Cadieux adds that the only way to overcome these challenges would be to position those brick-and-mortar locations in a way to support fast and cheap shipping of products via online sales. “It has been quoted that Amazon loses a significant amount of money every year from the cost of shipping. They are “investing” in taking over the convenience sector, and the only way to compete is to match them. Big- and mid-box retailers have 'warehouses' strategically placed near customers. Whoever can position these retail spaces into 'urban warehouses' will be best positioned to compete and survive the race to the bottom and the race to the top.”

Repurposing the centers of the past will be the biggest challenge for the retail sector, Joe Dykstra, co-CEO of Westwood Financial, tells GlobeSt.com. “Large interior malls were developed with old-world concepts and typically incorporated three tenants in every category. The challenge for retail owners will be repositioning or renovating these assets into centers that make economic sense today.”

Moreover, not every retail property is in a premium location, nor does every retail property lend itself to alternative uses, adds Randy Banchik, co-CEO of Westwood Financial. “Retail owners will need to evaluate the demographics surrounding their centers and what these demographics can economically support. Retail owners with inferior, obsolete centers in secondary and tertiary markets will struggle to execute strategies that will economically underwrite changes.”

As successful merchants focus on product differentiation and creating a unique shopping experience in store, they will continue to outperform homogenous retailers, who are not adapting this model, Jeff Edison, CEO of Phillips Edison & Co., tells GlobeSt.com. He adds that categorizing the retail sector as one category does not allow room to see a lot of the nuances of each segment. “At Phillips Edison, we invest almost exclusively in grocery-anchored shopping centers. We believe that necessity-based retail centers tend to be recession resilient, so we believe this asset class will continue to remain resilient even in this challenging environment. While the broader sector may be pulling back, we believe our unique strategy positions us to continue to grow and expand.”

A major current challenge for retail owners is struggling to adapt older class-B and -C malls to the changing consumer demands and the overall space requirements of retailers today, Patrick Ward, founder of MetroGroup Realty Finance, tells GlobeSt.com. “Originally, these older malls were filled with large department stores and multiple retailers in the same category. Now, retail owners are struggling to fill the excess space in these centers and/or reposition them into different retail uses such as mixed-use, including office and residential or more entertainment-focused centers.” Some of the better positioned B and C malls are courting community retailers such as grocery and drug stores to fill the retail spaces left vacant by department stores, he adds.

Retail centers are still receiving 1.2 visits per week from adults, but some centers will not survive the transitions, says Ward. “This may be because they were poorly conceived, and while the anchor tenants survived the first 20 to 30 years, they were not strong enough to be repositioned.” Large retail owners who are proactive and adapt to the evolving retail industry will continue to see opportunities, he points out. “The overall nationwide occupancy rate for retail centers is 93%, which is still a very healthy level.”

Ward says that owners and users of real estate have access to better, more-detailed demographic studies than in the past. “What was once just a traffic count and a one-, three- and five-mile income study are now detailed behavioral studies and trend reports, revealing preferences in entertainment, shopping and food options. These detailed studies provide retail owners with a better understanding of the market and targeting consumers and result in better, well-executed centers positioned for long-term growth.”

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ORANGE COUNTY, CA—From big-box downsizing to Internet shopping and rising costs, the challenges retail real estate faces are great, but the nimblest and most resourceful players will win in the end, experts tell GlobeSt.com. We spoke with a number of executives who have a strong handle on different aspects of the sector to find out some of the biggest challenges retail real estate is facing and how it is overcoming these challenges. Stay tuned for a more in-depth feature on this topic, our Annual Retail Review, in Real Estate Forum's May issue.

Lindsay Parton, president of DJM Capital Partners, tells GlobeSt.com the greatest challenge retail is facing is the downsizing of big-box retailers ranging from Sears to JCPenney. “All of the larger big boxes are challenged in trying to get rid of space. Most of this space will be turned into some other type of use, either office or multifamily. This situation does provide both challenges and opportunities. Operators like DJM are taking advantage of these opportunities while we have them, but it is a fundamental rebalancing of the retail format around America and around the world. Particularly in the US, we have come to be essentially over-retailed.”

However, Parton says in spite of all the doom and gloom, his firm is highly optimistic. “We think particularly in Southern California there are new opportunities. There are more than 40,000 new stores opening in 2017. It's not all doom and gloom; there are good things happening in the retail sector. But it is particularly market dependent; markets where there are big barriers to entry or where there is development weakness are where we are seeing the best opportunities moving forward.”

Nate Cadieux, president of real estate for the Moniker Group Inc., says the biggest challenge is retailers in the “middle” of the price range. “If the bottom is fast and cheap, and the top is special and not limited by price, the middle isn't great at either. It's products that are not going to be able to compete with online prices, but can be easily found and purchased online—stores like JCPenney, Radio Shack and Sports Authority. These retailers used to be considered conveniently located, trusted and stocked products at a fair price. The Internet and globalization have created a supply chain that is actually more convenient and cheaper. Any store that operates in the 'middle' will struggle to deliver a value proposition strong enough to draw the same number of customers it previously did.”

Cadieux adds that the only way to overcome these challenges would be to position those brick-and-mortar locations in a way to support fast and cheap shipping of products via online sales. “It has been quoted that Amazon loses a significant amount of money every year from the cost of shipping. They are “investing” in taking over the convenience sector, and the only way to compete is to match them. Big- and mid-box retailers have 'warehouses' strategically placed near customers. Whoever can position these retail spaces into 'urban warehouses' will be best positioned to compete and survive the race to the bottom and the race to the top.”

Repurposing the centers of the past will be the biggest challenge for the retail sector, Joe Dykstra, co-CEO of Westwood Financial, tells GlobeSt.com. “Large interior malls were developed with old-world concepts and typically incorporated three tenants in every category. The challenge for retail owners will be repositioning or renovating these assets into centers that make economic sense today.”

Moreover, not every retail property is in a premium location, nor does every retail property lend itself to alternative uses, adds Randy Banchik, co-CEO of Westwood Financial. “Retail owners will need to evaluate the demographics surrounding their centers and what these demographics can economically support. Retail owners with inferior, obsolete centers in secondary and tertiary markets will struggle to execute strategies that will economically underwrite changes.”

As successful merchants focus on product differentiation and creating a unique shopping experience in store, they will continue to outperform homogenous retailers, who are not adapting this model, Jeff Edison, CEO of Phillips Edison & Co., tells GlobeSt.com. He adds that categorizing the retail sector as one category does not allow room to see a lot of the nuances of each segment. “At Phillips Edison, we invest almost exclusively in grocery-anchored shopping centers. We believe that necessity-based retail centers tend to be recession resilient, so we believe this asset class will continue to remain resilient even in this challenging environment. While the broader sector may be pulling back, we believe our unique strategy positions us to continue to grow and expand.”

A major current challenge for retail owners is struggling to adapt older class-B and -C malls to the changing consumer demands and the overall space requirements of retailers today, Patrick Ward, founder of MetroGroup Realty Finance, tells GlobeSt.com. “Originally, these older malls were filled with large department stores and multiple retailers in the same category. Now, retail owners are struggling to fill the excess space in these centers and/or reposition them into different retail uses such as mixed-use, including office and residential or more entertainment-focused centers.” Some of the better positioned B and C malls are courting community retailers such as grocery and drug stores to fill the retail spaces left vacant by department stores, he adds.

Retail centers are still receiving 1.2 visits per week from adults, but some centers will not survive the transitions, says Ward. “This may be because they were poorly conceived, and while the anchor tenants survived the first 20 to 30 years, they were not strong enough to be repositioned.” Large retail owners who are proactive and adapt to the evolving retail industry will continue to see opportunities, he points out. “The overall nationwide occupancy rate for retail centers is 93%, which is still a very healthy level.”

Ward says that owners and users of real estate have access to better, more-detailed demographic studies than in the past. “What was once just a traffic count and a one-, three- and five-mile income study are now detailed behavioral studies and trend reports, revealing preferences in entertainment, shopping and food options. These detailed studies provide retail owners with a better understanding of the market and targeting consumers and result in better, well-executed centers positioned for long-term growth.”