Keeping Up with E-Commerce

Impact on Retail Real Estate

By Paul Rosta on May 30, 2014 in News

As online sales continue to rise, the signs of the Internet’s impact on retail real estate are hard to

According to projections by Forrester Research, cross-channel retail sales—including those influenced by online information but completed in stores—will hit $1.8 trillion by 2017, up from $1.2 trillion in 2012. Projections of new-store openings hold more subtle clues. Cassidy Turley estimates that restaurants will account for 43 percent of the 38,000 new-store openings expected this year. Until 2011, new-restaurant openings averaged only about 35 percent of the total. The result hints that online sales are contributing to a broad slowdown in non-restaurant retail expansion, according to Garrick Brown, director of research for Terranomics, Cassidy Turley’s retail affiliate.

For retail real estate management, the implications of e-commerce are both far-reaching and complex. The much-noted preference for smaller footprints is a fact of life for many electronics retailers, department stores and other categories, which can treat their stores as showrooms, notes David Birnbrey, chairman & co-CEO of the Shopping Center Group.

The influence of online shopping on this shift is impossible to miss. As a rule of thumb, Birnbrey says, the most likely products to be sold via e-commerce are those people don’t mind waiting for. For instance, according to the most recent estimates by the Census Bureau, computers and consumer electronics account for 22 percent of all Internet sales. Apparel, the runner-up, makes up 18 percent—the only other category to reach more than 10 percent of total online sales.

Yet rising online sales do not negate the value of a strong brick-and-mortar presence for apparel retailers. Ordering a DVD online is one thing, but customers like to see clothing and try it on before taking out their wallets.

In this fast-changing environment, retailers are expanding the complementary use of different retail channels. Fulfillment is one activity demonstrating robust growth, with bigger retailers increasingly fulfilling e-commerce orders from their stores, observes Bryan Jensen, vice president & principal of supply-chain strategy and logistics consulting firm St. Onge Co.

By the end of last year, Best Buy Co. was offering its ship-from-store service at more than 400 locations. Macy’s, too, is expanding its omni-channel services, with plans to make fulfillment available at 500 stores. And in November, Gap Inc. expanded its “Reserve in Store” service to more than 200 Gap stores in 15 markets as well as its entire Banana Republic portfolio. Customers are invited to order as many as five items, which are held at the store for pickup until the next business day.

On the flip side, some retailers are downsizing their stores, partly vacating a large-scale footprint. That presents a series of challenges for the owner and its leasing agent, since they have to ensure enough frontage for the retailer that replaces them, according to Jeff Green, a veteran retail real estate consultant based in Phoenix. But space that needs backfilling also gives the management team a chance to refresh a center—for instance, replacing an office products store with a strong anchor like Whole Foods.

More complex are some new strategies emerging from a combination of growth in e-commerce and continued economic recovery. Macy’s, for instance, drew headlines in January when it announced intentions to shutter stores in a number of states—including Arizona, Kansas, Maryland, New York and Utah—and trim about 2,500 jobs. Its focus on its online sales was widely cited as a factor, but amid the buzz about the closings, the company’s plans for new stores may have been overlooked. By fall 2016, the department store chain expects to open stores Macy’s-brand stores ranging from 150,000 to 195,000 square feet in the Bronx, N.Y., Las Vegas, Miami, Ponce, Puerto Rico, and Sarasota, Fla.

During that stretch, Macy’s will also roll out new Bloomingdale’s stores in Honolulu, Miami and Palo Alto, Calif. Of note, the 120,000-square-foot store at Stanford Shopping Center in Palo Alto will replace an aging predecessor that, at 229,000 square feet, is also twice the new store’s size.

Executives cite such cases as evidence that e-commerce is bringing about an evolution of real estate management strategies rather than an abandonment of brick and mortar. Moreover, forward-thinking owners and retailers are riding other e-commerce trends to make their stores more competitive. In 2012, Forest City upgraded WiFi capability throughout its portfolio. The step allowed the company and its tenants to adapt to the constantly changing mobile devices that retail center visitors use to enhance their shopping, according to Jane Lisy, senior vice president of marketing for Forest City Enterprises Inc.’s commercial group.

Owners can even employ online tools to give shoppers a say in managing centers. As part of its makeover of Short Pump Mall, a 1.2 million-square-foot regional center in Richmond, Va., Forest City invites mall customers to visit popularise.com. The website is a vehicle for owners to seek community feedback on projects, as well as to provide updates. By mid-February, the Short Pump page had attracted 177 suggestions for possible retail and restaurant tenants and another 78 ideas about amenities at the property.

Paul Rosta is senior editor at Commercial Property Executive. This discussion of e-commerce is excerpted from a larger article published as part of a special report on e-commerce that appeared in the March 2014 issue of CPE. The special report includes a Q&A with industrial sector leaders about how e-commerce is shaping demand for specialized fulfillment centers.