What effects has the Internet had on the brick-and-mortar retail market? This question has been discussed, written about, analyzed and debated thousands of times over the past several years. During this time, it has become rather routine for consumers to purchase all sorts of goods on the Internet. From clothing to household items and office supplies, it’s clear there is a generational shift that is affecting one’s buying habits. As a result, vacancies are up and demand is down as fewer transactions are occurring in the physical stores.
Other consequences have also emerged as a result of this increase in online shopping. First, shopping centers have become less about a place to make routine purchases and more about a meaningful experience where members of a community can spend several hours on a weekend or afternoon. Landlords are expanding their basic services by providing value-added features that are not easily duplicated online. For instance, shopping centers now provide consumers with personalized services like farmers markets, concerts and holiday-themed events. Centers have quickly become mini-oases, catering to all members of the family with waterfalls, light shows and cartoon characters. The retail tenants that are in demand are those that cannot easily be replicated through a computer transaction, such as movie theaters, restaurants or ones that provide products that consumers do not typically purchase via the Internet, including those found in grocery stores, drugstores and high-end retail locations.
Yes, retail is most definitely experiencing a bifurcated market. Cap rates are compressing for properties that are either anchored by a national grocery store or drugstore, or are viewed as a destination centerpiece for a community. Conversely, retail centers that do not offer unique services or have historically relied on retailers whose products are now more often purchased online are experiencing less demand and thus, higher cap rates.
Although the Internet has predictably affected the retail real estate market, it has perhaps unexpectedly increased the demand for industrial real estate. During the recent recession, industrial properties suffered greatly due to the rapid decline in economic activity. Recently, however, retailers that account for a large percentage of their business online are requiring large distribution centers and warehouses in order to rapidly distribute their products to consumers. As such, the market for infill industrial properties is extremely tight, with occupancy rates at record highs and cap rates on the steady decline.
The Internet does not necessarily mean doom and gloom for the real estate market. Granted, it has made it pretty convenient for people to buy the latest best-seller while sitting on the couch in their pajamas. Those landlords evolving and willing to make the necessary expenditures, however, are witnessing growth and a valuation increase in their properties across the retail and industrial sectors.