Family Office Real Estate Retail Real Estate Investing……..Really?
Questions Family Offices Should Ask When Investing in Retail Real Estate
By: Todd Laurie – Baceline Investments
It’s a well-known fact that the universe of retail is changing at a rapid pace. Dynamic influences, as well as market disruptors, are reshaping the way consumers shop. The evidence of significant change coupled with a lack of detailed understanding of the retail space, have led to a withdrawal of investors from retail real estate.
Where there is a lack of understanding, however, there is also ample opportunity. Family offices that take the time to understand the variables at play will not only be able to weather the changes taking place, but may be well positioned to thrive with a targeted investment approach in the coming years and economic cycles. The most notorious disruptor at work in the retail universe is e-commerce.
According to the US Census Bureau, total e-commerce sales for 2017 increased by approximately 16% from 2016, and accounted for 8.9%of total retail sales. This was up from 8% in 2016. Total retail sales increased by 4.4%year-over-year, 2016 to 2017. 
E-commerce has had the greatest impact in the sales of discretionary, durable goods. Electronics, sporting goods, and clothing easily lend themselves to sales on an internet platform. There are plentiful examples of retailers which have had declining financial performance followed by substantial store closures as a result of the growth of online sales.
Exceptions exist, however, and there are retailers that have invested in strong multi channel sales platforms which embrace e-commerce and have reduced the size of their stores. These retailers are now enjoying renewed growth. This demonstrates that retailers who are nimble and leverage the power of e-commerce can still be successful in today’s environment. Other exceptions include specialty and discount durable-goods retailers which are also performing well; “dollar ” stores, home improvement and discount clothing stores are examples that are still showing signs of growth and resilience.
However, the internet is only one variable, and it does not have the same influence over sales of non-durable or necessity-based goods. Services are also not as sensitive to internet commerce. Performance of service providers such as dry cleaners, salons, and fitness clubs remains healthy. This is intuitive for most people, as the goods and services offered by these retailers are not easily, if at all, provided by the internet. Restaurant sales, for example, have grown consistently year-over-year since the recession, and now exceed the sales of grocery stores. The fact that consumers’ needs for these goods and services remains fairly constant through all economic cycles has added benefit for investors seeking consistent, predictable income. Because of their inherent resistance to e-commerce and resilience during economic downturns, neighborhood and community shopping centers (or strip centers) that are convenient have been an attractive real estate investment for many years.
The appeal of neighborhood shopping centers as an investment opportunity has become clouded in the last couple of years as the impact of e-commerce has been felt in the durable goods retail space. Overwhelmed by stories of store closings and news articles which fail to distinguish between different types of retail, investors have forgotten about the essential differences that separate neighborhood centers, which are inherently internet and recession resistant, from their mall and power center cousins, which are not. Although tenants may change, (electronics stores give way to restaurants, and shoe stores are replaced by dental offices) consumers will prefer businesses that provide everyday goods and services to be conveniently located in the
neighborhood shopping centers near their homes.
Investors should continue to be wary of real estate occupied by retailers that are highly sensitive to internet sales or have large, expensive store footprints. Properties leased to companies that have robust multi-channel sales programs and a prudent mix of bricks-and-mortar that provide a positive “customer experience” and act as a hub for distribution, may be more viable. Real estate that focuses on everyday goods and services retailers seem to provide a very attractive opportunity for investment into the foreseeable future.