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The E-Commerce ‘Amazon Effect’ on Commercial Real Estate

By Erin W Wicomb | February 21, 2018

Consumer trends have been throwing retailers for a loop recently as e-commerce continues to play a huge role in changing consumer behaviors. The so-called ‘Amazon Effect’ is shifting the way consumers think about the entire shopping experience.

With less shopping sprees and more ‘Cyber Monday’ deals, traditional retail stores -- and investment properties -- are trying to gauge the impact. Consumers aren’t appreciating the traditional retail store business model, and the effects are starting to set in for big box stores.

Forbes noted that last year JCPenney closed 140 stores (14%), Macy’s closed 100 stores (15%), Sears closed 150 stores (15%), HHGregg closed 88 stores (40%), and CVS closed 70 stores. The numbers for some retail companies like these are staggering. The number of stores closing demonstrates the new consumer mindset of wanting something unique and special from their brick-and-mortar experience.

The commercial real estate industry is adapting to these shifting trends and reevaluating what a valuable property truly is. Despite the decline of many big-box stores, the retail sector isn’t a completely dead and wasted opportunity. Quite the opposite, actually. There is plenty of opportunity for lucrative investments in the shifting retail landscape.

The New Consumer
This shift in consumer behavior is driven by new expectations about the meaning and purpose of shopping. The general public now has endless options to consider when making a purchasing decision.

Running to the store is becoming obsolete. Gone are the days of Mom having to drag the kids around in the minivan as she runs errands at Sears, CVS, and Macy’s. She can simply type the product she wants into a Google search and find dozens of viable options (many on Amazon) … all without having to hassle with the kids, as is the case with many dropshipping business websites. This represents the shifting demand for e-commerce products that are a chore to pick up at the store.

Customers today often complain about stores being dull and uninspiring, difficult to browse for items, and stale in the redundancy of product lines. Commercial retailers are forced to deliver a new entertainment factor. To encourage consumers to leave the couch and visit a physical location, retailers are trying to provide a complete shopping experience for their customers. Consumers are demanding and need stimulation, otherwise, they can just choose and order an item online with the click of a button.

Retailers noticing this trend are shifting their tactics to focus on the new consumer: i.e. regularly changing the product line, incorporating individual services like beauty treatments, or offering complimentary food or drink service. Successful retail businesses and are focusing their attention on providing a robust customer service proposition.

Commercial property investors are also starting to take notice as well. Their strategy is shifting to focus attention on smaller, more unique buildings and walkable urban locations, rather than big-box retail properties that require customers to drive and park.

‘Wins’ in Retail Despite Big-Box Crash
With a consumer-centric approach that focuses on a more holistic experience for customers, some retailers are actually thriving and expanding in the current market, despite the struggles of major big-box retailers. These specific retail areas present profitable opportunities for commercial property investors that can cater to their specific real estate needs.

For example, GlobalData projects the beauty industry to lead all retail sectors in growth over the next five years. “Forecasts from GlobalData predict that beauty will top the list in terms of growth over the next five years, with a projected spending increase of almost 32%. This rise will be driven by several factors, including an aging population determined to stay youthful, an increase in the number of men buying personal care products and continued product and format innovation by both manufacturers and retailers.”

With many limitations in terms of housing for the younger generation, many are forced to rent property instead of investing in residential real estate. In turn, the home retail market is another sector that’s expected to have a strong performance in the next few years with sales growth in furniture, housewares and home improvement products. The Colliers report shares that “a robust housing market and the willingness of consumers to invest in products for their homes are both beneficial drivers of expansion.”

How Commercial Real Estate is Taking Advantage
Savvy investors are noticing these major trends in consumer behavior and the commercial real estate market and are experimenting with new strategies to adhere to changing preferences.

One notable shift is the overall consumer demographic. We’re starting to see the Millennials and Generation Z make up a larger portion of the consumer base. These are the generations that are comfortable receiving goods ordered from Amazon on their doorstep two days later, instead of running around to different shopping malls to find the right item. With the younger generations in mind, the focus isn’t on the building location or the building space, but rather building a full experience.

By focusing on creating a consumer experience, this is pushing the retail sector to go beyond just selling products and incorporate more non-retail offerings into their value propositions. Subsequently, shoppers respond quite positively to a blend of non-retail and product offerings, resulting in an increase in the frequency of visits and the amount of time spent during each visit.

The general distaste for repetition in product lines, especially within the apparel sector, is driving more brands to enter the market. Consumers are spreading their purchases across more brands and retailers, which is driving stores to differentiate themselves with unique and interesting products, as well as smaller retail space to keep shoppers engaged. The objective for retailers with a physical location is to use the store as a place of inspiration where shoppers are able to interact and connect with brands, in addition to becoming a commercial experience.

In-store attractions like pop-up fashion shows or social spaces like coffee shops are new tactics for retailers and property managers to consider. Commercial real estate investors should be brainstorming ideas to create a relaxing and enjoyable environment that encourages shoppers to linger and spend more time in and around their properties.

E-commerce is heavily influencing how consumers perceive the shopping experience and make their purchasing decisions. The added convenience and reduced cost afforded to consumers is shifting the demand for many goods and products to the online marketplace. Big-box stores are feeling the hurt and are desperately trying to innovate their business models to stay relevant.

However, the dynamic behaviors of today’s consumer present a window of opportunity for commercial investors who can spot the changing trends and take advantage of them. With consumers demanding more from their visits to brick-and-mortar stores, real estate investments should focus on unique property types that offer a little flair in the shopping experience. It’s no longer about the sales per square foot in the retail business, but experience per square foot.

Author and Bio: Erin Wicomb, co-founder of Mavrik Investing, has helped build their company through the transition from residential to commercial acquisition and development from California to New York. Erin is a leader and visionary and acutely understands market conditions and trends.

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