The End Of Brick And Mortar Is Being Exaggerated

by: MF Capital

Summary

Brick and mortar retail isn't going away fully anytime soon.

Commercial real estate (and CMBS) will be fine even with diminished physical retail establishments.

Other CRE industries will expand with the contraction of retail CRE.

Introduction

Recently there has been a lot of murmuring about the coming end of retail establishments with physical locations as the popularity of eCommerce continues to soar. Though there is certainly reason to keep an eye on the commercial real estate business I don't think we need to be at all concerned about an all out bubble in the business or a severe lack of future growth. Delinquincies on commercial real estate loans has been on a downward decline since Q2 2010. Furthermore retail occupies but a small portion of all commercial real estate and many other areas are still seeing stable growth.

What comprises CMBSs

Commercial mortgage backed securities are comprised of a number of commercial real estate loans including offices, retail establishments, multi-family buildings, hotels, hospitals and industrial properties. While the primary concern for commercial real estate failing is the falling of brick and mortar business retail only makes up about a quarter of all loans in CMBSs (according to CREFC). While a complete fallout of retail business would drastically impact institutions that issue commercial real estate loans and the CMBSs that are made up of these loans that isn't necessarily the case.

End of brick and mortar

As physical retail buildings begin to close as they are no longer needed due to the rise of eCommerce we will see a rise in other commercial real estate that will become necessary. Physical warehouses to house the items being shipped and office buildings to manage the increasingly complex supply chain associated with delivering these goods will become more prevalent. These won't fully replace the CRE loans that will be caused by disappearing physical real estate establishments but they will certainly mitigate the impact it has.

To add on to the concerns over the shrinking number of physical retail locations I think it's important to note that these concerns are overstated and unwarranted. I've summarized my reasoning for this belief below in a few bullet points.

  • Many retailers are still performing well in the environment (including corporations like Ulta (NASDAQ:ULTA))
  • There will always exist a need for items that are needed immediately where you can't wait for them to be shipped (or even delivered by drone) this isn't something that can be replaced by current technology and won't be replaced in the near future.
  • Some people would rather go to the store to buy the items they want. Credit cards have been around for nearly 70 years, they're easier to use and better than cash in nearly every single way. Yet, people still use cash, why? Changing someone's ways away from the how they used to do something and implementing the infrastructure to do so isn't so seamless and will take time. Definitely not something that's going to be completely replaced in the near future.

Conclusion

Commercial real estate is definitely going to experience a bit of turbulance in the near future. Financial institutions are going to see a diminished demand for loan issuances and that's certainly going to impact their business. Corporations that package and securitize commerical real estate loans are going to have less loans to compose these securities and will have less products available to generate revenue off of.

But the market itself will sustain. There's too many other areas of commercial real estate for diminished physical retail locations to have any significant effect on this industry. Beyond that the concerns over the retail industry are overstated. There are many factors mitigating the contraction of the industry. Overall commercial real estate is fine for the time being and I don't see any strong factors pointing to it falling apart in the near future.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.