The Real Estate Espresso Podcast The Worst Investment Asset Class in 2019
On today’s show we’re talking about some of the excellent global research performed by accounting firm Price Waterhouse Coopers. They recently published their latest prediction reports for a number of geographies around the world.
The data reflects the views of individuals who completed surveys or were interviewed as a part of the research process. The data comes from 1630 people who responded to the survey or were interviewed individually.
Over the next several days we’re going to pull out a few significant items that are worth noting from this 108 page report.
The top areas for investment according to the PWC report are:
- Warehousing
- Fulfillment
- Workforce housing
- Senior Housing
- Midscale hotels
- Medical office
I find it comforting that my company is currently investing in 4 out of the 6 areas listed as the top asset classes for 2019.
We will talk more about these other asset classes on future episodes. Today we’re going to zero in on the worst asset class on the list.
Heading up the worst asset classes are virtually all forms of retail, with suburban malls and big box stores at the worst end of the list.
The buzzword in retail is Experiential retail.
“You will see a lot more experiential retail. You need to give people a reason to go to a retail location.” So what is experiential retail? It combines an element of retail and entertainment.
A great example of that is "House of Vans" in London. It certainly lives up to the company motto of being “off the wall”. Vans is a maker of athletic shoes that target the skateboarder market. House of Vans is a location where art, music, BMX, street culture and fashion converge, you can find almost everything you can imagine across the 30,000 square feet building. There’s a cinema, café, live music venue and art gallery, the bottom floor holds the most unique feature of the building; the concrete skateboarding bowl, mini ramp and street course.
While some retail experts are claiming that experiential retail is the future, I don’t buy it. There’s no question that a few retailers will transform the buyer experience through innovations. That will no doubt help that specific retailer. It will do almost nothing to help The owner of retail real estate. The price per square foot you can get in rent as a retail landlord is a function of supply and demand. it’s very simple. If there is too much supply and not enough demand, prices will fall. Many businesses that have traditionally used a large format to carry local inventory are shrinking their foot prints.
When you extract the direct holding cost of the inventory, the cost of the real estate to house the real estate is a significant cost. By using warehouse space instead of retail space to store that inventory, retailers can experience the compounded savings of the higher storage density and the lower cost per square foot. Together the real estate component can be 50 x cheaper. That’s why e-commerce companies like Amazon can beat retailers with even higher shipping costs. They’re real estate costs are a fraction of the retailers.
That’s why I believe there will be a surplus of retail real estate for decades to come. When you obey the laws of supply and demand, the market will tell you what’s going to happen.