The Effects of Technology on Retail Sales, Commercial Property Values and Percentage Rents
Baen, John S., Journal of Real Estate Portfolio Management
Executive Summary. This study examines the impact of e-commerce and the effect of technology on traditional retail sales, commercial property values and percentage rents. This study analyzes standard retail Leases and seeks evidence of retailers shifting on-site sales to off site e-commerce and catalog operations. The results indicate that of those surveyed, most shopping center owners, managers and leases contain no provisions for these sales, which have value implications to owners. In addition, this study presents both theoretical concepts and empirical results that suggest commercial leases need to be altered to account for online and catalog sales. Alternative uses for vacant bank buildings and retail spaces are suggested as well as specific recommendations to owners l tenants to reduce the threat of e-commerce to retail centers.
E-commerce is causing a leakage of retail sales at traditional retail locations. That is, many ecommerce sales are occurring at traditional retail locations and are recorded as catalog sales or computer sales for next day pickup or delivery directly to customers' homes. The sales information is often logged off site at the tenant's national data center, although the physical retail center was the procuring cause or point of contact for the sale. The results are loss of on-site sales information, reduced tabulation of gross sales per square foot reported to the property management company/owners and potential loss of percentage rents.
The potential effects of e-commerce on traditional retail property values could eventually be profound and be a result of two primary aspects: (1) more off site retail sales resulting in less foot traffic, lower impulse sales by non-anchor tenants, lower profit margins due to comparative web shopping, greater competition, lower profit margins for tenants and eventually higher vacancies; and (2) more on-site retail sales that are accounted for as off site or catalog sales or computer orders.
It can be assumed that every Internet sale equates to a loss of gross sales revenue reported to or attributed to traditional retail property and/or a reduction of catalog sales. This assumes that at any given time, there is only a finite amount of retail sales or catalog sales and disposable income per household and that traditional retail sales can only be maintained if the economy expands at an increasing rate, faster than the growth of ecommerce.
The implications of technology and the predicted downsizing of the various commercial and residential real estate professions (Baen and Guttery, 1997) have not noticeably occurred except in the lending/banking and title insurance areas (Power, 1998). Mergers and technological efficiencies have contributed greatly to increasing vacant branch bank facilities either within malls or on pad sites within the immediate area of major retail properties. Alternative uses of vacant retail centers and bank buildings have become common topics in the main stream press (Brown, 1998) and has become a priority topic for funded research (ICSC Priority Research Topic 1999).
Major national retailers are either closing stores and moving to the Internet (Halkias, 1999) or making major moves to begin or expand online sales within existing retail operations (J. C. Penney, Wal-mart, Radio Shack, etc.).
While the trend is occurring faster than the traditional academic journal articles can be published, the main stream press is full of references that are causing real concern to shopping center owners, retail leasing agents and property managers. Examples are:
1. REIT Interest-Will the Internet Kill All the Shopping Centers? (Martinez, 1999).
2. Rural Residents Find Internet Closer Than Malls (Associated Press, 1998).
3. Price War! Dozens of New Web Sites Want to Help Online Shoppers Compare Prices-Much to the Irritation of Retails (Woolley, 1998). …