For the past several years, retail real estate has been the black sheep of the investment real estate industry. Reports of declining mall sales and failing properties have filled the industry publications. Fears that on-line retailers will kill brick and mortar retailers have kept many investors away from retail properties forcing up capitalization rates and making retail property purchases challenging to finance.
Evolving technology along with changes in consumer behavior is creating disruption in the retail sector. Where and how people buy goods is changing rapidly. The biggest factor impacting retailing is the trend from sales taking place in brick and mortar stores to online sales. Currently, only 9 percent of total retail sales take place online, but that number is increasing by 15 percent with about 64 percent of U.S. households having an Amazon Prime account. This trend has led to a record number of store closings of eight to ten thousand per year, and space absorption has turned negative for malls and lifestyle centers across the country.
Retailing as We’ve Known It is Changing
Despite the negative news in the retail sector, gross retail sales are increasing at a healthy pace and brick and mortar retailers are fighting back with promising new strategies. In fact, retail store openings are continuing to outpace store closings and great locations still rent for premium prices. But retailing, as we’ve known it, is changing. The next generation of retailing is becoming a melting pot of e-commerce platforms, physical stores, sophisticated supply networks and showrooms. Successful stores are giving customers things that they can’t get online such as convenience, knowledgeable staff, ability to examine an item up close and try things on. The new world of retailing needs to be more entertaining with an emphasis on the consumer experience. If done properly, shopping in the real world can be much more interesting and fun, then shopping online.
So how does this translate into successful real estate investing, leasing and asset management in a resort town like Aspen? The value of commercial real estate in resort destinations like Aspen is heavily dependent on the success of the retail and restaurant sectors. In Aspen, 82 percent of total sales and consumption taxes, excluding lodging taxes, are directly or indirectly related to the retail and restaurant sectors. So the health of these two sectors is directly related to the health of the commercial real estate sector.
Landlords Need to Assess How Retailers Are Adapting to New Trends
So successful investors, owners and asset managers of commercial properties in Aspen need to pay attention to these evolving trends in retailing. The question that investors and owners need to ask when buying and leasing properties, is how well the existing tenants, or potential new tenant, are adapting to the new world of retailing? Are they on the cutting edge of this rapidly changing retailing environment, or are they falling behind? Retailers who are not making the kind of changes needed to survive in the new retailing environment are likely to start seeing declining sales which could lead to less value for the commercial landlord as well as issues of lease defaults and potential bankruptcy.
Landlords and asset managers, particularly in a resort community like Aspen, seeking to create the greatest value, should be seeking out specific retailing concepts and not settling for whoever is willing to pay todays asking rent. Even though tenants are capable of leasing a space for the asking rent today, it doesn’t mean they will prosper and increase the value of the building. The value of commercial properties in the Aspen retail core are heavily dependent on the right mix of retail tenants, restaurants and bars that will continue to attract and entertain shoppers and consumers.