E-Commerce & Shopping Centers
What Online Spending Can Tell Us About the Future of Retail
During the 2010s, media and investor sentiment regarding retail centers was overwhelmingly negative. Talks of a “Retail Apocalypse” swept through the media landscape, with many retailers feeling the effects of the recession that emerged from the 2008 financial crisis. Consumer spending growth was muted, employment markets were slow to recover, and a potentially industry-threatening factor loomed, the rise of e-commerce.
Online ordering for retail goods was hardly a new concept by the 2010s. Many investors believed e-commerce growth would spark the death of brick-and-mortar retail. Developers began pursuing alternative property types rather than constructing new retail centers, greatly diminishing the effects of new supply in the market. Why would the nation need so much brick-and-mortar space if shopping was taking place online?
These predictions were correct about e-commerce’s rapid growth, but at the same time, shopping centers have become a darling of the CRE industry. Record-low vacancy, stable rent growth, and resilient sales metrics have propelled retail centers from an underperforming asset class to a preferred category within the industry. All while e-commerce retail sales climbed 588% from 2010 to 2024.
The fear of a “retail apocalypse” heightened again in 2020, when COVID-19 restrictions and lockdowns enabled online shopping to accelerate. More people were ordering brickand-mortar staples like groceries online, and service-based businesses were forced to close their doors. Once again in the face of doubt, consumers returned to retail centers in full force, driving the property type to new heights while other property types struggled to grapple with rising interest rates.
Physical retail has been so successful in the face of these threats for a multitude of reasons. For many industries, like grocery, drugstores, and restaurants, online ordering has only served to augment physical space demand. In store or curbside pickup allow for heightened retailer revenue per location. This has helped many firms keep doors open during the pandemic, as well as expand post-pandemic. Other retailers saw opportunity in what consumers missed during lockdowns, launching huge operations in the experiential retail segment, highlighted by the profound growth of facilities ranging from pickleball clubs and gyms, all the way to nail studios and hair salons. The result is an economy where online retail is rapidly growing, but in addition to in-store retail, rather than at its expense.
Online Sales to Augment Physical Spaces
Grocery-anchored retail has long been a staple of many institutional grade retail portfolios. The foot traffic generated by these centers benefits surrounding tenants, boosting its value to investors for both its limited risk and potential for stable and growing rents. While many were scared that Amazon’s purchase of Whole Foods would end grocer’s retail dominance, this segment has only strengthened its position since Amazon entered the grocery game.
Even with the expansion of online groceries by both Amazon and Walmart, the two biggest players in the segment, grocery sales remain heavily skewed towards physical stores. This is especially true when compared to other retail segments like electronics, apparel, and furniture. Even with expanded online ordering, restaurant foot traffic grew more rapidly than any other retail segment from November 2023 to November 2024, according to Placer.AI.
Profitability is likely to pressure restaurant and grocery retailers away from robust e-commerce growth moving forward. These industries typically operate at thin profit margins and additional costs for delivery, or more costly third-party delivery systems, will weigh heavily on these firms’ bottom lines. While consumers may be growing more accustomed to online ordering in these segments, it is likely the retailers themselves will act to maintain majority in-person operations.
At the same time, the food industry is experiencing unbelievable growth and has been fueled by the expanding use of food delivery apps. Restaurants converted space into pickup areas, many of which remain entering 2024, years after in-person service resumed at restaurants. National chains like CAVA, Dutch Bros, and Wingstop have stepped up space demand, filling the void left by struggling legacy chains like Red Lobster, Boston Market, and Denny’s.
These new restaurants and coffee shops prefer smaller spaces, usually around 3,000 square feet. Limited new development in this tranche has restaurant leasing competition near all-time highs. The lack of new development of such spaces, in combination with increased consumer demand for food services, has created a leasing environment where chains are having trouble finding available space, and roughly 75% of the new space that is constructed is already pre-leased. The slowdown in office construction has exacerbated the retail space shortage, as many office properties typically contain ground floor restaurant space, especially in urban pockets.
New and Old Retail Tenants Provide Irreplaceable Services
Consumers were clear in what they wanted out of retail spaces coming out of the pandemic, and that is an experience. Experiential retail comes in various forms, ranging from interactive displays augmenting traditional retail stores to fully immersive experiences. Traditional retailers like Dick’s Sporting Goods recently launched its “House of Sport” concept at 12 locations nationwide. House of Sport locations recorded a 7.2% increase in foot traffic last year, while traditional Dick’s locations saw traffic decrease 2.3% over the same period. Specific features of these locations include climbing walls, batting cages, and golf simulators. Dick’s success in this area has prompted plans to renovate 100 more stores into experiential concepts, capturing a portion of the market that is looking for more than what the convenience of e-commerce offers.
Non-traditional tenants have also gained substantially by offering customers an experience rather than a product. Some of the top retail leases signed in 2024 include gyms and athletic clubs, highlighted by the rapid growth of pickleball facilities and clubs. Smaller format gyms and boxing clubs have aided demand for mid-sized spaces, and firms like The Picklr, Chicken N Pickle, and even mini-golf tenants like Puttshack have effectively merged exercise and entertainment with their concepts. These kinds of experiences are irreplaceable by a phone or computer, insulating demand from online shopping trends.
Another segment of traditional retail that has benefitted greatly from its irreplaceability, is health and beauty retailers. While many people thought this segment could see a major shift to online sales during the pandemic, health and beauty providers ranging from nail and hair studios to makeup stores have thrived in the post-pandemic landscape. Beauty related retailers recorded 54% more visits in December 2023 than they did in December 2020, and most experts expect holiday retail sales to increase again in 2024. These strong demand drivers are one reason why Ulta Beauty and Sephora are major lease signers entering 2025.
Looking Ahead
While e-commerce does allow consumers to consume goods without utilizing physical space, its emergence and growth are hardly existential threats to the brick-and-mortar industry. Traditional retailers have found ways to get more out of their existing spaces by utilizing online channels, and an entire new kind of retailer has emerged to fill the experiential void online shopping’s convenience removes from retail consumers. The past calls for a “retail apocalypse” stifled development, in turn strengthening the brick-and-mortar retail outlook.
Looking ahead, younger consumers are more likely to utilize online challenges when buying goods. But, demographic trends suggest consumer spending is poised to grow so sharply, both in-person and online, that retail has an exceptionally bright outlook. The millennial cohort is on the verge of replacing Gen X as the top family formation generation, and a large influx of 30–50-year-olds suggests retail spending will rise substantially before the end of the decade. At the same time, the slightly smaller Gen Z is beginning to graduate college and enter the workforce, giving these older Gen Z’s substantial spending power in the economy for the first time. More young and well compensated consumers will boost overall spending on goods and services, both online and in-person for decades to come.
