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February 2000

Under the Knife
by Mark Borsuk

Wall Street "cybersurgeons" are about to cut into retailing, forcing store closings. That's bad news indeed for real estate investors.

Wall Street this year will be pressuring large retailers to create "channel leverage" by strengthening their online sales at the expense of store expansion. This is going to create a new breed of investors – call them "cybersurgeons" – who will slice and dice retailers that cannot become true multichannel merchants. And the cybersurgeons' cure could become a bloodletting for both property owners and for real estate investment trusts, or REITs – publicly traded portfolios of property investments.

Expect a schism to develop between mass merchandisers and retail property owners over the value of location. Formerly, merchants and landlords had parallel goals – the best location generated the highest sales, paying the most rent. The online sales channel turns this rule on its head. Now cyberspace competes for merchants' attention.

Look for Wall Street analysts to demand that retailers curtail new store growth, reduce the number of locations and shrink store size. The punishment for slackers and those failing to provide superior online execution will be stock downgrades and credit rationing. Some will end up in the cybersurgeons' operating room.

Cybersurgeons are hostile takeover specialists hoping to maximize a firm's value by selling it piecemeal or re-engineering a store's core strengths for the information age. Their goal is to find a retailer with sufficient brand equity to prosper online while cutting back on brick-and-mortar locations. Strangely enough, retail merger and acquisition activity in the 1980s centered on the value of real estate. Now cybersurgeons are hell-bent on reducing stores.

For aggressive cybersurgeons, three characteristics dominate patient selection. First, the merchandise must consist of brands, standardized goods and self-service items. Books, CDs, consumer electronics, pet items, sporting goods, office supplies, groceries, health and beauty products, and toys all fit the bill. Second, customer demographics must be favorable to buying online. Finally, does Pareto's Rule apply? Do online customers generate the bulk of profits? If so, cybersurgeons will risk downsizing or closing stores that serve customers who generate only a fraction of the profits.

Cybersurgeons will carve up retailers with depressed stocks. They will prescribe a merchandising strategy aimed at the most profitable customers. They'll also make purchasing easier online, convert some locations to showrooms, radically cut costs, substantially eliminate noncore personnel and management, and centralize inventory.

Cybersurgeons will present landlords with painful choices. They are likely to demand cheaper rent and take less space. They may "go dark" while continuing to pay rent. The going-dark scenario is particularly deadly for landlords because the loss of a key tenant cuts foot traffic for other retailers. Lease termination by bankruptcy can be worse, with wider implications for property investors such as pension funds and insurance firms.

The retail property community is confronting a growing sense of irrelevancy and obsolescence in several ways. The International Council of Shopping Centers and the National Association of Real Estate Investment Trusts joined the so-called e-Fairness Coalition to oppose favorable tax treatment for online transactions. They hope to increase customer costs and slow the growth of e-commerce. The ploy is completely misdirected. In many cases, buying online is more convenient – it offers better comparison shopping, provides greater selection, is less expensive and saves time in comparison to brick-and-mortar stores. Manipulating the sales tax issue will not force shoppers back to stores.

Cybersurgeons may also turn their attention to distressed retail REITs. Retailers receiving the cure are also likely REIT tenants. To avoid evisceration, REITs may be forced to dump properties at fire-sale prices. The trick will be to align themselves with nonretail users. Adaptive reuses of big-box retail stores and supermarket-anchored community centers is inevitable.

The information age symbolizes the shifting of wealth from tangible to intangible assets. Cybersurgeons will exploit the opportunities in the transition. Online buying's negative impact on retail property is part of the economic and social upheaval ahead.

Mark Borsuk, a property attorney and retail leasing broker, is managing director of the Real Estate Transformation Group in San Francisco.

This article first appeared in The Industry Standard Magazine on January 14, 2000. For more news and analysis of the Internet, visit


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