By now most DST investors are familiar with our property prejudices: Storage, senior living, student housing, etc. In a nutshell, those properties with multiple doors and multiple tenants.
However, it is important to understand how we arrived at these choices. Why are we not fans of such traditional CRE types as retail and office? Well, e-commerce didn’t kill bricks-and-mortar stores, but it made them a whole lot worse. Much worse.
Physical stores today are understaffed and full of inconveniences like locked shelves and self-checkout lines. Adding insult to injury, there is just not enough stuff.
According to the WSJ, consulting firm Alix Partners, studied 30 different retailers and found on average only 9% of their online women’s clothing assortment was available in their physical stores. Why even bother making the trip?
For major department stores, the numbers are even worse: the percentage was 7%, with mass merchandizers bringing up the rear at 2%. Talk about an exercise in futility.
Compared to the ease of ordering things from the comfort of your couch, bricks and mortar retail is hard pressed to compete.
This has turned once busy retail emporiums into dilapidated mausoleums. Traditional retailers’ response to this has been to jump on the e-commerce bandwagon themselves by hugely expanding the breadth of their products sold online.
The one exception to this trend seems to be luxury brand retailers like Hermes, Louis Vuitton, etc. This makes sense from the standpoint that the hallmark of luxury is exclusivity. As Enzo Ferrari famously said, “Ferrari will always make one less car than the market demands.”
A cornucopia of online goods is the antithesis of this. Visiting a high end store/dealership is part and parcel of the exclusivity experience. It’s a big part of what you are paying for.
However, having been in the DST business for over 25 years, we have yet to see a Hermes, LV, Rolex or Ferrari store on offer.
Therefore, if you are in 1031 exchange and being sold the desirability of “essential” triple-net retail properties, you may have to make do with a store front that has cut inventory too close to the bone forcing consumers online to satisfy their needs anyway.
There is precedent for this type of change. When the first department stores made their debut as a combination of innovative retail concepts and a desire to offer a wide range of products in one place, much hue and cry resulted from myriad artisans in their tiny workshops. However, it was not enough to halt progress as consumers enthusiastically embraced the ease and variety of goods available to them. There was no going back.
With the few exceptions previously noted, we think today’s bricks and mortar retailers are fighting a similar doomed, rearguard action against the inevitability of e-commerce.
Therefore, as an income property investor, if you wish to invest in the past, rather than the future, please consider moving triple-net retail properties to the top of your list.
