What’s the outlook for the retail real estate market?

Retail real estate is at an inflection point. Major department stores are reducing their footprints, mid-priced apparel brands are struggling in the face of online competitors and media headlines proclaim the demise of shopping centres.

Shopping centres and department stores must urgently differentiate their offering to counter these threats. Becoming a community hub, entertainment centre and provider of essential services can help achieve this.

Ecommerce is one reason the retail market has moved. The sector’s relative maturity, changing demographics and people spending more on services are contributing to shifting market conditions.

Australian shopping centres have been relatively insulated from the dramatic shifts in retail in Europe and the US. But the winds of change are blowing and new approaches are needed to capturing consumers’ attention.

All about experience and convenience

To counter online competitors, large landlords are recycling capital from less productive centres to developments that favour convenience and experience. Entertainment and leisure options, supermarkets, better quality food and beverage choices and essential services such as healthcare are all part of the new mix.

Australia Post data indicates online offerings fail to penetrate markets close to shopping centres that offer essential services and unique experiences. These shopping centres are well placed to provide defensive, growing income over the longer term.

Landlords who recognise this are thinking creatively and offering services not traditionally seen in centres such as co-working areas, healthcare, childcare and education offerings, which broaden an asset’s appeal and provide complementary benefits to other tenants. At the same time, landlords with an active management capability are remixing the existing “traditional” retail usages, bringing in new, higher-performing retailers including online-first brands.

What’s next for department stores?

Ironically, they were the original aggregators, bringing multiple brands to one convenient location. But online shopping’s arrival – never-ending shelves, easy ways to search for products and 24/7 shopping – means the place of department stores in the modern shopping centre has come under increased scrutiny.

Department stores have seen some success integrating services and food and beverage which complement the retail offering – these shifts are expected to continue. Focus will also be placed on improving customer service levels, expanding private label offerings and “right-sizing” to a smaller physical footprint concentrated in key metropolitan locations.

A social infrastructure hub

The difference between successful and unsuccessful shopping centres is an ability to adapt – centres that understand their customers’ needs and evolve to satisfy them will continue to outperform. Today’s evolution requires a broadening of appeal beyond retail to also include locally relevant elements of social and community infrastructure, and effective engagement with the consumers of tomorrow, millennials.

Some of the other ways they may be able to transform their offering are discussed below:

• Health and wellbeing

Shopping centres will increasingly offer health services such as hearing tests, as well as medical and allied health centres.

• Entertainment and leisure precincts

Between seven per cent and 10 per cent of most shopping centres’ gross floor area is presently occupied by food and beverage tenants. With the rise of convenience and casual dining it’s anticipated this figure will grow to more than 15 per cent in the near future. Complementary entertainment services such as cinemas and electronic gaming will also improve the ‘buzz’ in centres.

• Family essentials

Providing playgrounds, childcare, special events and fun activities will appeal to families and help shopping centres differentiate their offering in an online world.

• Helping customers

People will still go to shopping centres to compare products and prices, but this will increasingly be augmented by technology. Digital concierges will be able to draw on data such as spending patterns to make recommendations and provide customer reviews about products.

Shopping centres and department stores that can re-imagine their asset in some of these ways will be more attractive to global fund managers looking for quality assets exposed to today’s megatrends.