Hybrid store of the future

“Brick-and-mortar stores will remain vital for retailers for branding purposes and essential customer interaction, but the store’s purpose will shift to supporting the rise of the multichannel consumer, a consumer who uses physical stores, e-commerce, mobile commerce and social media for shopping and purchasing,” said John Morris, CBRE executive managing director and Industrial & Logistics and Retail Leader for the Americas.

Morris previously said that as online orders proliferate, retailers will need to minimize returns in order to keep costs down. Now, he’s also shouting out the need to manage inventory efficiently to mitigate the costs of shipping online orders in the first place. “Stores will now include a big portion of their overall footprint for inventory control, product sorting and shipping/receiving,” he said.

The new retail format CBRE foresees includes more space for curbside pickup, digital wayfinding and in-store features that tie into retailers’ mobile apps, designated click-and-collect desks, high-tech fitting rooms with smart mirrors, and multipurpose lounges for customers to take breaks.

CBRE envisions the new industrial side of brick-and-mortar stores to include a racking system that will separate online orders, buy-online-pick-up-in-store orders and in-store replenishment; will offer access for delivery services for both shipping and receiving; will use distribution center-style inventory optimization technology to ensure replenishment; and logistics support to determine if online returns should be reshelved or shipped back to fulfillment centers. CBRE created a 3D interactive view of its vision of the hybrid store. Watch the video here.

Best Buy seems to be on the same page. Ahead of the Christmas shopping season, the retailer revamped four Twin Cities stores to devote a good chunk of what had been sales floor space instead to online order fulfillment, according to Forbes. The typical 27,000 square feet of selling space has come down to 15,000, and the remaining 12,000 becomes fulfillment space. “The stores are now the primary fulfillment centers in Minneapolis and St. Paul,” the Forbes article said.

“To make the hybrid store format successful, both retailers and landlords will need to approach real estate differently,” said CBRE managing director of retail capital markets Melina Cordero. “For some retailers, it will mean fewer, larger stores in key locations and, for others, smaller stores in more locations for greater market penetration. Lease rates will adapt to blend more expensive rates for retail space with less costly rates for logistics space.”

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Retail REIT outlook

Retail REITs in general possess enough liquidity to cover near-term capital needs, according to Moody’s Investors Service’s REITs and REOCs — US 2021 Outlook. They also have the flexibility to adjust dividends and preserve capital, and they have improved their credit quality since the last downturn. Meanwhile, they tend to own quality assets, the spots surviving retailers likely will want. And retail REITs have opportunity to convert their retail space to other uses, perhaps multifamily than can anchor and drive foot traffic to retail, or fulfillment, which can serve existing retailers’ omnichannel efforts. The downside there is that fulfillment use does not on its own attract customers. It does, however, draw lower rents.

Retail REITs face challenges, too, including tenant bankruptcies and store closures, for which January often serves as a reckoning period. Additionally, tenants are likely to have more leverage in rent negotiations, according to Moody’s.

Migration to top properties and tenant negotiating power

Here’s an example of that tenant negotiating power Moody’s was talking about. Warren Frye owns multiple units of the Beef ‘O’ Brady’s franchise chain in Cape Coral, Florida. One location, in the Coral Shores Shopping Center, was too cramped to allow social distancing. Six miles away, an opportunity arose. Ruby Tuesday had been closing units quietly throughout the year, including its restaurant in The Shops at Midpoint Center. Frye jumped on it and opened there on Nov. 11. The move meant an upgrade from 2,550 square feet to 5,600, including the gain of a private party room. The new location also is more central within the city and sits at the major intersection of Veterans Parkway and Santa Barbara Boulevard, promising higher foot traffic. All those gains, and Frye’s rental rate per square foot went down. The improvement to Frye’s lot, he said, likely wouldn’t have been possible without the effects of COVID-19.