Last week, Llenrock sponsored the Cornell Real Estate Council Philadelphia Panel, a gathering of alumni and members within the commercial real estate industry. The luncheon and panel was lively and insightful all thanks to the topic of the day: urban retail trends and challenges. Being absolutely enthralled by the discourse between panelists, which are some of Philadelphia’s most impressive names in CRE, I thought it would be fitting to discuss urban retail trends with you.
The panelists covered some interesting areas:
- The challenges the internet and e-commerce presents to brick-and-mortar retail
- How urban is helping retail to thrive
- Constraints that Capital puts on urban developers
Remember when I named the U.S. retail sector our Mensch of the year for 2015? Many were floored since headlines like “Clicks Defeat Bricks” surfaced following Black Friday weekend. We can never deny the negative impact online shopping and e-commerce has had on traditional brick-and-mortar retail because It’s largely understood that e-commerce came out stronger in sales for the holiday season. Who wouldn’t want to buy a crock pot from the comfort of their own bed?
Just this past year, big mainstream retail companies like Target and Macy’s announced that they’d be closing a number of stores due to low sales. However, much of this was blamed on the impacts of global warming, not high online sales. Some of these retailers have even been moving more towards urban locations. Where there is people, there is opportunity.
The threat of e-commerce seems less terrifying to urban retail, especially because of the increase in demand of retail as urban populations sky-rocket. More and more young adults and empty-nesters are gravitating towards urban areas and it’s no longer taboo to raise a child in the city, it seems. Just in 2011, the population growth in urban areas started to outpace the suburbs for the first time in a century. According to the Wall Street Journal, at least seven out of 10 people on Earth will be living in an urban area by 2050. By 2030, there will be 661 metro areas with populations over 1 million people, compared to a number of only 270 metro areas in 1990. Not only has this been positive for residential real estate, but it has allowed for the retail and mixed-use sectors to thrive.
Cities are dense, walkable, provide a wide range of services and many developers are focusing more and more on having a diverse and eclectic mix of retail tenants to attract residents. Residents living in newer neighborhoods, like recently gentrified Philadelphia neighborhoods Fishtown and Point Breeze, don’t necessarily want a Starbucks on their corner; they want a ReAnimator or an Ultimo or a La Colombe. In terms of urban retail, people are showing more interest in niche independent or smaller-chain options – options that provide a more individualized and memorable experience and product.
What exactly are the constraints Capital puts on CRE developers in the urban retail sector? Since value is being found outside of solely attracting big retail names, there is a constant voice telling developers to maximize the diversity of their tenants while still satisfying investors. However, there is a big difference between renovation and new construction. New construction of urban retail properties can prove to be more challenging and much more costly, causing investors to be more hesitant when partnering on certain projects.
When predicting trends in U.S. real estate for 2016, PWC says
“Retail assets have turned in the highest total returns of all property types in two of the last three years, and also lead the long-term performance measures of the ten- and 20-year time horizons.”
Although the retail sector (and its developers) have faced some disruption and challenges, there is a positive outlook for urban retail. The rehabilitation of older, overlooked properties in order to create a space for a coffee shop or boutique will remain a consistent trend, allowing for Midwest cities like Detroit and Cleveland to reinvent themselves.