Commercial Real Estate a Mature Industry?
I read a good post from Mike "Mish" Shedlock this weekend about the commercial real estate market. It reinforced my hunches about the status of this industry and business model.
Mish said it beautifully: "Does the Shopping Center Economic Model Work?" His answer (and mine) are a resounding NO. There are a number of factors that work against retail stores and big shopping centers. Let me count the ways:
1) Rising Energy Prices. This is a double-whammy to retail store/mall owners. First, the rising cost of energy increases the store's utility costs and overhead, which has to be passed along to customers. Second, it costs more for families and individuals to drive the car or SUV to the shopping center. Unless that mall or store is close to where someone lives, its doubtful many folks will want to drive a long ways to shop.
2) Time. It seems life is busier today than it was even five or ten years ago. People don't seem to have the free time they used to. Even if they can afford to drive halfway across town to shop at their favorite mall or store, they may not have the time or energy. And when you're in the store, it may be understaffed, which can result in long lines and wait times to get checked out. Not to mention talking with retail store staff who generally know less than you do about the products. This makes the option of shopping online more appealing, which brings me to my third reason:
3) The Internet. Shopping sites such as Amazon, eBay, Overstock and many others give consumers options that weren't available 10 or 20 years ago. And why it new from a store, when you can buy it used at a discount... from the comfort of your office or home? Point, click, done.
4) The Hassle. I'm a 30-something single guy, and I hate going to shopping malls and stores - especially during Thanksgiving or Christmas. There's too many people, it takes too much time, and I'd much rather buy online or from a less crowded store. Now, I know some people (usually women) who love to engage in what they call 'retail therapy.' Bully for them. But it's just not my cup of tea.
It's not all negative for retail stores. I think most Americans still prefer to look at, feel and try on clothes before they buy. But as a viable business model, I think the mega-malls and shopping centers have matured, and may eventually go the way of the dinosaur. It may take a decade or two, but I believe more transactions in the US and around the world will be done online.
It just makes sense. Why spend tens or hundreds of thousands of dollars to start and maintain a brick-and-mortar facility, when you can spend a fraction of that amount on a virtual, online storefront? If you have a phone, fax, e-mail and merchant accounts, and a website that can take payments online, you're in business.
You can start an online business from a small studio apartment or home, instead of a physical store - where you have the potential threats of fire, theft, and vandalism. Instead of selling a physical product or service, you can sell information - which has low costs, and high profit margins.
These are the reasons why I believe commercial real estate (specifically shopping malls and retail stores) are at a plateau, if not on the down part of the Bell curve. Just like with stocks or commodities, the trend is your friend. And these trends are a lot friendlier to Information Age-type businesses, vs. stores from the Industrial Age.
Mish said it beautifully: "Does the Shopping Center Economic Model Work?" His answer (and mine) are a resounding NO. There are a number of factors that work against retail stores and big shopping centers. Let me count the ways:
1) Rising Energy Prices. This is a double-whammy to retail store/mall owners. First, the rising cost of energy increases the store's utility costs and overhead, which has to be passed along to customers. Second, it costs more for families and individuals to drive the car or SUV to the shopping center. Unless that mall or store is close to where someone lives, its doubtful many folks will want to drive a long ways to shop.
2) Time. It seems life is busier today than it was even five or ten years ago. People don't seem to have the free time they used to. Even if they can afford to drive halfway across town to shop at their favorite mall or store, they may not have the time or energy. And when you're in the store, it may be understaffed, which can result in long lines and wait times to get checked out. Not to mention talking with retail store staff who generally know less than you do about the products. This makes the option of shopping online more appealing, which brings me to my third reason:
3) The Internet. Shopping sites such as Amazon, eBay, Overstock and many others give consumers options that weren't available 10 or 20 years ago. And why it new from a store, when you can buy it used at a discount... from the comfort of your office or home? Point, click, done.
4) The Hassle. I'm a 30-something single guy, and I hate going to shopping malls and stores - especially during Thanksgiving or Christmas. There's too many people, it takes too much time, and I'd much rather buy online or from a less crowded store. Now, I know some people (usually women) who love to engage in what they call 'retail therapy.' Bully for them. But it's just not my cup of tea.
It's not all negative for retail stores. I think most Americans still prefer to look at, feel and try on clothes before they buy. But as a viable business model, I think the mega-malls and shopping centers have matured, and may eventually go the way of the dinosaur. It may take a decade or two, but I believe more transactions in the US and around the world will be done online.
It just makes sense. Why spend tens or hundreds of thousands of dollars to start and maintain a brick-and-mortar facility, when you can spend a fraction of that amount on a virtual, online storefront? If you have a phone, fax, e-mail and merchant accounts, and a website that can take payments online, you're in business.
You can start an online business from a small studio apartment or home, instead of a physical store - where you have the potential threats of fire, theft, and vandalism. Instead of selling a physical product or service, you can sell information - which has low costs, and high profit margins.
These are the reasons why I believe commercial real estate (specifically shopping malls and retail stores) are at a plateau, if not on the down part of the Bell curve. Just like with stocks or commodities, the trend is your friend. And these trends are a lot friendlier to Information Age-type businesses, vs. stores from the Industrial Age.
Labels: commercial real estate
posted by Brian Ochsner | 7:19 PM
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