Everyone knows that news affects all kinds of economic markets. So no one should be surprised by the recent news that retail properties are coming under pressure. The cause of concern is the rise of many online retail sellers like Amazon, Overstock.com, and a host of others.
If you haven't been watching the US stock market in the last month or so, then you don't know that retail stocks on the NYSE and NASDAQ have suffered sharp declines in recent weeks. This has been especially the case for older retail brick and mortar companies, as earnings and sales at many retail businesses locations across the land have suffered dramatic downturns. Commentators, both on TV and in the economic news, have heaped on the growing stock price carnage with ominous statements like,"The end of the brick and mortar retail era is upon us," and "Online retail has now increased to a point that traditional retail has finally started to suffer significant market share losses." While most of these statements are factual, the major impact of these and other news reports has been to cause national stock prices to take a dive. We have yet to see any noticeable effect on local retail property prices in South Florida, but that downside turn in commercial real estate prices is an inevitable coming reality. Why?
As the psychology of the retail market turns more and more negative, mostly resulting from the growing trend of more and more online retail businesses taking market share from brick and mortar retailers, and from the growing deflationary pressure online retailers are putting on traditional brick and mortar retailers, buyers of commercial property are going to have a genuine opportunity to purchase some quality real estate. "How can this be," you might ask, or maybe you are saying to yourself, "How could there be any real estate bargains, coming to the market, when business for current South Florida for retailers is pretty darn good?" Indeed, the current sales numbers and demographics clearly show that more and more people in South Florida are willing to take their time to drive to any given retail location to do their buying. So why should property prices drop anytime soon?
The answer is there are going to be real estate bargains, because psychology always wins out over current market behavior. That is why all economic markets are cyclical. Since human beings make up any given economic market, and human beings are always affected by market psychology, it follows that sooner or later we are going to see some panic develop retail property owners. Smart investors will need to be ready in the the near future to snatch up any well located retail property. Since the psychology of fear already is starting to play such a powerful role in the stock markets, you can count on some retail property owners seeing what is happening in the stock market, and entering a state of panic regarding their businesses down here in South Florida. Many sophisticated stock market investors understand that the market often foresees what is ahead for the economy. It happens all the time that owners of commercial property see a trend in the stock market, and start to liquidate their holdings. It happened on a very large scale in 2009, and it can happen again in 2016. Smart real estate investors are always waiting and ready to take advantage of someone's panic or fear, based on the US stock market. But there is another reason that you can count on retail property bargains coming into the local commercial market at some point or another in the near future: many retail business owners are simply not prepared to face the genuine market changes, being forced upon traditional retailing in America. As a result, these folks cannot foresee how they might transform or change their business operations, or their real estate properties which contain those businesses, into other types of profitable uses. In commercial real estate, profitable use and zoning are always key and premier issues, and most owners of retail property do not understand that their buildings afford a large and varied number of potential profitable business uses. And, unfortunately, a retailer often finds their property frozen in time by local planning and zoning officials. I'll explain what I mean regarding zoning in my next Linkedin Post.
The current pressure on brick and mortar retail businesses to move away from traditional retailing is growing: just look what is happening to Sports Authority, and you'll begin to grasp what is coming to the South Florida economy. Smart investors are going to be on the lookout for real estate bargains, coming on the commercial market for sale. And once they have their properties under their control for a good price, these same investors are going to start thinking about how they want to transform their buildings into spaces conductive to new kinds of profitable uses.
In my next post, I will explore just how this transformation of profitable use can take place. It is not an easy process, but it can be accomplished, and by taking this approach, an investor can make a great deal of money.
John K Brackett, Ph.D.
John K Brackett Real Estate
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