Partners in Innovation – Why real estate and retail need to innovate together

Photo by Johannes Plenio - Unsplash

Do you know why innovation is the key to business growth? Because your customer’s needs are constantly changing. In every industry today, there has been a cosmic shift in the balance of what’s considered important, the commercial real estate (CRE) industry is no exception. Customers today hold more power than they have ever done. To have a competitive edge in today’s market, you need to offer your customers the best product or service out there.

Physical retail is at a turning point. Many assumed in-store shopping experiences were on their deathbed, even long before the pandemic hit. With mass high street closures and businesses moving online, it was easy to assume that e-commerce was the top dog. But now the tables are turning and physical retail is bouncing back. Since the pandemic, people are craving social interaction more than ever, it’s suggested that up to 72% of consumers will return to stores now that the pandemic is coming to an end. Even digital-native millennials are returning to the physical realm, while they still browse and research products online, 82% of them prefer to commit to a purchase in person.

This begs the question, is physical retail still the underdog? While in the past the most important role of retail was to enable transactions, its new role is becoming the social bridge between the physical and digital worlds. Retail will always be the facilitator of transactions, but now it’s got a new role: the relationship builder. E-commerce and physical retail are no longer battling against each other – they are collaborating with each other. The combined forces of both shopping channels leads to creating an enriching shopping experience that deepens consumer and brand relations.

Retailers are constantly developing new engaging concepts to combine digital and physical. Nike’s House of Innovation engages customers by letting visitors test out products before buying, this approach resulted in a 30% growth in Nike’s online sales. McKinsey’s research shows patterns in the natural growth path for digital brands. Eventually they all engage in brick and mortar assets in one way or another. This helps them not only to reach customers directly but also brings down customer acquisition costs.

While digital brands are changing, so is the way that buyers shop. Brands are under pressure to figure out their new playbook. They’re in the headspace of experimentation, testing out how to add physical space to their strategy and finding out what works and what doesn’t. In many cases, it is uncharted territory, making their decision to take on physical space for the long term a difficult one. This is where CRE starts to normalize flexible leases. Just like brands, property owners need to adapt to their customer’s requirements to remain relevant. Flexible leases are on the rise and retail tenants are demanding them. This new approach to leasing changes the dynamic between landlord and tenant. Tenants are more frequently being referred to as customers and/or partners. This new approach creates a more balanced partnership between the space owner and the occupier.

 

How can real estate owners and property managers create an environment that enables brands to innovate and play with physical space?

 

1. Put tenant’s needs at the nucleus of your strategy

The first step is to recognize what your customers (aka tenants) are facing in regard to physical retail. The second step is having the willingness to embrace these difficulties and create solutions.

This could mean that property managers need to do a full 180 change of perspective on how they view their business, from being asset-centric to tenant-centric. While this is easier said than done, it means businesses have to work on creating a corporate culture whose primary focus lies on how to best serve its customers.

2. Offer flexibility

How can commercial real estate offer more in terms of service? They focus more on personal, tech-centric solutions with flexibility at its core. Modern brands are adapting by trying new concepts and reacting to market feedback. This degree of experimentation does not pair well with traditional retail leases, which often require heavy upfront investments.

Of course, any new approach to retail leasing has a lot of pressure to perform. It’s not an easy feat to re-invent an industry that is steeped in traditional processes. But it is difficult to ignore that these retail experiments have distinctly different requirements to building a flagship store. So how does a property manager cater to this new need? He offers flexible leases.

3. Make it simple – think digital

Offers lacking in transparency, mixed with time-consuming and complex processes, make for a lengthy, drawn-out experience. Renting a space can quickly feel daunting. The goal should be to simplify the process, not only for your occupier but for space owners too. Digitally native brands expect a certain level of efficiency that is offered by technology, they are technologically savvy and are used to quick self-serve processes.

Many digital-first brands are realizing they need to enter the world of physical retail to grow. To do this, they want a process that is as easy as possible. They want quick access to information on leasing offers, and a simple process to start or even complete a lease online. To meet this expectation, modern leases need to be simplified and digitalized.

4. Think about the real value

How does one value a product? Or a piece of art? Do you consider the cost of production? Or the costs of materials? The time spent? Like great works of art or well-designed products, retail spaces are equally challenging to value.

With residential or industrial spaces, you can base value upon clear features; function, floor space, design, outdoor space, vehicle access, etc. Arguably, you could use these factors to value retail spaces, however the key value points to retail spaces are hidden and harder to calculate.

When considering retail spaces, the key-value point is footfall and location. Since footfall is a very fickle thing to predict and is prone to immense daily, weekly, and monthly changes, the value of a retail space is dynamic and fluctuates throughout time.

Value is even harder to predict if the usage of a space doesn’t span over a complete year, meaning an average yearly rent calculation doesn’t connect to the actual value of the space day by day. Not ideal if you are offering flexible leases.

Innovative owners and occupiers are starting to approach the question of value from a partnership perspective with shared risk models. Offering rent-based packages, where the rent is formed of different factors such as base rent, footfall, and turnover rent. This creates a comprehensive value estimation from a space instead of basing it on superficial factors.

5. Offer new insights based on real evidence.

Since space evaluation is becoming an increasingly multi-layered concept, solid data is needed to support the discussion. This comes in the shape of footfall data, location insights, income potential, and whether certain marketing activities during a certain period inject value (think of promotional events in shopping centers).

Digital native brands whose expansion relies on brick and mortar, are going to want to see tangible data that supports the value of a space. Their mindset is different, their natural affinity to technology makes them ultra reliant on data to ensure the success of their business.

6. Offer additional services

This new approach to leasing offers up the opportunity for space owners to become the service provider. There’s a high chance that a lot of the digital brands who are starting to experiment with flex leasing are leasing a space for the first time. This opens the opportunity to add extras to your lease offerings, such as furniture packages, concierge service, or staff packages. Showing an interest to help digital brands enter physical space makes the most of their leasing experience. It strengthens the partnership between both parties, and best of all saves time, money, and creates a sense of reliability.

Into the future of tenant-oriented property management.

The commercial real estate market is finally catching up with other industries and developing at a fast pace. The early adoption of new technologies will smooth this transition and keep leasing managers and space owners on top of their game. Simplifying internal processes means leasing teams have more time to concentrate on what is important – people. A switch to become more service-centric, and an openness to take digital brand’s challenges on board, will allow the commercial real estate industry to keep on top of its game. Flexible leasing models combined with advancements in technology will start to shape the future relationship between occupiers and property managers.

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