Is e-commerce taking a 'huge bite' out of the retail construction sector?

ere's no arguing that the internet has changed the way people live, as they are increasingly paying their bills, getting to know each other, and working via online tools. However, the greatest convenience might be the ability to shop the world's markets and retail outlets from the comfort of home. From household staples to furniture, food and artwork, anything can be bought with a credit card and the push of a few keys.

In fact, according to Internet Retailer, on an adjusted basis, eliminating items like cars and restaurant purchases, online shopping — or e-commerce — accounted for more than 10% of all 2015 U.S. retail sales and totaled $340.8 billion. Internet sales have increased approximately 15% annually for the last six years and are expected to hit $523 billion by 2020.

This booming industry is great news for online retailers, but what does it mean for the construction industry?

Warehouse construction on the rise

E-commerce has kept warehouse construction alive, and, according to the Dodge Data & Analytics 2017 Construction Outlook report, that segment will grow another 2% next year in an effort to keep pace with demand. Almost 100 big-box warehouses, representing 60 million square feet in total, saw completion in 2015, leaving only a 7.4% vacancy rate for the segment, according to National Real Estate Investor. Those strong figures are obviously good news for construction companies in the warehouse sector.

"Warehouse construction is built for two reasons — to stock live stores and for e-commerce. With the proliferation of e-commerce, (retailers) are commissioning more warehouse distribution," said Carl Oliveri, partner and construction practice leader at Grassi & Co. Even large store chains like Macy's, he said, are moving toward hybrid models and developing warehouse distribution strategies. "To stay relevant, they have to compete in that space," he said.

A decline in brick-and-mortar building

However, online sales are growing at five times the rate of brick-and-mortar stores, according to a Colliers International report. It doesn't take an expert to read those signs — fewer in-store sales equals a potential decline in new retail construction projects and renovations.

Adding another layer to the problem for contractors: Some retailers who are planning renovations or building new stores are opting for smaller, local contractors in order to save on construction costs and boost an already-injured bottom line."Anecdotally, we definitely feel that e-commerce has taken a huge bite out of retail sales," said Chuck Taylor, director of operations for Illinois-based Englewood Construction. Englewood, which performs a significant amount of retail ground-up and renovation work nationwide, has seen a downward deviation in this sector in the last several years, according to Taylor.

Taylor said that by not hiring contractors like Englewood who have brand experience and know the stores inside and out, those retailers are subjecting themselves to a possible bumpy ride on the learning curve with new contractors and are putting more pressure on the architect or corporate construction managers who have to watch the project — and unfamiliar contractor — more closely.

A heightened focus on the customer experience

The exception occurs when the very large retailers look to companies like Englewood for a turnkey experience. "They want to teach the learning curve once and get those expectations out there and recreate (their store model) every time," Taylor said. Of those stores that are still adding to their stock of physical locations, he said, "They are focused on and have shifted to remodels in order to refresh the brand. Everybody is talking about creating a new customer experience."

Of course, millennials are playing a role in this new shopping environment as well. Taylor said retailers are trying to appeal to the millennial desire for convenience in addition to offering the community and social component that demographic wants as well. Muoio said the millennial draw to walkable cities and an urban, mixed-use experience has also changed the brick-and-mortar dynamic. "This is very clear in both the pricing and transaction volume for 'urban storefront' versus big-box or mall properties," he said.And it's creating that experience that is a challenge. Peter Muoio, chief economist and executive vice president of commercial real estate firm Ten-X, said the constant battle to drive customers to a physical location makes for a "more effective and competitive" environment in the long-term. "Some retailers are increasingly using a 'showroom' approach, where you can try on clothes and feel the fabric but then get the clothing delivered to your door," he said. "This cuts down on the inventory they need to carry, reducing costs, but also reducing square footage of their stores."

What's next for the retail construction sector

These experts emphasized that no one should count brick and mortar out yet. E-commerce is just one of the factors affecting retail construction, according to Richard J. Burstein, partner at Honigman Miller Schwartz and Cohn in Michigan."The e-commerce factor is obviously affecting retail sales to some extent, but not as dramatically as some predicted," he said. The retail sector is experiencing a "new normal," Burstein said. "The trend (toward) smaller stores (isn't all attributable) to e-commerce, but a changing retail marketplace out there is for sure."

Looking ahead, Muoio said that more retailers will likely be turning to the experience-focused business model and expanding into salons, gyms, restaurants and even doctors’ offices. "This will change the look and layout of brick-and-mortar retailing, but it will still be there," he said. "As retailing evolves, there will still be plenty of brick-and-mortar stores." 

Burstein said he's seeing a significant amount of infill development and predicts new building will rise as populations relocate. "But it's certainly not going to be a heated environment for a while," he said.

Perhaps the relocation of millennials is what's responsible for what Oliveri has seen with his clients. "We handle a number of contractors renovating Macy's stores, and they've never been busier," he said. Millennials who have moved to the suburbs and need access to retail have also led to building in those areas.

Taylor said retail renovations still keep Englewood's retail business busy, as their customers struggle to obtain the perfect combination of in-store sales and e-commerce. "Our retail sales from a general construction standpoint have been reduced significantly but are still a component of our business and will continue to be," Taylor said. "It's just different."