The e-commerce impact: Beyond retail into real estate

We’ve been listening to news of an increasing number of stores announcing closures, citing unviable trading conditions in the face of heated competition from e-commerce and changing preferences of a new demographic. The latest retail giant to report trouble is Forever 21, who as of last week was preparing for a potential Chapter 11 bankruptcy filing.

The ramifications of these store closures are felt not just in the retail industry; they also reverberate though the real estate space. For instance, mall owners and operators who lease these units, many of which are anchor stores, struggle to maintain revenues and find new tenants when existing stores shut shop. As a result, they might have to settle for lower rentals as a trade off to keep spaces occupied.

Transformation of traditional retail

In a market like the UAE, where new malls are opening in quick succession despite a tepid retail and slowing real estate market, the struggle is even more pronounced. In the first half of this year, especially the second quarter, the emirates of Abu Dhabi, Sharjah, and Umm Al Quwain saw the completion and handover of new malls and retail spaces.

In Dubai, DIFC’s Gate Avenue, Springs Community Souk and Bluewaters Island are the most notable retail developments to have been handed over recently.   Supply is only set to increase in the emirate over the coming quarters with the expected entry of over 4.5 million sq ft of retail space, most notably the Meydan One Mall, Dubai Hills Mall and both Nakheel Malls, as well as Cityland Mall Phase Two and the new Meadows Community Souk.

On their part, mall operators are working to extend the shopping experience to a social experience that cannot be achieved online. By offering entertainment venues like cinemas, ski slopes, amusement parks, concept restaurants and even gyms, mall operators are providing customers with an interesting tenant mix to fulfil all needs.

Even for those customers whose main objective is to shop, retailers and operators are working together to offer an omnichannel experience with options such as click and collect, or order in store and deliver to preferred location. Brands such as Lululemon and Macy’s, who are already far along in their efforts in building their omnichannel presence, have started to organise pop-up stores and events to involve the consumer and then build a lasting brand loyalty which can be continued online or in store.

Logistics and warehousing in focus

While e-commerce is causing an unprecedented shift in retail formats, another area witnessing transformation is the logistics and warehousing space. With increasingly more items available at the click of a button and the promise of same-day delivery through services Amazon Prime, there has been a surge in demand for Grade A warehouses to store these items. With the return rate of items purchased online at 30-35% versus 8% for physical shops, storage of returns is also a notable concern for companies. Therefore, distribution centres that support digital infrastructure, and last mile hubs within proximity to their increasingly time conscious end-consumers, are highly sought after.

However, existing onshore supply will likely not fulfil future demand, with insufficient supply of good-quality, non-free zone warehousing.

Until areas are developed to house facilities of superior quality, it is likely that retailers will reconfigure their existing outlets to provide additional storage or use third-party logistics operators. Authorities including JAFZA, Dubai South and DAFZA have developed schemes and are working with relevant government departments, such as Dubai Customs, to support e-commerce business growth, eliminate red tape and enable easier access to the local market.

Even after real estate concerns are addressed, there are still some logistical issues that need to be tackled for e-commerce to meet its full potential. Issues specific to the region including lack of street addresses and use of PO boxes, hassling coordination between shoppers and delivery drivers, cash on delivery and the issues of cash refunds on returns, all need to be addressed to ensure a seamless experience. However, the introduction of Makani and more drop box, click-and-collect locations have improved these issues in Dubai.

With the UAE’s current online retail purchases at only 2.2%, the country has been slow to jump on the e-commerce bandwagon. However, with its young demographic, high population density, and residents’ disposable income it is well positioned to be an e-commerce hotspot in the near future.