Retailers across America are closing stores at a record pace. The commercial
brokerage industry projects that over 8,600 retail locations will close in 2017, which is
greater than the number of closings during the Great Recession of 2008 through 2009.
The future of malls is in question as major anchor department stores continue to report
declining sales; with long standing retail giants like Sears near bankruptcy. Experts
predict that up to half of the malls in America could close in the next decade.

Ironically, despite these projected store closures, overall retail sales are actually
increasing. In 2016 according to the U.S. Census Bureau, gross retail sales increased
by 3.3% over 2015 to $5.5 trillion; including a 4.1% increase in the 4th quarter of 2016
over the same period a year earlier.

So why are brick and mortar retailers closing their doors in record numbers while
retail sales are increasing? The cause appears to be past overbuilding of brick and
mortar stores and a massive shift in the way people shop. In 2012, roughly 10.5% of
retail sales took place on-line. Today that number has increased to 15.5% and the pace
seems to be accelerating. The retail industry is witnessing a shakeout not seen since
the super stores and category killers like Wal-Mart, Target, Barnes & Nobel and Toys
“R” US killed the small mon-and- pop Main Street retailers of yesteryear.

The current trend in retailing from in-store to online is also having an impact on
retail real estate. What seems clear is that the demand for traditional retail space
needed to support traditional retailing is likely to plateau or shrink over the next decade
as traditional retailers require less space. That could mean flattening or declining retail
rents in many markets around the country as competition increases among owners of
retail real estate. This trend is likely to be most acute for large box retail space and
malls currently occupied by stores that are most at risk from e-commerce. How quickly
this trend unfolds is difficult to gauge, but if on-line sales continue to accelerate, we
could see dramatic changes to brick and mortar retailing in the next ten to twenty years.

But, whenever there is a changing landscape, interesting adjustments start to
take place. In some cases, old malls that closed have been repurposed to serve other
uses, some even more profitable for real estate investors. Empty store front retail
spaces make good patient friendly locations for health care professionals. Also, demand
for industrial warehousing space is increasing as on-line retailers, like Amazon, expand
their distribution networks. Empty malls and big-box retail space may become the next
distribution centers for e-commerce as the companies like Amazon shorten the time
from ordering to delivery. Another interesting trend is a move by on-line retailers, like
Amazon, to brick and mortar locations. Amazon recently opened a physical store in New York City, the first of what will likely become a new network of brick and mortar retail
stores.

Despite the trend away from traditional retail stores to on-line shopping, there are
retailers that have been able to buck the trend. Luxury retailers that have strong brand
identification and don’t sell products online, continue to be successful against the e-
commerce world. This is also true for many clothing stores where shoppers like to try
items on before buying. But even these types of retailers may feel the impact of
technology as things like virtual reality improve making visits to physical stores less
interesting to shoppers. Of all the segments of the real estate industry, the retail area is
the one undergoing the most change; but this may also open up new opportunities for
investors.

William Small, CCIM is the Founder and CEO of Zenith Realty Advisors, LLC, a
commercial-investment real estate advisory and investment firm. If you’re interested in
contacting him, you can reach him at (970) 925-3866 or by email at
William.Small@ZenithInvestment.com