The Impact of E-commerce on Real Estate

7 min read

The Retail Apocalypse

The rise of the digital age is undeniable, and it has immensely changed the way we live and work. These days, we scroll through our newsfeeds instead of reading the paper; we store e-books in digital libraries and leave our bookshelves empty of paperbacks; we send emails in lieu of letters. With the rise of e-commerce, virtual storefronts seem to be displacing their original brick-and-mortar counterparts.  

Foot traffic that once belonged to traditional retail storefronts has been shifting to the digital realm in the form of impressions. Even on Black Friday, one of the most anticipated shopping events of the year, the long cues and stampedes through shopping aisles seem to have converted to spikes in retailers’ digital traffic.

Figures from Statista state that e-commerce accounted for 7.3% of Canada’s retail sales in 2017 and 8.1% in 2018. Projections are on an upward curve with 1% growth year on year. Michael Davidson, VP of Commerical Sales at RE/MAX Realtron Realty, sees this apparent shift in the market, stating that “Direct to consumer shopping did put Sears out of business, and now Alibaba and Amazon are standing over the graves of many other traditional companies because they recognize the shopping habits of younger generations shifted to mobile and digital technology platforms using PayPal and credit cards.”

While e-commerce in Canada may be seizing market share from the retail real estate sector, it has coincidentally sparked demand in other sectors. As the online shopping landscape continues to grow and evolve, so must the real estate industry if it is to ride the coattails of e-commerce.

Technology Innovation in Canada

Canada is considered to be one of the leading destinations for businesses, investment, career development, technology, and social growth. More IT professionals and companies are considering Toronto, Vancouver, and Montreal as the next IT hubs. The Canadian government has increased its support of the growing tech industry by approving a $1.26-billion Strategic Innovation Fund. The program is designed to boost the number of high-growth companies and to support the development of the digital, clean, and health technology sectors by the year 2025.

Despite Canada’s high percentage of Internet users, e-commerce adoption still lags behind the U.S., U.K., and China. It was only in 2016 that the rates of e-commerce activity began to capture more significant market share as Canadian consumers began migrating online. Now, e-commerce imposes a serious threat to the retail real estate industry. The penetration of online shopping into the Canadian demographic is most prevalent amongst the millennial generation that finds that the platform offers a more convenient and personalized experience.  

No one demographic sector is immune to the growth of e-commerce, especially with the growing diversification of hardware devices that connect us to online retail. Mobile purchases have increased threefold since 2014, and the introduction of new devices, including voice-driven hardware, has only accelerated the rate of e-commerce adoption.

Impact on Real Estate

After the demise of Sears, Toys ‘R’ Us, and Kmart, Lowe’s will be closing its 47 North American stores and reallocating their resources to restructuring their business. Gordon Pape, editor and publisher of Internet Wealth Builder and The Income Investor, quoted “What we have seen so far is the tip of the iceberg, and even that tip is putting some brick-and-mortar stores out of business.”

The Canadian retail sector is poised to suffer significant losses in market share to the likes of Amazon. Gordon Pape added, “As people become more comfortable with the ease of purchase and fast delivery of e-commerce, we’re going to see a lot more of that. Note where Walmart is directing a large percentage of its capex these days—to developing its e-commerce business to compete with Amazon.”

Is E-commerce a Serious Threat?

Although e-commerce is posing some real challenges for the retail market, we cannot blame the shift entirely on technology. There are many reasons consumers are choosing to go online rather than physically going to malls and retail stores.

Retail traffic may be down, but this is not to say that the sector cannot manage. Retail has undoubtedly been disrupted, but it is also reacting to the new market trends and reevaluating its models and strategies. Traditional retail isn’t dead; there is still a demand for a tactile shopping experience, and some things—like food, yoga, and spa services—just can’t be “Amazon-ed.”

Moreover, while younger buyers are more accepting of online shopping, 90% of Canadians still prefer going to malls to browse physically, avail discounts and promos, compare prices with other stores,  touch products, and purchase.

While it seems that no retailer nor real estate stakeholder is insulated from the domino effects of e-commerce, it is important to note that these market changes are merely a change catalyst, not a death sentence.

How to Compete with E-commerce in Real Estate

Many retail operators are currently reinventing themselves to compete with the ever-changing environment. The retail and industrial real estate industries have followed suit and are actually using technology and e-commerce as partners for success.

Warehousing

The Sears at the Great Lakes Mall in Mentor, Ohio was once a hotspot for deal-hunting shoppers By 2016, Sears had closed, and the mall had installed Amazon lockers, where shoppers could pick up and return packages bought online.

E-commerce sites are hunting for more logistics and warehouse space in metropolitan cities and the suburbs due to the demand for expedited deliveries. Shorter lead times have become a competition, driving players to transfer and store products in key locations. Take a look at Amazon, which may not have chosen Toronto for the HQ2, but employs around 17,000 workers in the cities of British Columbia, Ontario, Alberta, and Montreal.

Service-Centred Stores

Because they are experience-based businesses, movie theatres, spas, health and diagnostics centers, pharmacies, curated food hubs, and gyms are “e-commerce-proof.” The presence of these types of tenants drives much-needed foot traffic to retail complexes and continues to spur consumer activity.  

Additionally, both traditional and digital retailers can join pop-up events where they can learn new marketing trends and better connect with their target audiences. Owners and investors can also benefit from pop-ups because they generate buzz, drive walk-ins, and attract possible long-term tenants.

Stay in Larger Cities

Still, the most prudent strategy for retail investors is to stay and maintain properties in larger cities. There is an ongoing issue of low population densities, so businesses keep their foothold in urban areas where the workforce is the most concentrated. Class A malls and lifestyle centers in critical areas continue to flourish while improving their service elements.

Hybrid Retail

E-commerce is challenging traditional retail and driving the sector to innovate. It is high time for retailers to rethink the in-store experience and drive friendly competition by doing various experiments to capture and sustain customer attention.

Most retail stores in Canada are still absent online, and perhaps change is long past due. While the concept of a physical store isn’t obsolete, there is an opportunity for retailers to start an omnichannel strategy, which diversifies their sales and marketing avenues. Some stores have in fact, realized the benefits of hybrid retail and have begun to offer multi-channel options that include in-store, online, mobile, and social media conversions.

Mixed-use Malls

Shared spaces are now becoming popular across Canada, and most investors are adding e-commerce-resistant businesses like restaurants, offices, gyms, and condo units to fill vacancies and add value to the properties.

Retail Evolution

The retail real estate industry should be adaptive to market and industry conditions. E-commerce in Canada is still fairly novel, and it will take time for the market to evolve and grasp its full impact on real estate. As technology forces industries to evolve, previously accepted methods of valuation and income generation need to be reassessed.

To continue thriving, an investor must anticipate disruptions and build a portfolio that consists of strong retail locations that will allow flexibility especially when a repositioning of assets is essential. As with most industries, survival largely depends on adaptability and a willingness to ride the tumultuous waves of digital transformation.