According to some “experts”, the rapid growth of eCommerce poses an imminent threat to commercial real estate because of the “retail apocalypse” that is currently underway. Of course, this is far from the truth as anyone savvy enough to look at what’s actually happening in real estate can tell you.
No, physical retail is not dead.
No, your favorite brand or store isn’t doomed.
At least, not yet.
Physical retail isn’t only still around, but it’s actually still growing. Is eCommerce and online shopping growing more quickly? Yes, but that doesn’t mean it’s time to write physical “brick and mortar” commerce off yet. Even thought eCommerce is slowly taking over more of the market (hitting 20% of all sales in the near future), that remaining 80% is nothing to scoff at.
But, to generalize every sale into one mega percentage has its own pitfalls. Each category of sales is being impacted by eCommerce differently. Products that can be easily shopped for and delivered digitally (like books and music) are already taking over half of their market’s shares. (Apparel isn’t far behind at 20%.) However, the grocery business still remains strong in physical stores, with eCommerce only accounting for 2% of total sales.
What does this mean for real estate?
Well, it all depends on how you look at it – and, of course, which part of the market you’re in. The intresting is that b2b ecommerce and b2c ecommerce sectors have reacted differently to the changes. Let’s dive in.
How eCommerce is Impacting Industrial Real Estate
Since 2010, eCommerce sales have grown almost three times as fast as those made in physical stores. This explosion of sales has done something incredible to the industrial real estate market: It has profoundly increased the demand for spaces that play a role in this online supply chain.
Because eCommerce stores pride themselves on outstanding customer service (fast delivery, easy options for returns) and seemingly infinite selection, industrial real estate has been forever altered. Today’s warehouses need to be logistically brilliant, offering the ability to quickly get products to consumers. This means that the spaces in greatest demand are those that are big – and tall.
How eCommerce is Impacting Commercial Real Estate
Commercial real estate, on the other hand, is on the receiving end of some of eCommerce’s biggest blows. In-store sales in the United States have significantly dropped with the rise of eCommerce and online shopping, which means that commercial real estate is needing to be reimagined in order to remain relevant.
Shopping malls, in particular, are finding ways to attract online retailers in the form of smart marketing. In addition to social media and content strategies, many successful online shops are using commercial real estate spaces as an effective advertising medium. Lifestyle centers and high-end malls tend to have the most success with this type of “convergence” model, although pop-up shops and events throughout the country, even in small cities, are a viable option.
How eCommerce is Impacting Valuation in Real Estate
How real estate is valued today has changed because of eCommerce. This shift is causing some formerly successful spaces, especially in the commercial industry, to be valued lower. And, because many shops and vendors are no longer needing as much space because of the eCommerce boom, larger spaces are in less demand.
In order to keep property valuation high, landlords need to consider updating their properties so that they are aligned with current needs.
The Big Takeaway
Yes, eCommerce is growing. But, that growth is not hurting retail real estate. Lenders are still happy to work creatively to find terms that work for everyone, although they may require a bit more information to make sure that they are putting their money behind a smart venture. And, right now, there’s maybe nothing smarter than industrial real estate, especially those buildings and warehouses that can be used as distribution centers for eCommerce stores.
While commercial real estate valuations might be decreasing, industrial landlords are loving the record-high rents and ever-increasing property values. Because the space needed for these warehouses is massive, the demand to get into properties that can check all of the eCommerce boxes is skyrocketing. (According to recent reports, the industrial vacancy in the United States is currently enjoying an all-time low). The other good news is that eCommerce services are on the rise. With more and more entrepreneurs going into the eCommerce space, businesses like eCommerce SaaS platforms and eCommerce marketing agencies have been growing year of year.
As far as commercial real estate goes, grocery stores seem to retain the strongest grip, as consumers seem to be slow (or completely unwilling) to adopt shopping online in lieu of purchasing fresh food and produce they select for themselves.