At First National Realty Partners, we are retail real estate investors. Within this property type, we prefer grocery store anchored retail shopping centers that are complemented by supporting tenants with a heavy experiential/service component. These include companies like boutique gyms, quick service restaurants, medical offices, and beauty salons.
These types of assets have performed well for us in the past and we continue to acquire them for our portfolio. However, the retail commercial real estate (CRE) category continues to undergo massive transformation. From the accelerated rise of e-commerce to the COVID-19 pandemic, the retail landscape is changing quickly. It is our job to recognize these changes and to capitalize on them as we allocate our investment capital. As we begin 2021, here are 5 trends shaping the future of retail properties (in no particular order).
Trend #1: The Rise of Medical Retail
One of the major impacts of the COVID-19 pandemic is that it has quickly separated essential retail businesses from non-essential ones. For example grocery stores have thrived in the pandemic while commodity based retailers like clothing and stationary stores have suffered. The space vacated by these tenants has created an opportunity for the healthcare industry.
In their article “Big Opportunity for healthcare to fill retail space,” JLL states that healthcare tenant occupancy has risen from 19% in 2013 to 24% as of the end of 2019. Further, they state that 69% of adults received healthcare in retail settings over the last 12 months. Typically, these services include things like: primary care, dental, diagnostics, and emergency/urgent care. Combined, these trends highlight the opportunity for healthcare providers to expand their reach and for property owners to fill empty space.
Their advice to healthcare providers considering leasing retail space is to:
- Analyze claims data, demographics and real estate market data to build their expansion strategy
- Understand the likely impact on adjacent retail while addressing consumer preference for convenience and efficiency
- Use predictive analytics to make data-driven, location decisions to ensure long term success
We agree that there will be an increasing number of medical tenants. We also think that their presence will have a significant impact on the commercial real estate market well into the future.
Trend #2: Blurring the Lines Between Retail and Industrial
Consumer demand for faster e-commerce deliveries has driven brick & mortar retailers with an e-commerce presence to consider more of an omni-channel fulfillment strategy. In their report, “The Future of Commercial Real Estate: 12 Trends for 2020 and Beyond,” Newmark Knight Frank highlights this trend. Depending on the size of the retailer and their available resources, it can take one of two paths.
First, companies like Amazon or Wal-Mart continue to pursue a hub and spoke distribution model, which combines large distribution centers in suburban areas with point of sale distribution in existing stores. Wal-Mart is a perfect example of this strategy. As they exist now, there is a Wal-Mart store within 10 miles of 90% of the population in the United States. By using large distribution centers to ship big items and their existing stores to ship small items or handle in store pickups and returns, this “industrialization” of retail space is expected to continue for the foreseeable future.
Secondly, retailers that don’t have the supply chain network of Wal-Mart are placing increasing importance on their stock rooms. In addition to receiving and processing merchandise to be sold on premises, they also need to process orders that come in from their website. To accommodate this use case, retailers are increasing the size of their store rooms and shrinking the size of their sales floors.
Trend #3: Increasing Adoption of Robotics Technology & Artificial Intelligence
It isn’t just science fiction any more. Major retailers continue to experiment with the use of in store robots, drones, and other autonomous technology to deliver an enhanced shopping experience. To underscore this point, the National Retail Federation states:
“2020 was supposed to be a breakout year for robots in retail, perhaps even more so given the “hands-off” mindset that colored the past year. That wasn’t the case. Experiments and rollouts were sluggish as other projects took priority. Still, the objectives remain firm: In-store robots must accurately, repeatedly and autonomously collect and process data to solve business problems. Drones still have the potential to make certain trips obsolete, conserve energy and contribute to more sustainable practices. There are bright spots: Walmart is experimenting with driverless cars and flying drones; Walgreens has partnered with Wing and is testing drone deliveries in Virginia; Nuro’s autonomous vehicles are rolling across a handful of spots around the country; and robots are powering in-store inventory management and speeding fulfillment in distribution centers.“
While implementation of the technology at scale may still be years away, the short-term use cases are compelling for last mile deliveries in major urban areas like Manhattan, Denver, Los Angeles, and San Francisco.
Trend #4: Touch Free Technology is Here to Stay
Born out of necessity during the pandemic, many retailers quickly adopted touch free technologies to wide acclaim. They aren’t going anywhere. According to the National Retail Federation:
“a tremendous amount of innovation during the pandemic was born of the need to reduce the frequency of touch. And shoppers have embraced the trend with gusto. Digital shopping has soared, contactless payments have quickly become the norm, and augmented and virtual reality — technologies that have been dancing on the edge of more widespread acceptance for the last few years — are poised for growth. Case in point: virtual fitting rooms. Using AR to facilitate virtual try-ons is proving to reduce return rates. Look for retailers to connect mirrors to social media — a move that will provide a more interactive personalized experience. Shiseido is using hands-free technology (along with artificial intelligence and algorithms) to remotely analyze skin and offer personalized suggestions. A Japanese company recently debuted the first-ever foot-operated vending machine allowing hands-free access. And it’s hard to ignore the elephant in the room: Amazon One, the new technology for its Amazon Go stores that lets shoppers pay for their groceries by scanning the palm of their hand.”
We see these technologies taking hold in our tenant stores and expect that it will be the norm going forward.
Trend #5: Successful Retailers Are Experiential
It is no longer enough to just have a retail storefront that sells goods. Successful retailers are chasing new opportunities for growth by investing in significant tenant improvements that add an experiential component to the in-store shopping experience. This strategy is primarily targeted towards millennials, but it benefits all. For example, Nike’s flagship store in New York has a basketball court and a series of treadmills where potential buyers can test out the product. Although these experiences may not boost overall sales significantly, they are proven to drive continued brand awareness which is equally as valuable.
How These Trends Impact Our Investment Philosophy
As we think about our investment philosophy on a go-forward basis, the trends mentioned above (and others) mandate constant refinement of our investment philosophy. To that end, these changes highlight the need to:
- Continue to pursue shopping centers that contain tenants with a heavy experiential component that is difficult to replicate online. We believe grocery stores are at the core of this thesis.
- Understand tenant business plans. We have begun to invest more time to understand what each tenant’s business plan is and how it capitalizes on the trends above. For example, we may work with our grocery store renters to understand how they plan to utilize the square feet in their store rooms to fulfill online orders. This type of understanding ensures that our tenants succeed so they can continue to pay their rent. It also positively impacts property valuations and the pricing that can be achieved when it comes time to sell.
- Enhanced Due Diligence. If the COVID-19 pandemic has taught all real estate industry participants anything, it is that due diligence and stress testing of tenant financials are of paramount importance. While we always review tenant financial statements, we place added importance on it given the shifting nature of the retail landscape and the potential for future economic downturns.
- Embrace the trends. When looking for new tenants, we prefer to work with those who are ahead of or willing to embrace current trends and in a position to capture the additional market share that comes from it.
Interested In Learning More?
First National Realty Partners is one of the country’s leading private equity commercial real estate investment firms. We leverage our decades of expertise and our available liquidity to find world-class, multi-tenanted assets below intrinsic value. In doing so, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in.
If you are an Accredited Investor and would like to learn more about our investment opportunities, contact us at (800) 605-4966 or info@fnrpusa.com for more information.
