The holiday shopping experience just isn’t what it used to be and, for many real estate investors, this could be a very good thing.
Once focused on grand department stores with elaborate holiday window displays, consumers now turn to online shopping to check off the items on their wish lists. The 2018 PWC report on Emerging Trends in the U.S. and Canada notes that U.S. retail sales are seeing a long-term annual growth rate of 4 to 4.5 percent. Yet some of the focus once centered on retail centers is shifting toward industrial options that serve the demands of an e-commerce market.
There’s no doubt that e-commerce is changing the face of shopping, but it’s only one factor in the shifts retail markets are experiencing. Overall, the retail industry is reaching maturity and the traditional department store is becoming obsolete in the face of specialized retail options. Consumer demographics and preferences are driving retail offerings as technological advances help to streamline the entire shopping experience.
But, before you count retail out in the face of e-commerce and overcapacity, note that the forecast isn’t all bad for retail investors. Capital is still available to owners and investors who present assets that have been well-planned and thoughtfully positioned within key locations. And, despite oft-mentioned challenges, retail properties are still considered relatively healthy. Examples of e-commerce entities opening stand-alone locations only serve to support this stance.
On the flip side of the e-commerce coin, industrial real estate investors are citing the technological trends as a positive force driving the success of the sector. The world’s largest industrial real estate owner, Prologis, is a prime example. Serving the warehousing needs of e-commerce giant Amazon has helped the company’s stock tick up 22 percent through October, according to Forbes.
Examples like this are spurring developers to invest massive amounts of money into building new warehouse space. The Toronto Star reported that U.S. expenditures in warehouse construction reached $2.6 billion in September – a number that triples the amount spent just five years ago.
And, while industrial has been a top-ranked property sector for several years, market fundamentals have only gotten better in 2017. Supply and demand are relatively balanced and vacancies are historically low. In fact, net absorption is tracking to reach nearly 1.5 billion square feet in a five year period. Plus, industrial users are willing to pay for space that fits their needs, spurring rent growth.
The PWC report is quick to point out that other factors build upon the positive impact e-commerce is having on industrial and warehouse development. For instance, structural changes in product categories across e-commerce, transportation and health care create increased requirements for supplies, devices and equipment, along with the space to house these assets. Plus, warehouse space is becoming essential to meet consumers basic daily needs, as is the case in fresh food services and delivery-based grocers.
This last point is especially noteworthy as grocery chains work to compete with Amazon Fresh. They’re creating distribution networks to move perishable goods, and investing in cold storage units. In the past few years, temperature-controlled warehouse units have benefitted from cap rate compression as warehouse values have increased substantially, according to CoStar. Current market caps in the segment range between 7.5 and 8.25 percent.
While features like cold storage may appeal to a growing market, what holds true across retail and commercial sectors is the importance of location. The distribution chains that power e-commerce services rely on market placements that expedite processing and shipments. And, for brick-and-mortar retail outlets, success still hinges on the development’s placement within a community.
As always, the real estate professionals at Intelica CRE are monitoring opportunities for investment and growth in the St. Louis market and beyond. Reach out to us if you’re looking to capitalize on the e-commerce trend, or position your holdings for success amidst market conditions. We can help you make the right moves to make the most of your portfolio.