How THIS COMMERCIAL REAL ESTATE SECTOR is Struggling to Compete

If you read the headlines, you would think that construction is booming everywhere in the country in every sector. However, one sector is certainly struggling: the shopping center development niche. With nearly 6,000 stores already slated for closing in 2019 and retail bankruptcies abounding, it seems likely that the traditional shopping center could be a thing of the past[1]. That is bad news for the developers whose specialties lie in the creation and construction of the traditional shopping mall and strip mall, warn analysts[2].

The problem is far-reaching and likely to affect major metropolitan markets that are otherwise relatively strong. For example, at the peak of the last retail real estate boom, in 2007, developers completed 8.4 million square feet of shopping center projects in the Chicago area alone. However, in 2019, developers will likely add about less than 10 percent of that. According to Crain’s Chicago Business, “developers [ in Chicago] are actually less busy than they were in the worst year after the real estate crash, 2011, when they finished 1 million square feet.”

A National Trend

Retail analysts report today that the United States has more retail space than it needs. However, consumers’ desire for a new type of retail experience that incorporates shopping, dining, and entertainment all in one destination, are fueling the drive to create new commercial retail space. Older spaces may be difficult to renovate to meet this new need, though, so older properties may sit vacant while newer ones are erected nearby. This represents big opportunity for investors who are able to identify “older model” developments that can be updated for less than new construction.

“The smart money these days are people that are reusing existing spaces,” said Mid-American principal Andy Bulson, author of a report on how e-commerce is disrupting the brick-and-mortar retail industry and interfering with the traditional trends for demand for more retail space associated with a hot economy. Bulson notes that these new uses are not always in the traditional retail space, either. Empty Sears spaces have been converted to apartments and health clubs, for example, while entire malls are being redeveloped as mixed-use properties with apartments, condos, grocery stores, restaurants, and shops all in the area.

Is this the End for Retail Real Estate?

Although consumers are certainly becoming more comfortable with using the internet to order everything from breakfast to bedframes, the brick-and-mortar sector is certainly not dead, yet. For starters, although many long-lived retailers like Payless Shoe Source, Walgreens, Victoria’s Secret, and JCPenney are closing many stores this year[3], stores that analysts tend to describe as “eccentric,” like Five Below, Aldi, and Ollie’s Bargain Outlet, are expanding. The market could level out in the next five or six years, with online spending growing to make up about a quarter of the market and new brick-and-mortar trends emerging as some brands expand and others retract.

Tell us what you think:

  • Do you think online retail will ever eclipse brick-and-mortar?
  • Will “old” malls eventually die out completely?
  • Would you invest in a retail building?

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[1] https://www.cnn.com/2019/04/16/business/store-closures-retail-bankruptcies/index.html

[2] https://www.chicagobusiness.com/commercial-real-estate/shopping-center-construction-drop-another-low

[3] https://therealdeal.com/2019/04/16/us-retailers-have-closed-more-stores-this-year-than-all-of-2018/

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