When the Oracle of Omaha, Warren Buffet, speaks we listen. At Berkshire Hathaway’s annual meeting, the billionaire investor forecast a total change in the retail industry within the next ten years as it heads towards a mostly online business model.
Why was he discussing this? He was explaining why he dumped $900 million in Walmart stock.
We work with a lot of retail real estate owners and I’m here to tell you…the majority are plugging their ears. But it’s getting impossible to ignore the fast-shifting, downward trends of brick-and-mortar retailers. Let’s not forget we have a healthy economy. That should mean retail stores are doing well – not that they’re closing their doors by the thousands. We think this is a permanent change of how and where Americans shop.
This is going to change the game dramatically for real estate investors. How will landlords respond? Here’s a prediction. More flexible, shorter term leases.
We’re already seeing this. It wasn’t long ago that 20 year retail leases were standard. Today, 5 year leases are the norm. Going forward you may see 1 year leases with annual options to renew or terminate. Smart retailers want flexibility. They don’t want to declare bankruptcy to end a lease early.
The good retailers are constantly updating their shopping experiences. They iterate and will continue to do so faster and faster. They’re going to want the option to change, move or even close the location without drastic financial consequences.
Long-term leases with massive build-out costs no longer make much sense. Pop up shops aren’t the answer either because it’s hard to create an experience worth commuting to in a white box you just moved into last week.
We think the answer lies in the middle of these two extremes. Some build-out costs but much less than historically. Short term leases that give the tenant the option to renew or cancel on an annual basis. Locations will need draws like movie theaters, restaurants, groceries, drug stores, entertainment venues and fun. Retailers will try to weave themselves into the fabric of the local community in a more intentional way. And much more technology will be built it. Less employees, more automation.
That’s what we see happening next.
Not ideal for retail real estate owners but they have to keep spaces filled and they have to drive traffic to their locations. Don’t forget that there is a reason these retail businesses choose to locate so close to one another. They expect to receive traffic from shoppers who commuted to the location to visit other stores. They want to piggyback on once other retailers get the shoppers there. If you don’t think the tenant mix will drive traffic to your store you don’t move there. It’s a balancing act that can turn into a downward spiral if the landlord doesn’t play his hand right.
About Beau Beach, CCIM
Beau is a leading Investment Real Estate Broker, author, investor and adoring father of four. His clients appreciate his no-nonsense demeanor and his legendary work ethic.
He’s the author of the books The 3 Reasons: Why Most Commercial Properties Don’t Sell and True Wealth: What Every Seller Should Know About 1031 Exchanges.
Beau leads Prowess Investment Real Estate Services which specializes in selling investment real estate for the absolute highest price the market will pay in Wisconsin, Florida and Illinois.
Considering selling? Request a free Sell For More Listing Plan to get the step-by-step blueprint to sell your property for the absolute highest price the market will pay. Request yours now at www.SellforMorePlan.com.
Beau can be reached at 414-324-4938, 561-425-9935 or Beau@ProwessIRES.com