market thoroughly.