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News Releases - June 17, 1999

 “Nowhere Yet Everywhere: Investigating online buying’s impact on retail property values” is Borsuk’s presentation to the American Real Estate Society in Tampa on April 9.  ARES membership comprises real property professors from across the country.  Borsuk participated on the panel entitled “Retail Properties and the World Wide Web.”  Joining him were Dr. Grant Ian Thrall (U of Florida), Dr. John S. Baen (U of North Texas) and Dr. Norman G. Miller (U. of Cincinnati).

Borsuk discussed how customers found online buying an irresistible value proposition, voted in 1998 to make it a mainstream activity, and set in motion the cannibalization of in-store sales for many kinds of merchandise.  Those retailers seeking to leverage the online sales channel would likely shift their requirements for new stores, seek to reduce stores within a trade area and selectively downsize them.  This would have an impact on retail space demand, rents and property values. 

Borsuk argued the academic community was well suited to analyze the issues.  He outlined a research agenda including investigating how online buying impacts individual store financial performance, what changes are required in site selection methodology, what is the optimal store leasing strategy in a wired world and the need to develop a methodology for assessing the adaptive reuse potential of redundant retail space.

In the question and answer session, the Profs quickly polarized into those who thought online buying would impact space demand and those who argued there would be no impact on the location based channel.  The debate was lively with strong opinions expressed.  One professor urged his colleagues to look to California and other heavily wired areas to understand the transformation ahead.  This suggests a metropole effect.  Although universities and colleges comprise a significant part of the online community, the Internet lifestyle, so evident in the San Francisco Bay Area, Boston, Chicago, NY and Seattle, may still be a novelty in some parts of the country.

On May 6-7 Borsuk spoke at the Urban Land Institute Spring Council Forum in Atlanta.  On the 6th, he discussed INFOTECH SCAN(sm).  INFOTECH SCAN(sm) lets retailers assess new store profitability by examining customer propensity to purchase online.  The methodology helps to correct the declining value of demographic and psychographic data used for site selection decisions.

Developers also need to know the online buying proclivities of the local population.  Households who transact online require developers to change the tenant mix and rental rates.  This can impact the project’s value.  The May issue of Chain Store Age featured Borsuk’s article on INFOTECH SCAN(sm)

On May 7, Borsuk participated in an online buying and retail development panel with Craig R. Schmidt, the Merrill Lynch retail REIT analyst.  Schmidt’s recent report discussed the impact of Internet buying on retail REITs.  In his view, the impact will be negative although not for all property types. 

Borsuk urged the developers to consider adaptive reuse of failing projects and to create MetaSpace(sm).  MetaSpace(sm) integrates cyberspace into retail space.  Borsuk used illustrations from his May article in Shopping Center World to discuss the creation, operation and income potential from MetaSpace(sm) for developers.

“Nowhere Yet Everywhere” was the topic of conversation at the International Council of Shopping Centers (ICSC) convention in Las Vegas on May 25.  Stephen Finn (E&Y Kenneth Leventhal) moderated “The Impact of Internet Sales-How Will It Affect Shopping Centers?” panel.  Although, Borsuk was not a participant, Finn quoted extensively from the ARES paper.  He began his remarks by quoting Borsuk’s observation on how the real estate and Internet worlds perceive time and its implications.

The audience was far from sanguine about online buying’s impact on retail space.  One woman, again quoting Borsuk, noted how cyberspace price competition continues to pressure location based retailers.  Another participant told the panel to disregard the supposed inconvenience of delivery and the sales tax moratorium on Internet purchases.  In his view, convenience and lower prices were driving customers online at the expense of the store.

The panel got hopping mad about the Internet Tax Freedom Act (1998).  Federal law prohibits new sales taxes on Internet purchases for three years.  The law follows the 1992 US Supreme Court decision in Quill v. North Dakota (504 U.S. 298).(1)  The Court requires a nexus between the merchant and the state before imposing a tax.  Most catalog merchants fall within the exception.

The panel took an inconsistent position when it came to a decline in sales tax revenue.  The panel’s consensus was online buying would have a minimal impact on retail real estate.  However, they bemoaned the loss of sales tax revenues for local governments.  Clearly, the sales tax shortfall could not occur without a decline in store sales.

There is also a striking contrast between the ICSC and the National Retail Federation (NRF) positions on prohibiting online sales taxes.  Arguably, merchants are the first casualties and should be demanding tax parity.  However, the reality is far different.

While the ICSC is lobbying hard to level the playing field for location based retailers(2), the NRF is taking a neutral position.  Collectively they may believe reconfiguring the sales channel matrix is necessary for survival.  Therefore, the status quo benefits them.  Under the existing rules, a properly structured online entity can avoid collecting the sales tax even though they have a store in the state, e.g., barnesandnoble.com.

While the ICSC panel and audience did not seem to be in sync, another topic is coming to the fore.  Does online buying stimulates store sales or cannibalize them?

The head of Barnes & Noble said expanding online sales actually benefit stores.   This is the accretive view.  See Barnes & Noble first quarter earnings report, May 19 (Business Wire) and New York Times.(3)  A recent article on REI’s online sales supports this view.(4)  Finally, Hugh Kelley of Landauer Associates argues in Real Estate Issues that online buying complements real estate.(5)  Conversely, E&Y believes cannibalization of in-store sales can occur(6).  Furthermore, surveys done by the Consumer Electronics Manufactures Association(7) and NFO Interactive(8) forecast customers will buy less from stores when they go online.

In the short-run, can these antagonistic views be harmonized? Yes, it is possible for certain merchandise categories.  A clue to the phenomenon may lie in 1998 retail book sales.  Last year an important shift took place among booksellers.  In volume terms, those selling online gained two percent of the market, large chains marginally increased their share to twenty-five percent and independent booksellers saw a decline of about one percent to seventeen percent.(9)   This suggests the loss to independents flowed online and to the chains.  Thus, while chain booksellers experienced a slight volume increase, online transactions grew by 349% over 1997, the first year surveyed.(10)

The accretive argument is intriguing from another standpoint.  It assumes continued market growth reduces the negative impact on store economics.  However, last year the book market suffered a three percent volume decline in adult purchases.(11)   The accretive reasoning breaks down in a slow to no growth market as the online purchasing gains.

UPCOMING TALKS

On July 13, Borsuk will participate in a panel discussion entitled “They’re Coming Down the Stretch: E-Commerce—The Dark Horse or the Favorite” at the ICSC Idea Exchange in San Diego.  Panelists include Lara Hodgson, iXL Corporation and Steve Bowers, CB Richard Ellis Retail Services.

On October 15 Borsuk will speak at the Appraisal Institute conference in San Francisco.  Appraisers are concerned about online buying’s impact on retail property values.  Borsuk will offer his views on value and appraisal pitfalls in a wired world.

The following week Borsuk presents “Online Buying is a Hungry Cannibal: How to avoid becoming your landlord’s lunch” at the NRF’s Financial Executives conference in San Diego.  His discussion will focus on leasing strategy and retailer use of MetaSpace(sm).  Pam Stubing invited Borsuk to participate on her panel at the conference.  Ms. Stubing is the Associate Director of E&Y’s Retail and Consumer Products Industry Services group.

Later that week Borsuk will lead a breakfast roundtable at the ICSC Law Conference in Scottsdale.  The hot topic for lawyers this year is online buying.  The conference will have many sessions discussing Internet retailing and drafting tips for cyberspace.

UPCOMING ARTICLES

Borsuk is writing an opinion piece for The Industry Standard{“www.thestardard.com”} about Internet buying’s impact on stores.

Borsuk will also contribute an article to the Real Estate Law Journal.  The Editor-in-Chief has asked him to discuss lease drafting issues, creating the MetaSpace(sm) agreement and legal malpractice concerns.  Borsuk is a member of the California and Federal bars.

IT HAD TO BE!

On June 2 the Financial Times (London) reported an English bookseller, Ottakars, was opening new stores able to withstand a 5-10% loss in sales from online buying.  Expecting cannibalization, it was looking for less costly space and smaller footprints.   The article also quoted an analyst from CSC Consulting suggesting a fifteen (15%) percent online sales cannibalization would make a profitable bookstore unprofitable.(12)

Contact Mark Borsuk, Managing Director at (415) 922-4740 / FAX 922-1485 /

mark@borsuk.com

 The Real Estate Transformation Group thanks Mihalovich Partners, Commercial Real Estate Services {“http://www.mihalovich.com”}in San Francisco for hosting this article.

 Copyright 1999.  All Rights Reserved.  Mark Borsuk.

(1) Logging On to Cyberspace Tax Policy (www.caltax.org/taaxwhpap.html).

(2) ICSC Government Relations Report, Vol. 22, No. 2, May 1999, pp. 2 & 8.

(3) Doreen Carvajal, Trying to Read A Hazy Future, The New York Times, Sunday, April 18, 1999, Business Section, pp. 1 & 6.

(4) Leslie Kaufman, A Behind-the_Screens Glimpse of an Internet Retailer, CyberTimes, May 24, 1999 (www.nytimes.com/library/tech/99/05/biztech/articles/24web.html).

(5) Hugh F. Kelly, CRE, You Say You Want A Revolution?  Technology Turns Out to Be a Plus for Real Estate Demand, Real Estate Issues, Winter 1998/1999, pp. 5-8.

(6) Pam Stubing, ROI: Give It Time and Know Your Timing, Ernst & Young LLP, Retail News, Spring 1999, p. 4-5, 8.

(7) New CEMA Research Shows Consumers See Internet and Traditional Storefronts Working in Tandem (www.cemacity.org/files3/webkey.htm).

(8) Beth Cox, Survey: Online Shoppers Will Cut Spending At Traditional Stores, InternetNews.com, May 28, 1999 (www.internetnews.com/ec-new…icle/0%2C1087%2C4_128871%2C00.html).

(9) Doreen Carvajal, As Booksellers Shuffle, Readers Depart, The New York Times, May 3, 1999, p. C13. 

(10) Press Release, Book Industry Study Group inc. (www.bookwire.com/bisg/pressrelease98.html).

(11) ibid.

(12) Caroline Daniel, Low-tech book has set the pace for internet retailing, Financial Times (London), FT-IT Review, Wednesday, June 2, 1999, p. X (www.ft.com/ftsurveys/q620a.htm).

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