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COVID-19 Is Accelerating the Effects of E-Commerce in Retail Real Estate

Let’s face it, online shopping has become part of our culture. Why go to a shoe store when you can buy any pair in the world online? Why drive around town looking for and mailing that perfect present when you can just open an app and have it delivered directly to your nephew on his birthday? Last year, for the first time in history, e-commerce sales exceeded ten percent of total retail sales. 

Because of this, retailers are closing shop all over the country, with at least 2,600 stores set to close in 2020. Now struggling retailers are in an even worse position with the COVID-19 virus closing stores and keeping people inside their homes. The future is uncertain for retail. No one knows how long this virus and social distancing requirements will keep people from going out and shopping. 

As brands deal with the realities of COVID-19 and increasingly turn to e-commerce business models, a greater amount of retail space is at risk to go unfilled in the future. However, there are two factors at play that may close the gaps that retail will leave across the real estate market. The first factor is e-commerce itself. The shift to e-commerce creates a need for another property type, urban warehouses. The second factor is a cultural shift from material purchases to experiential purchases, a shift that will certainly remain intact once we’re all able to resume “normal” public activity, however far away that may be.

Both realities will play a tremendous role in the way investors think about the retail landscape moving forward. And, to take advantage of the opportunities in the retail market and to account for the current crisis, that reimagining needs to start as soon as possible, if investors want to capitalize on this trend.

One clear shift that may result from the pandemic is that, depending on how long the threat lasts, it may push U.S. companies to invest more in domestic manufacturing. This, coupled with the rise in e-commerce, creates a need for more warehousing space. Given that, industrial properties are in high-demand as brands become increasingly inundated with online orders. According to the Deloitte Center for Financial Services, “industrial real estate demand is expected to increase by 850 million square feet, to 14.8 billion square feet, by 2023.”

Investors looking to enter or stay in the retail space will see increased returns in industrial investments, as demand for warehousing begins to outpace the need for traditional retail properties. As brands increasingly deal with mass orders, extensive inventory sets and demanding shipping timelines, industrial real estate investments will be a sound decision in the current market, with significant ROI potential. 

With the growth of e-commerce and the pandemic-led major spikes in demand as products continue to disappear off of shelves at alarming rates,  has come the growth of concepts like same-day delivery, making it more important than ever for many brands to have last-mile warehouse facilities within major metro areas or major residential areas, in order to get products to their customers as quickly as possible. As companies look for warehousing closer to “main street,” we will see an uptick in the conversion of urban and suburban retail space to industrial warehouses to meet this need. Additionally, converting already existing retail spaces instead of commissioning the development of new, industrial spaces, will save investors significant building costs.

For a while, younger generations (Millennials and Gen Z) have made it clear that they value experiences over material things. Even older generations are jumping on that boat. A study by Expedia found that a majority of Americans (74%) prefer experiences over products.

While traditional retail in malls starts to wane, this culture shift will drive the conversion of malls into more mixed-use properties. Mixed-use properties will encompass everything from residential units to restaurants and other forms of entertainment (think: darts, bowling, movies, axe-throwing). Even if this virus has kept us apart temporarily, people will always want to gather, it is a basic human need.

If today’s mall could offer more than just retail, consumers will naturally gravitate back to them. Like retail, the mall concept is not dead, but it does require re-imagination. A well-informed, experienced investor should certainly take a hard look at mall properties with a new lens moving forward. They are valuable spaces if investors know what to do with them. For every clothing store that closes in a mall, a brand that offers experiences is taking its place. This is how investors must tackle mall properties if they want to continue to invest in them.

Overall, investors must always be savvy when making moves in the market, especially during this unprecedented time, but, looking to the next decade, mixing retail with industrial and mixed-use properties will likely be a sure bet for them.

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