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Clicks alone won’t break retail bones

E-commerce may be outpacing overall sales, but bricks–and-mortar stores are once again on the rise, as retailers attempt to serve customers online, on their phones—and in person.

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Video may have killed the radio star, but is e-commerce doing the same to local retailers? Will the rise of everything from Amazon to Zappos take down your neighborhood book store or local shoe shop?

Don’t bet on it.

While the much-touted demise of good ‘ole fashioned “bricks-and-mortar” stores makes for good headlines, the facts tell a far different story. New research from JLL shows that most local retailers are safe for now and probably well into the future—at least from the online revolution.

“People still need to see and touch things; the instant gratification of an in-store purchase can’t be discounted. Retailers who want to thrive will need to incorporate it all—hands-on goods, e-commerce and mobile-commerce.”

Kris Cooper, Managing Director of JLL’s Capital Markets

“Despite e-commerce’s leaps and bounds over the last few years, it still represents a relatively small percentage of total retail sales: 6.0 percent to be exact,” stated JLL’s Cross Sector Outlook, released this spring.

“Remember catalogs? Flipping through the pages, dialing up a call center and placing an order? Web sales are really just replacing that,” said Kris Cooper, a Managing Director of JLL’s Capital Markets. “People still need to see and touch things; the instant gratification of an in-store purchase can’t be discounted. Retailers who want to thrive will need to incorporate it all—hands-on goods, e-commerce and mobile-commerce.”

The Urban Land Institute drew similar conclusions in its recent report, “Emerging Trends in Real Estate 2014.” Retailers are using real estate to fashion a “bi-channel” approach to their businesses, one logistics executive told Institute researchers. “While one retailer decreases its footprint… another opens up more distribution warehouses for same-day delivery. Those lines are converging.”

Many bricks-and-mortar retailers are now promoting online sales through their own web and mobile sites, while some e-tailers are trying their hands at physical stores.

Despite these emerging structural challenges and newly announced store closings, including Radio Shack, Office Depot and Coldwater Creek, the U.S. retail sector has continued to make a solid recovery, and market conditions are even tightening, JLL found.

“Right now, it’s all about high-quality, grocery-anchored centers and trophy malls. Demand for those asset types is incredible right now—if only we could convince all the owners to bring those to market!”

Margaret Caldwell, Managing Director of JLL’s Capital Markets

More and more space is being leased by retail tenants, with consumption of available space up by nearly 50 percent from 2012 to 2013. Increased demand means higher rents, which are expected to increase 2.7 percent this year, though they remain below pre-recession levels, JLL research shows. Open-air shopping centers, also known as power centers, in particular, are punching above their weight class, experiencing the tightest overall market conditions with just over 5 percent of available space vacant.

What does this mean for the health of the retail investment sales and financing market? Investors have wasted no time hopping back on the retail bandwagon, particularly in core markets where newly available product often produces a “feeding frenzy.” In February, Savanna, a real estate private equity firm, purchased retail condominiums at 10 Madison Square West in New York for $60 million (more than $2,900 per square foot). Prices for retail properties are among the best performers in commercial real estate, posting a 23 percent increase in 2013, with similar gains expected this year, according to Moody’s/RCA CPPI for retail.

“Right now, it’s all about high-quality, grocery-anchored centers and trophy malls. Demand for those asset types is incredible right now—if only we could convince all the owners to bring those to market!” said Margaret Caldwell, Managing Director of JLL’s Capital Markets. “Investment in the gateway cities is strong, as always—but watch for a few dark horses to emerge in the coming months. Markets like Phoenix and Indianapolis could make some real headway by the end of the year.”

And there’s plenty of debt financing to go around, with life insurance companies increasing their allocations this year and domestic banks reporting stronger demand for commercial property loans. Money from commercial mortgage-backed securities is also plentiful, with retail accounting for 20 percent of all CMBS deals in the first quarter of 2014.

Some equity joint venture equity players were holding back on retail, waiting to gauge the impact of the e-commerce invasion. But no longer. “Watch for equity to make some significant strides in the retail space in the coming year as well,” said Mark Brandenburg, Executive Vice President of JLL’s Capital Markets. “Now that things have settled down a bit, many find they are under-allocated in the retail space and they’ll need to make some big plays to balance things out.”