The Changing World Of Retail And Hotels

This weekend not only were retail sales weaker than expected, but they were likely pulled forward and they were not likely profitable due to the deep discounts. The issue for real estate is that there has been a massive shift to online shopping, and it is accelerating at a high speed shift. It is very likely that in two years the percentage of online vs in store shopping will be reaching a tipping point, and that will likely continue. While it is true that going to the mall is a fun experience for some, and a way to pass time for the seniors, that does not translate into sales to generate the profits to retailers to maintain large, expensive stores. It is highly likely that the shift to stores becoming more like showrooms, and therefore taking less space, is going to accelerate. With the logistics of next day shipping now becoming highly efficient, stores no longer need to have the space formerly required for inventory storage. Amazon and others have perfected warehouse to residential front door delivery to a science and that means less space by bricks and mortar retail. It does mean more warehouse space easily accessible to major highways and rail in urban areas. If you are an owner of major retail you need to quickly start to talk to your tenants and doing research about these trends. It will get harder over time to find larger tenants who need the same space they once had.

Compounding the issues for retailers is Obamacare. Many of the retail employees are lower wage people and they will be caught up in the Obamacare nightmare of what to do about insurance. The issues for large retailers is their cost of healthcare is going to rise as the requirements of what has to be covered in a policy hit premiums, and so labor costs for the retailer will rise. If you accept that online shopping is going to impact space needs and usage, and you combine it with the cost issue of labor, then you will see that paying higher rents is a problem. Lastly, as we just saw, Christmas is not off to a promising start this year. Sales are down, discount ting is rampant and profits at retailers will be squeezed badly. There is a long term trend and a shorter term squeeze coming that you need to be aware of, and to do things to adjust your return expectations and rent forecasts.