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February 22, 2018

Retailers adapt to millennials, e-commerce

  • E-commerce is growing at a steady pace, yet over 93 percent of retail sales still occur in a brick-and-mortar store.

    Anne Marie Koehler

    Erika Koehler

    Seattle retailers are adapting to a changing retail landscape brought on in part by the growth of e-commerce and the newfound spending power of millennials.

    Broadly, shoppers in Seattle are not devoted to traditional brick-and-mortar stores, especially thanks to the growth of Amazon Prime Now and other same-day delivery services easily accessible over the internet. The millennial consumer will typically research online before heading to a store to purchase, will order online and pick up at a physical location, or will browse store aisles and then simply purchase on their phone.

    Retailers that offer only one way to shop will need to explore ways to adapt to reach this new shopper demographic. This will be particularly important if they have a significant retail footprint, such as apparel, shoe and office supply stores.

    Major national retailers are moving towards multi-channel shopping focused around concepts such as BOPIS (buy online pickup instore) and BORIS (buy online return instore), which are allowing them to carve a unique niche in the retail market. Companies like Walmart, Kroger and Target are all investing heavily in e-commerce to keep pace with changing consumer expectations.

    In fact, with its acquisition of Shipt, Target plans to have same-day delivery from all its stores by the end of 2018, which puts it in direct competition with several other retailers currently offering this highly popular delivery option.

    Despite these shifts, it is important to remember that, while e-commerce is growing at a steady pace, over 93 percent of retail sales still occur in a brick-and-mortar store. A telltale sign on the importance of some form of traditional retail is the presence of previously online-only retailers opening physical locations throughout Seattle. Notable examples include Tuft & Needle, Rapha and Indochino all opening physical locations or showrooms in downtown Seattle.

    These new types of stores pride themselves on fluid transactions, more curated products, and an emphasis on connecting with customers in person, coupled with more experiential and interactive environments that make shopping entertaining and relaxing for tech-savvy consumers.

    These adaptations have had ripple effects across all levels of retail and led to some interesting partnerships with commercial real estate development. Prospective developers know that Class A office and multifamily developments need to have synergistic retail to achieve the highest possible market rents.

    Nationally, we see these retail-office and retail-multifamily partnerships trending towards established fast-casual eateries or new-to-market national establishments. However, in Seattle, companies need to provide deluxe lifestyle amenities for their workers in order to hire and retain top talent. For example, the new Rainier Square development, leased by Amazon, will house an Equinox fitness club and a 20,000-square-foot organic grocery store. Similarly, the new development at 23rd and East Union will house a Portland-based organic grocery called New Seasons.

    Retail moving towards amenity-based tenants is a trend that goes beyond tech firms too. 400 Dexter, where the drug manufacturer Juno Therapeutics is headquartered, is expected to include a boutique bouldering gym and a day and night bar along with collaborative workspace.

    Image from JLL [enlarge]
    The Rainier Square development, leased by Amazon, will house an Equinox fitness club and a 20,000-square-foot organic grocery store.

    These synergistic retail types all work together to provide a broad set of lifestyle amenities beyond what is currently being offered in high-end real estate markets like Lake Union and the Seattle CBD.

    The types of retail developments described previously are on the higher end, and in keeping with the pattern of wage growth and wealth generation that JLL is seeing across the Puget Sound. Income is an important consideration when thinking about the retail market and we expect to see personal income in Seattle grow by about 5 percent in 2018, which correlates to increased buying power for consumers.

    Nationally, wages are only now starting to grow at around 3 percent, which suggests that the future of Seattle’s retail is far rosier than what is being reported on a larger scale.

    A further boost to the retail picture from an investment standpoint is the rapid growth of home prices in Seattle. Approximately 47 percent of Seattleites are homeowners and, given the sharp increase in housing prices, their wealth has grown precipitously as well.

    This wealth generation offers Seattle homeowners further ability to buy more retail in the short to medium term. JLL sees this reflected in the drop off in the personal savings rate from over 5 percent in 2016 to 3.2 percent towards the end of 2017. This trend is consistent with a positive “wealth effect” accrued from increasing equity in Seattle homes. It suggests that Seattle homeowners are spending more out of their current income and saving less.

    Ultimately, these trends all point to a positive outlook for the high-end retail being installed in the urban core for the foreseeable future.

    Ann Marie Koehler has over 11 years of experience specializing in retail brokerage services, with a focus on urban retail. Erika Koehler has over 14 years of experience in commercial real estate, much of it focused on urban retail and mixed-use developments.

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