Investors Bank June 2017 Retail Sector Commentary

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“Retailing is a disaster.”  That is a common refrain these days.  But that is not correct.  Although brick and mortar retailers are having a rough go of it, total retail demand is rising at a decent pace.  What is happening is that the retailer of choice is becoming – more and more – the Internet.  But that change, although destructive for many, is something we have seen before and should lead to an even healthier retail sector. 

Households are still spending their money.  Okay, they are not shopping ‘til they drop or even shopping ‘til they are tired, but they are shopping.  The problem for traditional retailers is that consumers are letting their fingers do the walking instead of walking around malls.  

Ten years ago, e-commerce sales comprised 3.5% of total retails sales.  In the first quarter of this year, e-commerce demand reached 8.5% of all retail purchases.  Over the past decade, e-commerce has accounted for about 70% of the increase in total retailing.  In other words, people are bailing out of the stores like crazy, but not retailing.  Consequently, bricks and mortar stores are having a real problem surviving.  

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Despite what looks like a truly terrifying trend, the reality is that the retail sector has been through this before.  Indeed, what we are seeing is a transition that is actually not that unusual. 

After World War II, strip malls started to develop.  By the 1950s and ‘60s, when suburbanization exploded, retailing shifted out of cities and strip malls flourished.  These retail centers contained local shops as well as major national or regional companies.  

But the heyday of strip didn’t last long.  By the 1970s, regional malls started dominating the shopping scene.  Strip malls started failing and stores closed.  Eventually, many looked like ghost towns.  Sound familiar?

Eventually, many strip malls repurposed, attracting the local companies that couldn’t afford to locate in the regional malls.

Now, regional malls are being decimated by online shopping.  Stores are closing and, like the strip malls, ghost malls are appearing.

E-commerce is not going away.  It still has a long way to go before it peaks.  But that doesn’t mean shopping centers, however they may be defined, will go away.  

Indeed, the more demand changes, the more businesses adapt.  The less competitive regional malls are being reinvented.  They are becoming “town centers”.  These tend to be mixed-use developments and, like the strip malls of old, they are not enclosed.  

Today’s “retail” center contains traditional retailers, a heavy dose of restaurants, entertainment centers, residential units and offices.  They attempt to recreate the small-town centers of the past.  With households preferring higher density locations, these projects are structured to compete with center city locations.

As for the real estate that regional malls sit on, they are truly valuable properties.  They tend to be centrally located, near transit and highways.  More malls will fail.  But at least in metropolitan areas, they likely will not become ghost towns.  They will simply be repurposed, as they have in the past.  

 

The opinions expressed herein are the writer's alone, and do not reflect the opinions of TAPinto.net or anyone who works for TAPinto.net. TAPinto.net is not responsible for the accuracy of any of the information supplied by the writer.

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