Retail Isn’t A Dirty Word

NOTE TO READERS: This brief, authored by EDR Insight’s Dianne Crocker, was published in Commercial Real Estate Direct’s Year-End 2017 edition and is reprinted below with permission from the publisher.

Retail Isn’t a Dirty Word: Transformation Drives Opportunity

Like the broader commercial real estate sector, the property due diligence market is a market in transition. Transition due to the cyclical nature of the market. Transition due to the pressure of regulatory forces on lenders. And transition due to technological advances that are driving efficiency. Within this rapid transition is disruption—but also opportunity. In perhaps no other asset class is this rapid change more pronounced than in retail. Consider a few stats:

  • Retail is changing at its fastest pace since the introduction of regional malls in the 1950s.
  • Forty percent of current U.S. retail centers will be obsolete by 2020.
  • For each company closing stores, 2.7 are opening them.
  • There were over 4,000 net store openings in 2017, and another 5,500 projected for 2018.

Developments in retail this year go way beyond the dire headlines about record-high store closures. “Real estate investors forget that every 15 years or so, we blow up retail concepts and reinvent new ones,” said KC Conway, Director of Research & Corporate Engagement at the University of Alabama. “A year in retail is like leap-year every year—four times as much change gets packed in because disruption is just more pronounced in retail given its direct link to the consumer. There is not an apocalypse in retail nor a decline in consumer spending.”

The encouraging wrinkle is that disruption in retail is opening up opportunities to use space in a new way that is consistent with the changing demands of consumers in today’s e-commerce culture. For anyone supporting property due diligence on retail properties or design work on site redevelopment, the retail glass is half-full.

Opportunities to redesign, reuse, remake retail properties

On a panel at a CREW Boston event last spring, Katy Gnapp, Head of Commercial Real Estate Banking at Bank of America Merrill Lynch, proclaimed: “Retail is not overdeveloped. It’s under-demolished.” As retail properties change hands, it opens the doors for some interesting deals for property reuse and value-add opportunities. Malls and old shopping centers are becoming mixed use developments, medical centers, senior housing or a ‘power village’ if the area has the right demographics.

There are successful e-commerce retailers that started out online, only to realize the benefits of having a physical location so that is driving a new wave of site selection for brick-and-mortar stores. New opportunistic funds are emerging to take advantages of bargain properties in good locations. Traditional big-box retailers, like Target, are moving to smaller store footprints. Walmart Stores, Inc. just changed its name to Walmart to get customers to think beyond its 11,700 store locations and offer more options to buy. There are strong capital flows into the grocery-anchored market, and one of the most aggressive players today is Aldi, a German-based grocery chain. According to GRS Group, a provider of commercial real estate services, Aldi’s goal is to become is the third-largest grocery chain in the US by store count within the next four years by adding 900 locations by 2022, and remodeling their 1,300 existing stores. Their German rival Lidl is set to open up 100 stores by the summer of 2018, primarily on the east coast. In the short term, their aggressive expansion plans are great news for the commercial real estate industry.

Out with the old way of doing things, in with the new

As retail reinvents itself, it is creating significant momentum for transactions involving malls, shopping centers and single-store locations. The rise of e-commerce triggered retail’s latest stage of evolution, but it is also changing how retailers conduct site selection and property due diligence. “We are seeing a trend with our retail customers looking to couple business due diligence with environmental due diligence. As a result, Intertek-PSI is working to offer our clients business analytics like traffic counts and retail sales metrics embedded in a GIS platform like our property risk data. We are also seeing more requests from retailers looking to perform early screening of multiple candidate properties at once,” commented Steve Long, Principal-in-Charge, Environmental Services, Intertek-PSI.

The era of “risk-off” due diligence is here.

The recession had a measurable impact on the way lenders and investors view property risk. Likewise, each year that passes brings us one year closer to the next cyclical downturn. As buyers and lenders get more cycle-aware, and as prices level out in some metros and some asset classes, deals aren’t the slam-dunk they may have been a few years ago. The era of “risk off” due diligence has arrived. A $2 million shopping center today may not be worth that much a few years down the road, and there is a slimmer margin for error in assessing a property’s risk profile. Buyers are looking for ways to protect themselves in the event of a market slowdown, but in retail, the interest to buy well-positioned properties is there. “Demand by investors continues to be strong as developers have been able to obtain more favorable lease terms,” observed Noreen Clindinning, President of GRS Group. “The franchise restaurant and retail space continue to see heightened interest from private equity acquiring franchisees and entering into area development agreements.  Consolidation also continues as owners seek to gain market share and territories from smaller franchisees.”

In terms of geographic hot spots for retail properties in 2018, the ULI/PwC’s Emerging Trends in Real Estate report puts Salt Lake City, Pittsburgh and San Jose in the top three (see accompanying table). EDR’s ScoreKeeper model tracks environmental due diligence activity (measured in terms of the volume of Phase I environmental site assessments) for the U.S. market, states and metros. Since due diligence is performed prior to a property transaction, Phase I ESA activity is a leading indicator of growing commercial real estate investment market. The retail magnets in the ULI/PwC ranking that were already seeing strong demand for site assessments in the third quarter were Orange County, Seattle and Pittsburgh. If the ULI/PwC prediction is accurate, current slow performers like San Jose, Portland and Fort Lauderdale may have cause for optimism in 2018.

Strong demand for exciting new ways of evaluating retail sites for investment and reuse are ahead as the lines blur between e-commerce and the shopping experience, and as new technologies change the old ways of looking at property risk efficiently—not just in retail but in other asset classes as well.


The full edition of CRE Direct’s Mid-Year Update includes insight from a number of industry leaders examining the challenges the retail property sector is facing, year one of risk-retention rules, surging CMBS issuance, and the year-end CMBS awards:

  • E-Commerce: From Zero to 35 Percent of Retail Sales in 30 Years
  • Apocalypse Not: Why the Demise of Retail Centers Is Some Truth, Some Hype
  • The Good, the Bad and the Ugly
  • It’s Not All Doom and Gloom for Retail in the U.S.
  • Republicans Notch a Major Win