As the economy of the future becomes increasingly high-tech, the retail sector must follow. New technologies such as smartphones and automated checkout stands, especially in grocery stores, are paving the way for the future of retail and how consumers will shop. In addition, retailers and landlords have an increasing number of high-tech tools to better track shoppers and better tailor retail offerings to shoppers’ needs and wants.

Although media outlets have used headlines such as “The Retail Apocalypse,” the retail market is not dying, says Adam Robinson, founder and president of RAF Pacifica Group. “The demand for retail properties isn’t diminishing; the way these centers are utilized is simply shifting,” explains Robinson. “Retail owners and investors who recognize this and adapt their properties to accommodate these shifts will continue to find value in the years ahead.”

Investors in retail must be aware of changing consumer preferences. Consumers are shifting toward experience-based retail over material goods, and convenience is a crucial factor. An asset’s location will continue to be important, as well.

“Extreme convenience, service-based retail, a retailer showroom and a place of entertainment — that is what the future of retail will look like in the upcoming six or so years,” says Scott Crowe, chief investment strategist at CenterSquare Investment Management.

John David Booty, executive vice president at Ventus Group, agrees, saying, “Entertainment and destination retail have the most long-term stability, but a quality location with multiple demand drivers is essential for success.”

KNOWING THE CONSUMER

In the United States, people still spend a lot of their leisure time at malls. To be successful, brick-and-mortar retail owners will need to be aware of what consumers want from their shopping experience and what amenities and entertainment features they desire.

The millennial generation will have a huge impact on the new economy of retail. Born roughly between 1981 and 1996, the nation’s 71 million millennials form the largest generation in U.S. history, substantially outnumbering baby boomers and Generation X at 75 million and 74 million, respectively, according to MetLife Investment Management’s The Age of Experience-Based Retail.

According to the report, consumers have shifted toward experiences, such as travel, dining, movie attendance, sporting events and concerts, rather than material goods — furniture, electronics and apparel. Not only do millennials spend a majority of their disposable income on experiences, they do so at a higher rate than past generations did at the same age. MetLife believes this trend will continue in the future.

“This socially minded generation seeks out locations that offer diverse experiences beyond the core 9 to 5 business hours,” says Matt Strotton, global director – capital at QIC. “They want to be able to meet and socialize with friends; to eat, shop, and visit the newest showroom, gallery, theater; and tap into a range of other services at a time that suits them.”

The millennial generation’s preference for experiences, their rising spending power, and the age-driven shift in spending by baby boomers are all set to play a major role in determining which retail formats outperform in the future, predicts MetLife.

“The implications for future-focused, long-term retail real estate investors center on strategic investment in shopping malls that can be developed to deliver experience by offering food and lifestyle options that promote longer ‘stay’ time and, importantly, return visits,” explains Strotton.

A HIGH-TECH REVOLUTION

Technology will be a valuable tool in the future of retail, as it can generate insight into the behavior of customers and the way they interact with retail brands, providing valuable data for marketing and promotional campaigns, as well.

Retail property investors historically have used trade area and mileage rings and made assumptions on the share of the population in the demographic region that will frequent a local shopping center. But, according to JLL research, those old-school metrics rely on outdated assumptions. Retail investors now have access to empirical data that can identify shoppers by their smartphones to learn who is in the shopping center, where else they shop and what other lifestyle choices are important to them. Retail investment decision making no longer has to rely on demographics alone, as companies shift to evaluate “consumeristics,” the in-depth study of consumers and their behaviors.

One example is the use of technology commonly referred to as a geofence, which tracks an accurate profile of shoppers entering a property. Such software analyzes mobile data — both cellular and GPS — at specific geo-locations to track and measure which consumers enter the geofence and how long they stay on site, all in real time. The insights gathered by such shopper surveillance can be used to inform investments and marketing strategies for retailers and retail investors as they consider how to better locate and lease space.

Geofences are transforming how retailers and retail real estate owners collect information about shopper behavior. It is expected to be a $39.87 billion industry by 2019, according to MarketsandMarkets, up almost five-fold from $8.12 billion in 2014.

Mobile phones have implications for retail beyond tracking consumers’ physical behavior in stores. Gary Glick, partner at Cox, Castle & Nicholson, says the smartphone is the most prominent form of technology transforming the retail sector. “Every consumer under the age of 30 has grown up with a smartphone in their hands,” says Glick. “They rely upon it for everything. The sooner retailers appeal to these consumers through their smartphones, the more successful they will be.”

Smart grocery stores like the Amazon Go market in Seattle will enable consumers to use their smartphones in new ways. Amazon.com Inc. describes Amazon Go as “a new kind of store with no checkout required,” noting the store uses technologies like those found in self-driving cars: computer vision, sensor fusion and deep learning. This technology identifies when products are removed or returned to shelves, and tracks them in a virtual cart while consumers are shopping. When shoppers leave the store, their Amazon accounts will be charged, and they are sent a digital receipt. The mass adoption of such technology would mean never having to wait in a checkout line again. In February, Amazon revealed plans to launch up to six more cashier-free Amazon Go locations in at least two cities this year. According to Recode, three storefronts in Seattle have already been identified, as well as a site within The Grove shopping mall in Los Angeles.

“The technology used to create this no-checkout environment is certainly a technology that will further transform the brick-and-mortar retail market,” says Robinson.

While much of the conversation around the role of technology in the retail market relates to improving the consumer experience, QIC’s Strotton says, “technology also enables greater operational efficiency for retailers and mall owners. Installing advanced fiber-optic networks throughout malls provides a pillar for services, center management, building automation systems, superior security, telephone, high-speed Internet and reticulated television.”

REDEVELOPMENT AND REPURPOSING

The retail sector is not declining, but it is being reinvented, says Robinson. To keep up with the new retail economy, a large number of regional malls will need some form of redevelopment and repurposing.

In CenterSquare’s report The Fate of Real Estate in New Economy Retailing, the firm estimates approximately 44 percent of mall retail square footage, representing 30 percent of the sector’s value, likely will be shuttered or repurposed during the next five to seven years.

“The strategies implemented in the 1980s, centered around large department stores and indoor malls, don’t apply today,” says Robinson. “Retail owners and investors who adapt and evolve with the market will be well-positioned to take advantage of the next opportunity in the market.” He believes the recent bankruptcies by Fortune 500 retailers are actually creating an “opportunity for many retail centers to be repositioned or redeveloped into the mixed-use or lifestyle centers that today’s consumers are demanding.”

The current shakeout in the retail sector has been a “survival of the fittest,” with weaker centers and stores closing while stronger centers and stores have thrived.

“For those [retail stores] that have physically ceased operations, it’s also important to remember that the sales associated with them haven’t vanished — they have just been redistributed,” says Adam Ruggiero, head of real estate research at MetLife Investment Management. “Some will certainly flow online, but yet more may flow to stronger centers.”

In fact, the mall subsector has performed better than other retail types. MetLife’s analysis of NCREIF data reveals malls and lifestyle centers have outperformed other retail formats in five of the past seven years. Malls and lifestyle centers posted annual income growth 150 basis points higher than non-mall retail throughout this period, and achieved excess total returns of 290 basis points.

A robust opportunity exists in the United States to reimagine malls to better reflect the emerging needs of the communities they serve, says Strotton. “When compared to retail centers in Asia, the United Kingdom, the Middle East and Australia, we see the United States as essentially under-stored in the specialty, entertainment, and food and beverage categories, evidence that the physical layout and merchandising mix of a mall is primed for reinvention,” says Strotton.

Once the rationalization and repurposing of retail real estate is complete, a new equilibrium between the amount of physical-retail and new-economy consumption will be created, according to CenterSquare’s report.

THE CONTINUING STRENTH OF BRICKS AND MORTAR

The distinctions between the online retail world and the physical retail world are becoming less stark.

“One of the biggest changes for the retail industry will be the increasingly blurred lines between the physical and online retail worlds,” explains Strotton. “We don’t view the future as an ‘either/or’ proposition — rather, we see the future as one incorporating ‘total retail,’ where physical and digital platforms enable and complement each other.”

It is important for the retailer to have a physical presence because it is the only way to interact with customers, says Crowe. But for a physical retail presence to remain strong in the new economy, shopping malls must incorporate extreme convenience services such as fast-casual dining, phone stores, nail salons, banks, dry cleaners, hairdressers, gyms, lodging, etc. — things not easily purchased via e-commerce.

In addition, physical retail has continued to be part of a multi-step shopping process, in which consumers take the time to visit a store and “test drive” a product before purchasing that product either in store or online after their visits, explains Strotton. A challenge and opportunity for those in the retail business will be determining how value can be appropriately attributed to a brick-and-mortar store that may not directly process all sales, but that continues to be an essential component of the overall retail offer for a competitive brand, says Strotton.

One advantage for retail investors of millennials’ preference for experiences over material goods is experiences tend to rely more heavily on a physical presence. The typical date night experience of dinner and a movie can be replicated at home with Blue Apron and Netflix, but it loses something in the translation.

Grocery stores and most restaurant concepts draw in consumers and will continue to account for a physical retail presence because of their limited e-commerce capability, even if there is an uptick in delivery activity. “Creating place through food and entertainment retailing can also deliver significant upside for the sector,” says Strotton. “The number of restaurants in the United States is at an all-time high, having increased by 40,000 net over the past five years. And we believe there is still room to grow in this area. Americans now spend more eating out than eating at home.” According to Census Bureau data, through December 2017, full-service restaurant sales were up 3.3 percent year-over-year.

E-commerce brands have begun flipping the script and opening up brick-and-mortar shops. Online retailers including Boll & Branch, Allbirds Inc., Away, ModCloth Inc., Glossier Inc. and Madison Reed Inc. have opened their own brick-and-mortar stores in the past year.

Following its acquisition of Whole Foods Market, Amazon now controls 460 grocery locations across the United States and has begun selling Amazon products in those stores. The first official day Amazon owned Whole Foods, for example, it began selling its Echo devices to grocery shoppers.

Such moves may seem counterproductive at a time when major retailers such as Macy’s Inc. and J.C. Penney Co. have announced several hundred store closures to focus on e-commerce. But consumers still want the sensory experiences of shopping and to try on their purchases before actually buying them. Thus, established e-commerce brands are moving into brick-and-mortar space because consumers still shop in person.

“[Consumers] want to be able to touch and feel goods, and have an easy way to return merchandise,” says Robinson.

The growing brick-and-mortar presence of online retailers flies in the face of those who have predicted the demise of physical retail, says MetLife’s Ruggiero. “It reflects a recognition on the part of online retailers that not only would it be extremely difficult to drive the majority of major brick-and-mortar retailers out of business, but also that there is little incentive for them to do so since the result would be the closing off of a profitable sales channel,” explains Ruggiero. “Instead of trying to defeat physical retail, many online retailers are now joining the ranks. And some, most notably Amazon, are trying to reimagine it.”

The e-commerce brands exploring brick-and-mortar retail are ensuring they are modernizing their business models in their physical shops. Current mall-type stores are not connecting with consumers as they should be and are not giving the consumers a “new” experience. To this end, e-commerce brands are beginning to incorporate technology, such as digital touch points, and using apps to enhance the consumer experience.

Brands also are beginning to offer free delivery and the option to return online purchases in-store, as well. At ModCloth’s store in Austin, for example, guests can have their measurements taken by “ModStylists” and use them with ModCloth’s “Fit For Me” app to receive clothing recommendations. The app also helps shoppers find the perfect garment by crowdsourcing those who have already purchased the item.

NOT DEAD YET

To be successful in the emerging retail economy, investors must be aware of who their consumers are, what they want and need, and how technology will change consumption patterns. Physical retail stores are still in demand because consumers prefer the ability to touch products and try them on before purchasing. The weakest concepts, however, will increasingly struggle from a saturated marketplace rather than fading demand. Experiential retail will continue to draw consumers to shopping centers. More e-commerce brands may open brick-and-mortar stores, but they are changing the game by reshaping how they do business, using different tactics to attract consumers and give them a fresh, new experience.

The retail sector is not dead; it is simply evolving with the new economy. Investors who recognize this and are ready to evolve with it will be best positioned to outperform.

Jody Barhanovich is a reporter with Institutional Real Estate, Inc.