CREModels Quoted on New Retail Metrics in ICSC Cover Story

Managing Director
How to value retail space in an omni-channel age

This November cover story of ICSC’s Shopping Centers today asks an intriguing question: Given the growing consensus that sales per square foot is losing its luster as the end-all-be-all in retail real estate, could data-sharing be the path forward?

As the article notes, you can still use sales per square foot if the transactions happen at cash registers rather than on computers or mobile devices. However, retailers with active e-commerce programs are using their brick-and-mortar stores in very different ways these days. Many times, as SCT puts it, these new uses “confound timeworn approaches to valuing real estate.”

“…by operating stores at landlords’ high-traffic properties, retailers benefit in ways that boost their bottom lines: They can acquire loyal customers for a lifetime; ramp up brand recognition; run click-and-collect programs; speed up last-mile delivery; bolster online sales via showroom-style merchandising; and rack up impulse buys from shoppers who return online purchases at stores, to name a few…”

The trick is how to value the landlord’s contribution to all of this. None of these new approaches, after all, would be possible without the real estate.

The SCT story focuses on the potential for retailers and landlords to better understand the value each side brings to the table by collecting and sharing more traffic and customer data. “You share data if it gives you a competitive advantage,” says an analyst quoted in the story. “Otherwise, you don’t share it.”

Our sentiments exactly. Last year, we covered some of the incentives that could propel these new models forward in a piece for Forbes titled “From Stores To Showrooms: Evolving The In-Store Experience And Underwriting Practices.”

In the SCT cover story (“The Right Formula: Measuring Physical-Store Performance in an Omnichannel Age,” p. 34), Karl Thompson, head of CREModels’ transactions group, provides a big-picture view of the effects of e-commerce on retail leases. “Thompson and his team of analysts pore through thousands of pages of legalese each year to conduct due diligence and run CAM reconciliations for developers and investors,” SCT writes.

“We do see instances where Internet sales are specifically addressed,” Karl tells the magazine. “Most of the time, this is from national tenants with a lot of clout. They’ll present a standard lease form to the landlord, and then the landlord will have to negotiate with them over it.”

Karl describes how more national chains are pushing landlords to exclude Internet sales from definitions of gross sales in their leases. He also recounts clearly the strong counterarguments from landlords. The stalemate may well explain why gross sales and percentage rent appear to be declining in the industry, Karl tells the magazine.

Even when percentage rent is part of the picture, some landlords are pushing for “slot fees” in which they lump retailers’ merchandising revenues into gross sales.

“A lot of retailers raise revenue by charging product brands for access to high-visibility merchandising positions inside the store,” Thompson explains to SCT. “We’re seeing some landlords add slot fees to make sure they capture a portion of those revenues, which certainly do depend on real estate.”

Moving forward, it will be interesting to see whether retailers and landlords really will shift toward more collaboration on traffic and data—and monetizing same. If it works for Google and Facebook, why not everybody else?

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