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Weakness of bricks-and-mortar retail impacts commercial real estate market

On Behalf of | Jul 1, 2016 | Commercial Leases

Overall, commercial real estate has been on the upswing for seven years, both nationally and in Southern California. The end of the Great Recession brought a bull market, with rising rents for commercial property.

Experts are now uncertain whether this can continue. However, the struggles of one component of the market, namely retail stores, seem likely to continue.

In this post, we will address two main questions. First, is commercial real estate as a whole really on the proverbial bubble? And second, what are the realistic prospects for commercial retail given the dynamic increase in online shopping?

Trends in the CRE market

Nationally, it isn’t difficult to find pundits who are concerned about a possible downturn in the commercial real estate (CRE) market. One concern is of course that the market is overbuilt, with too many properties and too few potential buyers or renters.

There are also other complicated economic factors in play. These factors include the availability of credit under the Federal Reserve’s quantitative easing policies and the viability of commercial mortgage backed securities as an investment.

For now, the market remains remarkable robust overall. One key indicator – the Green State U.S. Commercial Property Price Index – has doubled since the Great Recession ended. This index is still rising, at a rate of 7.5 percent.

These national trends are reflected in Southern California as well. Since 2009, Los Angeles-area rents are up more than 19 percent.

Risk of a downturn?

So is commercial real estate in Greater Los Angeles really at serious risk of a downturn?

One view is that LA is well positioned for continued growth. The rationale for this view is that a diversified economy and a desirable location will continue to attract investment and appeal to prospective tenants, at least in the office market.

We discussed the international aspects of these investments in our June 4 post.

An opposing view is that a bullish cycle lasting seven years is drawing to a close. This doesn’t mean a 2007-level crash is coming, but rather the possibility of stagnant or declining prices.

No one has a crystal ball to foresee how this will unfold. But at least one CRE trend seems crystal clear: the ongoing decline of bricks-and-mortar retailers.

Bricks-and-mortar struggles

Online shopping has changed the game in retail. It isn’t only that some big national brands, such as Borders and Sharper Image, are gone. Many other bricks-and-mortar retail stores, for companies of all sizes, are threatened by the explosion in Internet commerce.

To be sure, tech is, as always, a double-edged sword. When Amazon builds a big distribution center, it is a boost for the real estate market in that area.

There is no doubt, however that retailers of all kinds are struggling to keep physical stores open as the consumer migration online continues to evolve. And this will mean less demand for commercial retail space.

Making strategic decisions

For commercial real estate professionals, the trends we’ve discussed in this post have to be consciously weighed and evaluated. There’s an abundance of information to digest and analyze.

As you consider your specific goals, it’s important to get knowledgeable legal counsel. With a skilled attorneys’ help, you can create and execute a sound legal framework for your strategic decisions.