Whether it’s Black Friday lineups or online shopping on Cyber Monday — investors may be questioning what the rise in online shopping means for brick-and-mortar retail investments.
Will Robson, executive director and head of real estate applied research at MSCI Inc., wrote about this topic in a blog post earlier this year based on an MSCI paper.
“We use MSCI data to illustrate that, despite the inexorable rise of e-commerce over the last 20 years, U.S. retail real estate investment performance has been resilient, providing stable returns,” he wrote in the blog. “With a limited impact on performance to date, recent doom-and-gloom predictions may have overstated the current stresses facing retail asset investors.”
The data shows that over five years to September 2017, there has only been a small difference when it comes to the annualized total returns of retail assets (10.4 per cent) versus non-retail assets (10 per cent). Robson noted this could be explained by the fact that online sales only represent about nine per cent of total sales, according to the U.S. Census Bureau.
Despite this, the MSCI data shows that “not all assets are created equal.” Some retail business models, like video stores, are becoming obsolete, while other models are changing and adapting, like banks and drug stores.
“This changing retail environment suggests that portfolios must be well managed and positioned for the transition that is underway,” wrote Robson. “Understanding relative performance trends across the various retail sub-segments and their drivers is a key step in this process.”
Robson also said mall owners and retailers are responding by amending their strategies, with mall owners changing their tenant mixes and retailers using brick-and-mortar stores to compliment online shopping. They’re also using data to get ahead of the game.
“Technological advancements are helping mall managers improve their assets,” stated the blog. “Free Wi-Fi and tracking systems allow managers to monitor shoppers’ traffic patterns by identifying where they visit and for how long. This data can then be used to make more informed development decisions, improve centre efficiency and enhance the tenant mix.”
Canadian Investment Review spoke to Michael Peck, senior vice-president and head of Canadian institutional investments at Invesco Ltd. as well as Phinex Wong, a fund manager at Invesco Real Estate- Asia.
“Retail is definitely changing, there’s absolutely no doubt, and whenever there’s change there’s risks, but there’s also opportunities,” says Peck.
Real estate investors should look at where people must go, like grocery shopping, or look for experiences like high-end retail, he says, noting as retails changes, there will be more of a focus on the beneficiaries of the changing face of retail.
“And a lot of that relates to logistics,” says Peck. “So be it the Amazons of the world, or whatever, all these warehouses and distribution centres are becoming much more important and they are supplanting the role of retail to some extent.”
Wong says he thinks brick-and-mortar retail will still exist because retailers are changing their business models by combining online and offline sales or putting automation into their physical stores.
“From a perspective of a landlord or investors, I think we have to be humble,” says Wong. “We need to work closely with retailers, tenants, and see how they’re going to change their business model. And we also have to change ourselves to work with them, to make sure our asset, at the end, can still be worth it.”