Shelf Space: 2017 Outlook for Retail Real Estate

By Anthony La Malfa & Natalie Kotlyar, Partners, BDO USA: Which retail trends will be critical for the real estate industry to watch in 2017?

Kotlyar_Natalie-IMG_3597-CR2-BG5Today’s retail industry is bursting with buzzwords and fresh business models, including direct-to-consumer e-commerce, handpicked subscription boxes, clicks-to-bricks retailers, and influencer product placement on Instagram and other social media platforms. For retail real estate, this confluence of disruptive factors makes for a seismic shift in companies’ demand for and use of space.

The current brick-and-mortar “renaissance,” in which retailers are increasingly recognizing their challenges and embracing opportunities in stores, has spurred many tech innovations and enhancements. As these investments finally reach stores, more retailers are realizing seamless omni-channel strategies. And those who aren’t keeping up risk being left behind.

Which retail trends will be critical for the real estate industry to watch in 2017?

Anthony La MalfaTech yields new marketing opportunities and security risks

“Smart” store features, like the new time-saving, checkout-free Amazon Go grocery concept in Seattle, could push retailers to raise the bar on their efforts to incorporate new-age technology into stores. The automated “virtual cart” technology that eliminates check-out counters and queues could revolutionize operations not only for grocers, but also for big-box and convenience stores.

Innovative and efficient new technologies are great news for investors, as Amazon has proven since the launch of Amazon Go, but could have different implications for commercial landlords. The technology required to create a seamless checkout experience could also bring up new—and as-yet unknown—cyber and data security risks for landlords and third-party commercial property managers.

Pop-ups are back in vogue

As more traditional brick-and-mortar retailers refresh their concepts or consider opening new locations­­­, many are testing the waters with pop-ups. Temporary locations are a great opportunity to capitalize on hype and, often, lower rents. As a result, pop-ups have seen a resurgence in recent quarters, especially among brands with a strong social media presence.

Not only do pop-ups allow retailers to show off creative concepts, they also give landlords a unique chance to showcase space to potential longer-term tenants. With vacancies starting to rise in major shopping hubs like Manhattan’s Fifth Avenue, welcoming pop-up tenants can generate revenue on otherwise-empty properties and increase the likelihood of leasing the space in the future.

Rents and valuations soften

As e-commerce gains more traction and continues to disrupt the sector, brick-and-mortar footprints are still trending smaller. Changing demand could factor into average asking rents falling by an average of 18 percent in the third quarter in all Manhattan shopping districts except Lower Manhattan. With investors and REITs moving into secondary markets in search of consistent returns, the question remains whether the softening in top-tier markets will prove to be a bellwether for the rest of the nation’s malls and Main Street shopping.

The December rate hike has set interest rates on an upward path into 2017, putting pressure on landlords to bring in higher rental rates to balance out the added cost. While a rise in interest rates signals stronger market fundamentals and healthy demand, rental rates have long been high—and perhaps even unsustainable—which indicates that we could see downward pressure on real estate values in 2017.

Anthony La Malfa is a partner in BDO’s Real Estate & Construction practice, and may be reached at alamalfa@bdo.com.

Natalie Kotlyar is a partner and national leader of BDO’s Consumer Business practice, and may be reached at nkotlyar@bdo.com.