In July of 2019 Amazon’s market capitalization surged beyond 1 trillion dollars. What is Walmart’s market capitalization? $335 billion. Target? $59 billion. Name the market cap of any major retailer and compare it to Amazon’s, it’s not even close.
We’ve all heard the headlines, the retail industry is in a downward spiral. With Amazon leading the way, e-commerce is dominating the traditional retail experience. In the US, nearly 12% of all retail spending is through e-commerce, a 17% increase compared to the year before. If that number seems small, consider the fact that in 2005 e-commerce sales accounted for only 2.3% of total spending. Within just a decade, we Americans have made a monumental shift in how we’ve been spending our money. Brick-and-mortar stores struggle to generate revenue as more and more consumers buy from home. Strip malls are being eviscerated by massive retailers like Walmart. Even the future of grocery stores, the trusty anchor to any residential retail development, seems uncertain. After all, if a drone could deliver milk to your doorstep, would you drive to the grocery store?
There is no arguing that brick-and-mortar retail is on the decline. E-commerce will continue to grow, and less and less consumers will drive to a store to buy what they need. That’s not to say that retail is dead, but it is past its peak. Given all this, why is the jury still out on the future of retail real estate? When we think of the core property types in commercial real estate, multi-family, office, industrial, and retail are what come to mind. However, it is quickly becoming the case that retail is not included in core funds. As Jonathan Miller writes for GlobeSt, “The idea of owning a 20 to 30 percent component of retail properties in an institutional core fund has been blown up whether we all realize it yet or not.” If retail is no longer considered core, surely it’s doomed. Credit-risks plague shopping centers where it’s only a matter of time before a tenant can no longer cover rent. This, however, gives a far too grim outlook on retail. Yes, the days of strip malls and convenience centers are reaching their end, but a new era of retail is taking its place.
In 2018 Forbes profiled Rick Caruso in an article titled “The Man Who Could Save Retail”. It’s a flattering look at Caruso’s real estate empire. Noting Caruso’s tendency to develop “Disney-esque shopping centers”, the article demonstrates something important. The convenience of buying things online is impossible to match. So when consumers go shopping, they are craving something more. This is why Rick Caruso is a billionaire. His genius is the ability to transform shopping from being a chore to being an experience. This is the silver-lining in an otherwise gloomy forecast on the future of retail real estate. As more and more retail space is expanded into multi-use, consumers are now shopping for the experience. Even though retail may no longer be core, its promise as an opportunistic and value-add investment play will continue to generate returns for investors savvy enough to spot the trends.