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Retail Tenants, Landlords Grapple withDivergent Perceptions of their Future in

Brick-and-MortarCynthia A. Nelson and Christa Hart*

A recent survey of 30 of the largest retail real estate investment trusts, and mall andshopping center landlords, as well as 90 U.S.-based retailers, examined how these twointerdependent industries view the role of physical store locations in future revenuegrowth. The authors of this article discuss the results of the survey, which reveal thedivergent views of the role of brick-and-mortar in the future of retail, and basic businessissues.

Mall and shopping center landlords and theirretail tenants differ on the role that brick-and-mortar store locations will play in the future,more digital world of retail sales. Understand-ably, landlords are more concerned about thevery real impact of online shopping on theneed for physical space and ultimately, onvacancies. Retailers, on the other hand, arelooking for ways their landlords can help thembetter adapt and thrive in the face of retail’snew omnichannel reality by adapting theirstores to enhance the customer experienceand meet evolving consumer demands.

This issue was explored in a recent surveyof 30 of the largest retail real estate invest-ment trusts (“REITs”), and mall and shoppingcenter landlords, as well as 90 U.S.-basedretailers, to examine how these two interde-

pendent industries view the role of physicalstore locations in future revenue growth. Theresults of the survey not only reveal theirdivergent views of the role of brick-and-mortarin the future of retail, but also about basic busi-ness issues, including the shift to online shop-ping, evolving consumer demographics andpreferences, and competitive pricing andpromotional pressure. Because of this discon-nect, retailers’ and landlords’ approaches toattracting shoppers and growing revenue differsignificantly. But, change breeds opportunity.

For example, while landlords overwhelm-ingly (93 percent) agree or strongly agree thatnew stores are critical to retail sales growth,just 61 percent of retailers share their belief.In addition, 60 percent of landlords believethat customers are shopping in stores less

*Cynthia A. Nelson is a senior managing director in the Real Estate & Infrastructure industry group at FTI Consult-ing, Inc., based in Los Angeles. Christa Hart is a senior managing director in the Retail and Consumer Productsindustry group at FTI Consult ing, Inc., based in New York. The authors may be reached [email protected] and [email protected], respectively.

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often, while only 37 percent of retailers agree,suggesting the landlords are far more aware

and more concerned about the impact ofonline shopping than their tenants.

Forget Back to Basics

The survey shows that basic brick andmortar attributes such as location, store designand parking are important for both; however,landlords and retailers prioritize these attri-butes differently. For example, 87 percent oflandlords but only 66 percent of retailers citelocation near other high-traffic retailers as be-ing most important for their physical storelocations. In addition, 63 percent of landlordsand only 52 percent of retailers say conve-nient parking is the most important benefit alandlord can offer. Compelling architecturaldesign and physical environment were alsoseen as a benefit by both, but there is a 29-percentage-point gap between how landlords

and retailers view it — 73 percent of landlordscited these features compared to 44 percentof retail tenants.

In addition, while landlords seem to overes-timate the importance of these fundamentalbrick and mortar attributes, they underestimatethe importance of such benefits as flexiblestore configuration (10 percent of landlordsversus 40 percent of retailers) and flexiblelease terms (seven percent of landlords versus27 percent of retailers). This disparity suggestsretailers are more interested in providing thepersonalized in-store and omnichannel shop-ping experience now required to attract andretain customers.

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A Disconnect on Business Priorities

The survey also revealed a disconnect inhow they viewed retailers’ key business is-sues such as competitive pricing, advertisingand marketing support, as well as the impactof evolving consumer demographics and pref-erences such as millennials and increaseddiversity.

For example, the largest gap in their percep-tions concerned the impact of competitive pric-ing and promotional pressure on the retailer,

with 63 percent of retailers expressing thisconcern versus only 17 percent of landlords.In addition, more than twice as many retailers,73 percent compared to 33 percent of land-lords, agree or strongly agree that shoppersdemand a more personalized in-storeexperience. Further, 40 percent of tenantsvalue their landlords’ advertising and market-ing support, while just 10 percent of landlordsthink it is important.

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On the other hand, landlords are far moreconcerned than their retail tenants about suchissues as the shift to online and the new shop-ping behavior of millennials (70 percent oflandlords versus 40 percent of retailers). This,presumably, is because of how they will impactinvestments in and changes to the physicalspace.

Landlords and retailers also differ in howmuch impact inventory supply chain enhance-

ments will have on retailers’ businesses; 47percent of landlords versus 28 percent of ten-ants cited it among the trends they expect tohave the greatest impact on retail companiesover the next three years. Surprisingly, theneed to bring products to market faster is atrend that neither landlords nor their tenantssee as pressing, with just three percent oflandlords citing that concern compared to 19percent of tenants.



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These responses underscore the need forlandlords and retailers to develop a betterunderstanding of each other’s needs and howthe changing nature of retail in an increasinglyinternet-reliant culture will impact them both.

Are Retailers in a State of Denial?

Research suggests that many retailers arein a state of denial about the depth andpervasiveness of shifts in consumer buying

trends, even as they expect e-commerce toaccount for 23.6 percent of their sales in threeyears, up from 16.1 percent today. In spite ofthis, they anticipate only small declines to in-store sales at malls and shopping centers —from 46.5 percent of sales now to 44.1 percentof revenue in three years. They also expectsales at stand-alone stores to decline from36.9 percent to 32.1 percent of revenue overthe three-year period.

As further testimony to retailers’ lack ofawareness, 60 percent of landlords agree orstrongly agree that retail customers are shop-ping in stores less often, but only 37 percentof retailers agree or strongly agree. Also,landlords are more concerned than their ten-ants about the continuing shift away fromphysical location to online purchases, 80percent compared to 54 percent of retailers.

It is not surprising, then, that landlords aremore concerned about the continuing shift toonline sales since e-commerce threatens theirown business models. Their concern is under-standable since landlords’ real estate assets

cannot be modified to succeed in the digitalera as readily as retailers can modify theirbusinesses to become omnichannelmerchants.

The survey showed that in spite of theseshifts in shopping patterns, occupancy ratesare still holding steady, at least for now. Whenasked to describe their occupancy rates today,60 percent of landlords report their occupancyrates are on target and 23 percent reportabove-target occupancy, compared to just 13percent who report occupancy rates belowtheir goals. None of the landlords reported oc-cupancy significantly below their targets.



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Looking Ahead: Plans to Boost Traffic

Looking ahead, retailers are keen to em-brace an omnichannel approach for growthand, as a result, expect all in-store sales todecline to 76.2 percent of sales in three yearsfrom 83.4 percent now.

So what do landlords plan to do to boost in-store traffic? Overall, landlords are already

improving the things their tenants value mostsuch as marketing (93 percent), physical ac-cess (93 percent) and the environment (97percent), as well as security. And almost all(97 percent) of mall owners plan to add morefood and entertainment options, increasesocial media and mobile apps (97 percent) andadd more non-retail options (43 percent) toincrease mall traffic in three years.



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Even so, retailers do not seem to value theirlandlords’ initiatives commensurate with theseefforts. For example, only 52 percent of retail-ers value their landlords’ efforts to drive storetraffic by adding new and innovative storeconcepts to the tenant mix, and only threepercent of retailers valued their efforts to addother non-retail options.

How are Retailers Embracing anOmnichannel Future?

Not surprisingly, retailers are makingchanges to enhance their omnichannel busi-ness, and most plan to do even more in thenext three years.



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Almost half of the retailers, 48 percent, saythey have altered store inventory managementand nearly three-quarters of them plan to doso in the next three years. A total of 40 percentof retailers have instituted flexible return poli-cies which allow online purchases to bereturned to a store, and 67 percent plan tohave such policies in place within three years.A growing number, 39 percent, offer deliveryof in-store purchases (including free delivery),while 64-percent intend to add this option. Inaddition, in the next three years, 44 percent ofretailers plan to improve both price transpar-ency and the check-out experience, whilemore than half (53 percent) plan to adjust storestaffing levels.

Perhaps, the most important finding to comeout of the survey is the mandate for landlordsand their retail tenants to develop a betterunderstanding of each other’s needs and howthe changing nature of retail will affect themboth. If this can be accomplished, mall ownersand their retail tenants can more purposefullyfocus on working together to compete with theexistential threat posed by retail game-changers such as Amazon and Walmart. Thischallenge must be met while continuing to findways to meet evolving customer tastes anddemands for new shopping experiences in theyears ahead.



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