Is America Really Facing A Retail Apocalypse?

The theory ignores existing real estate data and the potential for change within the sector.
By Scott Beyer | Mar 23, 2020 |
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By Scott Beyer | Mar 23, 2020 |
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[This article was originally published by the Independent Institute.]

The supposed “retail apocalypse” has become a sexy narrative for U.S. media. The theory—often peddled by people who wish to frame capitalism as some destabilizing force—posits that online competition will cause brick-and-mortar retailers to close. This, in turn, will lead to mass layoffs, empty storefronts, and declining public and private revenues.

The rise of Amazon and other e-commerce giants has fueled the theory, not without merit. Since 1992, e-commerce has jumped from 4 percent to 14 percent of total retail sales. The narrative of an e-commerce takeover is fueled by tales about the mass closure of established stores like Dress Barn and Payless Shoes.

Fortunately, this doomsday scenario has little basis in truth. Instead, retail functions like most other sectors in our dynamic economy. Some stores with outdated business models close, while new ones replace them. Since 2001, writes market analyst Sharon Woods for the journal Public Square, the number of retail establishments has been stable, flattening out each year at a little over 1 million net. The number actually increased by 20,000 between 2017 and 2018. In 2018, retail sales jumped by 4.6 percent, and are expected to grow similarly this year. The occupancy rate has also remained stable, at around 90-95%, although trendy urban development styles tend to outperform dated suburban ones.

Some of the reason for this stability is that online sales, while carving out a significant market share, are still a last resort for many. People like to see, touch, and test products before they buy. But the main reason is bigger: there are many retail uses that may never be subject to online competition, because they don’t sell physical, shippable products—aka “merchandise retail”. They instead offer services that would be hard to replace online. Below I’ve listed some of these retail genres, along with ones that don’t fit into the “retail” category, but are growing in popularity and will require brick-and-mortar space.

Experiential retail: This is physical space that customers enter more to enjoy an experience than any tangible product. It is recreational in nature, and includes bars, restaurants, coffee shops, movie theaters, live music, and more. Urban neighborhoods that have become trendy these last few decades, such as Fishtown in Philadelphia or Williamsburg in Brooklyn, largely grew around this concept.

Service retail: This too focuses on the intangible, but is much more relevant to everyday life and rampant throughout our economy. Examples include hairdressing, pet sitting, car washes, auto repair, web design, or anything else where a professional service is being exchanged rather than a physical good. These services will likely always need brick-and-mortar space; it’s hard to imagine the internet phasing them out.

Equipment suppliers: The stores that cater to housing development, lawn care, manufacturing, and agriculture may technically be merchandise retailers. But much of what they sell is too big to mail. That is why many of the big-name retail brands serving these industries, such as Lowe’s and Tractor Supply, have significantly grown their corporate footprint.

Schools: Whether it’s K-12 charter schools or community colleges, there will certainly be demand for educational services in at least some parts of the country. These institutions consume a lot of space, making them a good fit for, say, old malls that can no longer support retail. This is already happening nationwide, such as the branch of Austin Community College that’s in a former shopping mall.

Co-working Space: With the struggles of WeWork, one might suspect that the co-working space concept is a fad set to die. Wrong. Almost every major U.S. city, and many smaller ones, have seen an uptick of slick, trendy competitors that offer better value than WeWork. The number of co-working spaces in the U.S. has increased from just 14 in 2007, to more than 5,000 today. It’s projected to continue growing, as freelancing becomes even more common in America.

Warehousing: Even as retail goes online, there will still need to be places to store the merchandise. That’s why Amazon has been opening fulfillment centers all over America—massive warehouses on the suburban peripheries that help the company transport products into cities. The Wall Street Journal described the U.S. market for warehouse space as “white-hot”, growing by 174 million square feet per year since 2014.

Housing: Last but not least, excess retail space could be used for housing, which is in short supply in many cities. This could range from converting old shopping malls into mixed-use communities, to making one empty storefront an apartment.

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At the heart of this issue is government regulation, and how it adapts to economic change. Even if there’s eventually a glut of merchandise retail space, that space can be used for something else—including what I listed above. The reason that’s a government issue, though, is that such a turnover will require legal changes.

Today, many buildings zoned for retail can’t be converted to residences, offices, or even alternate styles of retail. Rezoning these buildings for other uses—or better yet, using zoning that doesn’t dictate use—will be key to ensuring they don’t sit empty. That way this real estate genre can be subject to the creative destruction process that ultimately leads to growth and innovation; while helping cities avoid the much-ballyhooed “retail apocalypse.”

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