At its core, the term "retail apocalypse" refers to the wave of store closures that has been sweeping the nation. If you're thinking of investing in a storefront or shopping center, you need to know what this phenomenon means for investors. With that in mind, read on. We've summarized what's happening for you and what it means for your portfolio.
What is the retail apocalypse?
Put simply: The retail apocalypse is the catchy name that the mainstream media has given the wave of store closures happening across the country. It's not just small mom-and-pop shops that are having trouble keeping their doors open, either. Big-box stores, specialty stores, and shopping malls have struggled to earn their market share for the past decade, and the pandemic does not seem to be making things easier.
According to recent insights from Coresight Research, an estimated 10,000 storefronts are expected to close in 2021. Among those store closures, apparel and footwear retailers are expected to be hit the hardest, along with department store giants like JCPenney and Sears.
Meanwhile, discount brands like T. J. Maxx and Marshalls, along with grocery stores and dollar store chains, have seen the largest growth.
What has caused this shakeup in the retail sector?
In truth, the retail dive has been a long time coming. Over the past decade, consumer behavior has become increasingly reliant on online retail. According to historical Census data, online shopping accounted for just 5% of total retail sales in the first quarter of 2012. However, by Q1 2021, that number had jumped to around 15%.
It should come as no surprise that the COVID-19 pandemic has also hurt traditional retailers. Between lockdowns making it impossible to enter a storefront and supply chain issues making it harder to actually fulfill customers' orders, some believe that owning or renting retail space has morphed into an expensive investment with a dwindling payoff.
What investors should know before investing in the retail sector
Still, if you want to invest in commercial real estate, particularly in the retail industry, it's important to know that all hope is not lost. A June report from Placer.ai shows that mall traffic is rebounding. The report found that shopping mall visits were down just 8.1% compared to the same month in 2019. This number represents a massive comeback even from the beginning of the year when visits were down 23.8%.
Additionally, retailers are opening new locations. Although it is not as great as the number of retailers closing stores, Coresite Research estimates that traditional retailers will open 4,000 physical store locations this year.
However, those opting to invest in storefronts are doing things a little bit differently than they have in the past. For example, many major retailers are opting for smaller brick-and-mortar locations while turning their larger locations into giant fulfillment centers, or "dark stores." Other brands, such as Walmart and Target, are doing their best to rearrange their customer service offerings to make the shopping experience as easy as possible for consumers.
The bottom line
As a real estate investor, if you're going to invest in a retail store or shopping center in 2021, you need to do so with eyes wide open. The days of simply buying a physical store and waiting for your tenant to ask to move in are over, and they may not come back (at least not for a while).
Nowadays, retailers are looking for smaller retail space offerings that will give them lower overhead while they expand their online retail options -- investors who can provide that are going to be the ones to come out ahead.