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Infrastructure and Operations

3 Ways the Future of Retail will Radically Disrupt Commercial Real Estate

Digital disruption in retail is going to have a butterfly effect on commercial real estate

As digital trends in how people research and purchase everything from food to clothes to home goods, traditional retail models are in the process of being completely upended. The future of retail is transforming stores and shopping centers from inventory-heavy transactional centers to experiential showrooms. In the process, the radical changes coming for retail will also drastically disrupt the commercial real estate market.

It only follows that the impact of digital disruption on retailers will flow downstream to landlords and investors who control the commercial spaces of today and tomorrow.  A new report by CBRE Group, the world’s largest commercial real estate services and investment firm, offered up some predictions on what digital shifts in retail will mean for the commercial real estate world. Chief among the prognostications by The Future of Retail 2030 report is the fact that stores in the next decade are increasingly going to be shrinking inventory, cutting back on staff, and focusing on improving the customizability of the ordering experience.

“The purpose of the store will shift from transactional toward service and experience—as showrooms, marketing platforms, loyalty-building environments and brand experiences,” write researchers Natasha Patel, Melina Cordero and Liz Hung in the report. At the same time, city centers will increasingly grow vehicle-free, with greater emphasis on electric vehicles, and changes in how products are manufactured and delivered to customers. All of this is going to cumulate in some big changes in the use of commercial real estate. Here are some of their key predictions on that front.

Everyone Will Have to Rethink Lease and Credit Models

With stores less centered on moving merchandise out the door, store performance measurements and, consequently, lease structures for tenants are going to have to change, CBRE predicts.

“Lease structures typically dependent on percentage or turnover rent will need to be restructured as the methods of measuring store performance shift,” they wrote, explaining that sales per square foot metrics and conversion rates will be deemphasized in favor of metrics around foot traffic and dwell time.

ON the flip side, landlords are going to find that consumer needs for physical shopping will trend toward hyperlocal and specialized experiences—with greater emphasis on independent stores, and food and beverage operators. This is going to mean that landlords will be dealing with smaller brands as many national and international tenants reduce their footprints.

“Lease contracts may trend toward shorter lengths and more flexible terms as landlords seek to experiment with new brands,” the CBRE wrote. “Rising consumer demand for local concepts may require changes to credit risk models and mitigation on the part of investors and creditors”

Shopping Centers Will Just Become Centers

“Shopping centers will become mixed-use destinations, with developers and landlords increasingly focused on delivering what people want, where the want it,” CBRE explains, stating that these centers are going to feature a lot more mixed-use facilities. So it’ll be a mix of educational facilities, leisure activities, co-working office space, and non-retail distribution facilities.

As the boomers get older, it’ll also mean that there’ll be a greater emphasis on healthcare facilities in this mix.

Meantime, expect to see “older, obsolete assets that haven’t been refurbished,” i.e. malls,  to start looking even more like vacant wastelands than they already do.

“There is currently too much retail space in the wrong locations,” CBRE says.

The Role of the Gas Station Will Completely Transform

Finally, even as the role of cars in urban centers will diminish, don’t count out the role that gas stations will play in commercial real estate in the future. Here’s the deal, as electric vehicles grow in prevalence, gas stations are going to start shifting into charging stations.

“Given that fast-charging points cannot complete fueling as quickly as current options, many people will be looking for things to do and products to buy, reating opportunities for additional higher-quality food and beverage offerings,” the report predicts.

What’s more, the way that gas stations are scattered globally also makes them ripe for repurposing in new ways, including as “mini-distribution hubs for delivery aggregation.”

“Internet-connected vehicles will liase with distribution companies to ensure deliveries and pick-ups are optimized based on location and timing—whether the vehicle is autonomous or not,” the report says.

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