As these trends evolve before our eyes, retailers of all stripes are being forced to adapt their business models or find another line of work. Savvy commercial real estate investors are responding by repurposing warehouses, vacant land and existing retail spaces to conform with new industry dynamics. And while zombie malls and large-scale mixed-use development projects dominate the headlines, individual investors and niche players can profit just like the big guys.
Here are five emerging trends in the retail space, and corresponding commercial real estate investment strategies to stay ahead of the curve.
1) Age of Experience
With virtually any product on earth now just a click away, retailers must lure customers into physical stores with engagement and entertainment. In the words of one REIT analyst talking to the Wall Street Journal, “Mall tendency has changed. What hasn’t changed is the human desire to socialize.” From well-worn brands like Lego and Apple to newcomers like Casper and Bonobos, successful stores now imprint an experience and positive association with a brand.
Unless Apple is calling to be your next retail tenant, seek out warehouse or flex space in trendy or soon-to-be trendy neighborhoods, looking for structures with good bones for an open plan. Make capital investments in systems: lots of power and new plumbing. With abundant natural light, a well-located warm shell could be the perfect spot for the next Urban Mini-Golf course or a digital amusement park like the Two Bit Circus in Los Angeles.
If full-scale renovation is out of your budget, consider a non-traditional tenant for a traditional space. Beam and Anchor is more than just a furniture flea market in a Portland warehouse. The owners created a gathering place for local craftsmen and women, complete with workshops and an incubator-like maker space. Creative businesses like these can often pay more rent than traditional industrial tenants, and they are likely to make improvements to an owner’s building which add value even after the tenant leaves.
2) Health and Wellness Boom
The global health and wellness market is somewhere around a $1 trillion industry, and has doubled in size in only 10 years. American employers spend more than $14 billion annually on wellness programs and there are now almost 4,000 mindfulness and meditation apps, according to the Global Wellness Institute.
Even if real estate investors can’t profit from app sales, there are ways to play the health and wellness boom with sticks and bricks. Fitness tenants like yoga studios and CrossFit gyms often fit multiple zoning categories and require minimal owner-paid buildouts. Focus on upscale retail districts with good access (public transportation, walkability or ample parking) and screen tenants to ensure the operator has a track record of success.
A cautionary tip: Bikram, or “hot” yoga outfits may have Zealot-like followers, but the extreme heat can cause co-tenancy issues: Not everyone wants to share, or smell, their neighbors’ sweat.
3) Transportation Revolution
Even though they haven’t figured out how to turn a profit doing it, companies like Uber, Lyft, Bird and Scoot have upended the way people get around. Developers and cities are scrambling to reshuffle parking ratios, and we are even hearing fresh rumblings from those intrepid tinkerers trying to commercialize flying cars.
Few real estate investors realize that one option for playing this burgeoning trend is to go long parking. This may sound counterintuitive since according to Forbes, Uber is killing the parking business. True, parking for restaurants, night clubs and hotels isn’t exactly a growth business, but shuttle operators, scooter companies and even car-sharing titans Uber and Lyft have acute parking needs for their fleets. This demand is most ideally met close to population centers, while still being far enough from the urban core to find affordable rents. Consider yard space that can be easily paved and secured, or even covered warehouses with columns spaced wider than the typical impossible-to-navigate Whole Foods parking lot.
4) Shifting Urban Food Dynamics
Speaking of unprofitable businesses changing the way urban-dwelling Americans live, companies like DoorDash, Grubhub and Zume are radically transforming food consumption patterns. And thanks to high rents, soaring labor costs and competition from delivery services, food purveyors are looking for ways to sell their food beyond the typically dine-in restaurant. Foodies now rule, as organic and locally sourced foods command a premium over their flown in, hormone-laden relatives.
Often housed in converted urban warehouse space, commercial kitchens can be profitable tenants, but build-out costs are enormous. Consider partnering with a known operator and negotiating a revenue sharing lease in exchange for sharing the capital investment burden. Better yet, engage your local community like the founders of The Basement in Reno, who transformed a century-old post office into an inviting food and retail gathering space.
5) The New “Click and Mortar”
Casually drop “the Halo Effect” at your next cocktail party, then pause for effect. Referring to the impact brick-and-mortar stores have on a brand’s web traffic, retailers are learning that physical locations can actually boost online sales. Internet-first, brick-and-mortar-second brands like Casper, Warbly Parker and Bonobos pioneered the “outpost” concept, where customers can experience products in a physical space, make immediate online purchases then walk out empty-handed.
Since companies often consider these locations a marketing expense, they may be less price sensitive when it comes to rent. Commercial real estate investors should focus on high-profile, high-visibility retail locations or convenient flex space with good transportation access. Established retail companies typically take a more corporate approach to real estate, so seek out their tenant-rep brokers to understand space requirements and acceptable economic terms.