THIRD WAVE WIPEOUT
Do retailers need landlords in a wired world?

By

Mark Borsuk
Managing Director
The Real Estate Transformation Group:
property strategies for the information agesm

For

High-Tech Horizons
Using Technology to Improve Real Estate Profits
Urban Land Institute
May 15-16, 1997
Reston, VA

Copyright © 1997. Mark Borsuk. All Rights Reserved, except the reader may copy this article into electronic form or print for personal use only, provided that: 1) the article is not modified; and 2) all such copies include this copyright notice.

THIRD WAVE WIPEOUT
Do retailers need landlords in a wired world?

Table of Contents

1. What Part of My Fallacy Do You Disagree With?
2. We’re About To "Go Critical"--Internet Market Size, Social Impact, and On-line Shopping.
   1. The Net Today--Market Size.
   2. The Net Tomorrow--Social Impact.
      1. Technology Diffusion.
      2. The Value of the Network.
      3. Social Impact.
         1. What Is On-line Shopping?
         2. Will Asynchronous/Remote Shopping Become Fashionable?
3. Why Retailers Must Reformat the Sales Channel.
   1. First the Good News--Little Is Happening.
   2. The Components Of Change.
      1. Moving From Demographics To Technographics.
      2. Who Is Teaching Consumers To Shop On-line?
      3. Credit Card Security.
      4. What Goods and Services Work In Cyberspace?
      5. On-line Shopping Is Different From Catalog Shopping.
      6. Crossing The Chasm.
   3. Competitive Pressure To Change.
      1. Increasing Shareholder Value.
      2. The 3rd Transformation In Space Use.
         1. Cybersurgeons.
         2. Securities Analysts.
      3. In-Store Sales Migration Will Drive the Decision.
   4. The Three Cs Of CyberRetailing.
      1. Connectivity--One To One Marketing.
      2. Competition.
         1. Stealth Competitors.
      3. Cost--Real Estate Implications.
         1. Rethinking the Retail Lease.
4. How Will Landlord’s Respond?
   1. Change Metaphors.
   2. Create a Tenant Screen.
      1. Who are the tenant’s customers?
      2. What is their level of technical sophistication?
      3. Are they going on-line?
      4. Is it more convenient or cheaper to purchase on-line?
      5. What is the merchant selling?
      6. Where does it fit on the continuum?
      7. Does the retailer add value to the product or service?
      8. Could the tenant operate in the store in a different format taking less space?
   3. If Not Retail, What Is the Next Best Use?
5. Plan For Change.

Charts
Further Readings

THIRD WAVE WIPEOUT
Do retailers need landlords in a wired world?

Mark Borsuk1
Managing Director
The Real Estate Transformation Group:
property strategies for the information agesm

Copyright © 1997. Mark Borsuk. All Rights Reserved.

I. What Part of My Fallacy Do You Disagree With?

Retailing is about to undergo a revolutionary change. In just few short years on-line shopping will forever alter the retailing of goods and services. Distance and time constraints will no longer hinder consumers. Instead retailers will offer goods and services on-line to complement their customers’ time and life style preferences. Information technology in the hands of consumers moves the point of sale from the store to cyberspace. Retailers will face a problem with sales shifting to cyberspace. Even a modest loss impacts individual store performance. Retailers seeking to exploit the value of on-line transactions will evaluate the profitability of their stores from a new perspective. The ascendancy of Internet shopping works against store based locations in the retailer’s channel mix.

On-line shopping gives retailers the ability to change the rules of the game. Landlord and tenants no longer share the same view about the value of location. Emerging technologies and changing social norms are coalescing to create a profitable on-line sales channel for retailers in three to five years. By recognizing the coming structural shift, property owners can avoid costly mistakes in tenant selection, leasing and development. Owners can plan for change today to capture the opportunities tomorrow.

II. We’re About To "Go Critical" -- Internet Market Size, Social Impact, and On-line Shopping.

A. The Net Today -- Market Size.

The dynamic growth of the on-line population is staggering. A recent Business Week survey finds one in five adult Americans are on-line. In addition, the survey found WEB users doubled in one year. Purchasing on-line is becoming popular and the ratio between male and female users is moving towards parity. Clearly, the Internet is a factor in the economy and society. Its continued growth and influence will have profound implications for retailers and their future space needs.



Source: A Census in Cyberspace, Business Week, May 5, 1997, pp. 84-85.

B. The Net Tomorrow -- Social Impact.

1. Technology Diffusion.

The Net is at critical mass and will continue to diffuse through society. Acceptance of technology and the unique nature of interactive media account for its success and growing influence. One way to measure the Net’s success is to compare it to radio and TV spreading to the home.

Home Internet usage is following a predictable path of technology diffusion. Early versions of radio and TVs were cranky and required some technical skill. However, within ten years from their commercial introduction, radio and TV were in half the households. See table below. The public’s acceptance of each new medium results from increased reliability, ease of use and falling prices.



Source: Christopher H. Sterling, The Mass Media, Praeger Publishers (1978).

The meteoric rise of on-line usage in households since 1994 portends a similar adoption cycle at least to the fifty percent penetration level. Current estimates place household penetration around thirty-five percent in 2000. See table below. This would parallel the early radio and TV adoption curve.



Source: FIND/SVP survey & estimates.
http://www.etrg/findsvp.com/timeline/forecast.html

2. The Value of the Network.

The growth of the Internet is inherently valuable for participants. Just as the value of the telephone system increases with more connections, a computer network has increasing value with the addition of more computers. This expresses Metcalfe’s Law. Another way to understand the phenomenon is to consider the increasing value of the network for each additional adopter as well as for past adopters. An example would be the Fax. When few had them there was little need. However, once a critical mass of users developed there were significant disadvantages to being a laggard and general acceptance followed. Internet usage is like Fax usage in the mid 1980s growing but not yet enjoying mass acceptance.

3. Social Impact.

a. What Is On-line Shopping?

The Internet’s ability to offer information about an ever increasing array of goods and services has tremendous benefit for consumers. The recent CommerceNet/Nielsen Media survey found thirty-nine percent (14.5 million) of WEB users searching for product information before making a purchase2. This is precisely the type of activity that reinforces the value of the network. Shopping also increases its value. But on-line shopping is different.

On-line shopping and in-store shopping are opposites. Store shopping requires the customer and the merchant to be physically present (local) at the same time (synchronous) while on-line shopping is done anywhere (remote) at different times (asynchronous).



Source: Dr. William J. Mitchell, Information Technology and The Way Communities Work, February 28, 1996.
http://sap.mit.edu/projects/colloquium/speakers_notes/wjm.html

Time starved consumers are a natural for on-line shopping. In many instances they cannot get to stores at convenient times. Also, many consumers expect to receive items quickly and have limited patience. They are "Just-In-Time" buyers, a perfect fit for the Internet. On-line shopping is a luxury for them. They can do what they need to do when they need to do it. This is the incentive for many people to start shopping on-line.

b. Will Asynchronous/Remote Shopping Become Fashionable?

The BusinessWeek survey says only twenty-four percent of on-line participants have shopped. This is not surprising given the newness of Internet commerce and the graphical user interface. Everything is less than five years old. It is also cumulative. The generation in school already is growingup in a wired world that considers on-line shopping part of the Zeitgeist. For the beginners an Internet shopping magazine guides the way3.

The geocentric shopping pattern largely controlled by driving time or availability of merchants in the area is no longer a constraint. This changes consumer expectations and attitudes. A subtle motivation for on-line shopping is that it offers a new form of social status. If consumers perceive themselves as time-starved, then buying in the asynchronous/remote mode promotes a time-luxury lifestyle. It frees them from the tyranny of the car, the crowds, lack of selection, poor service and is available 24 X 7. Buying on the Internet will confer a measure of glamour and prestige while causing techno-envy. Those following the fashion of the techno-savvy lifestyle will accelerate purchases on the Internet.

The opinion surveys are following the growth of on-line shopping. One survey inquired about Internet shoppers’ buying habits. They reported spending less time going to retail stores and reviewing catalogs as a result of being wired4. Buying on-line will mark participants as hip, cool, trendy, and smart. Having to trudge to the store will become a drag. Thus, a new social pattern is emerging to supplement the geocentric shopping pattern.

The Internet’s growing presence in households and consumer expectations is a challenge for retailers. The highly competitive nature of retailing will force them into cyberspace despite formidable technological and marketing hurdles. They, like property owners, are approaching a critical juncture5.

III. Why Retailers Must Reformat the Sales Channel.

A. First the Good News -- Little Is Happening.

Today, few chain retailers are expert enough to consider the second generation issue of space reduction. This will become a part of their overall reformatting strategy made possible by the consumers’ grasp of information technology. See Chart 1. Reformatting the sales channel is a gamble. Internet shopping is new, the customer base small, the competitive justification untested, the heuristics fluid, and the savings uncertain. Only a few see the preemptive value in early adoption. Merchant strategy and commitment will solidify over the next three to five years as many come to believe reformatting the sales channel is necessary to better interact, transact, and service customers.

B. The Components Of Change.

1. Moving From Demographics To Technographics.

Retailers must adapt to consumers no longer confined to ZIP codes or a trade area. As they did with radio and TV, retailers will quickly learn to exploit the possibilities of selling on the Internet. The significant advantage for them is the ability to consummate the transaction on-line.

Recognizing the changing role of consumers from passive information recipients to interactive participants, retailers need to consider how to reach these consumers. However, relying on demographics ignores the techno-savvy consumers’ motivations.

Technographics pioneered by Forrester Research6 segment consumers by their technological behavior, attitudes, and motivations. Such analysis, combined with Internet "POP" (Point of Presence) locations, offers retailers a new way to identify consumers unrelated to geography. Retailers could use email for in-store promotions or letting customers know what is new on-line. Cross-referencing mail and email addresses could also yield benefits to retailers seeking to develop an on-line presence.

2. Who Is Teaching Consumers To Shop On-line?

Retailers are not yet teaching consumers to shop on-line although there are some notable exceptions like Amazon.com for books and Peapod for groceries7. Instead, banks, stock brokers, mutual funds, hotels, car rental agencies, airlines, membership organizations and of course Microsoft are doing the work. Even the ICSC is teaching its members. They can now register for meetings and pay by credit card on-line. Shopping on-line is a natural after renting a car or trading stock. Today’s situation of retailers lagging the market will dramatically change over the next several years.

3 Credit Card Security.

Later this year VISA and MasterCard will introduce secure credit card transactions over the Internet. The secure electronic transaction ("SET") protocol legitimizes shopping on-line. The imprimatur of VISA and MasterCard removes a nagging but generally unfounded fear among consumers over credit card safety8. The credit card companies will also be teaching consumers about the Internet when they begin what is likely to be a massive PR campaign to popularize on-line shopping9.

4. What Goods and Services Work In Cyberspace?

The scope of what sells in cyberspace is evolving. Perhaps one-third of goods and services can sell using today’s technology. Consider a continuum moving from commodity goods like toilet paper, Heinz catsup, and HP laser printers to unique items like a sable fur coat. Commodity goods and service mainly sell on price with very little value added by the retailer. Increasingly retailers will have an incentive to move these items to cyberspace. At the other end of the continuum, retailers offer items requiring esthetic judgment along with the need to touch and feel. The continuum can act as a test for anticipating future retailer reactions and on-line strategies.

Another way to look at what works on-line is to consider self-service shopping. The absence of a sales person to offer guidance and opinion covers a broad spectrum of goods and services. Self-selection also suggests that many things sold in self-service stores could work on-line.

Wal-Mart is taking the lead in bringing its reputation and selection to cyberspace. It plans to offer on-line 80,000 items by year end10. Clearly, if Wal-Mart can leverage its franchise into cyberspace, then there will be a strong incentive for others to follow.

5. On-line Shopping Is Different From Catalog Shopping.

Many believe on-line shopping is really nothing more than catalog shopping and will have no appreciable effect on in-store sales. This represents a fundamental misunderstanding of the value of on-line shopping to consumers.

The Direct Marketing Association, a trade group, estimates catalog orders are about 4% of total consumer sales. There is very little evidence that catalog shopping reduces store sales11. Rather, anecdotal evidence suggests the reverse: catalog sales help target future locations. Thus, it would seem on-line shopping is not a threat to in-store sales. However, in the information age, the future is not in the rearview mirror.

Presently retailers can supplement store sales with catalogs. In addition, catalogers can open stores to increase market penetration. This is a roll-out strategy. The advent of the on-line sales channel permits a roll-up strategy.

There is a significant difference between a paper catalog and a Web site. Catalogs present static information in a linear format. Web sites offer greater product and service information in real time. Many sites are interactive, thereby keeping the consumer’s attention and offering affinity links to related sites of interest. When compared to the paper catalog’s lack of interaction and breadth, consumers discover a new level of convenience and shop with their mouse.

6. Crossing The Chasm.

Geoffrey Moore, author of Inside the Tornado, offers an insight into the hi-tech product life cycle and its mass acceptance. There are important parallels with on-line shopping. First, the product or service must be a distinct break with the past: discontinuous innovation. Second, the product or service must go beyond the early adopters through a period of quietude: The Chasm. Third, there must be a focused application for niche users and finally a rapid acceptance by the mass market: The Tornado.

In Moore’s opinion: "What will drive the consumer stuff will be airline, hotel and car reservations, and then car purchases, and then real estate browsing. Those are some fundamental personal transactions for which people are getting on the WEB a lot more than you would expect. It’s going to go beyond geeks very fast because they are already spending a lot of money in these areas." But he cautions: "The problem is that when consumer EC [electronic commerce] does blow open, it’s going to go like mad, and the last thing any company planning to engage in EC wants to do is be a year late to it, when the competition’s already in."12

Widespread consumer acceptance of on-line shopping will take several years. It is still in the Chasm, only the early enthusiasts are shopping. The next phase will reward retailers who offer customers niche products and services on-line. The Tornado will come at the end of the decade, when the mass phenomenon occurs. Thus retailers, to differentiate themselves in cyberspace, need to shortly create an on-line presence or face being left behind.

C. Competitive Pressure To Change.

1. Increasing Shareholder Value.

The Internet revolution is part of the transition to the information age. A hallmark of the information age is the changing nature of wealth. In the industrial age physical capital signified wealth. However, in the information age intellectual capital will signify wealth. This means the people in the building are more valuable than the building.

One manifestation of the trend is the emphasis on pursuing core competencies and re-engineering business processes to increase shareholder value. The emphasis on increasing shareholder value has had a profound impact on the role of real estate in the organization. See Chart 2. Over the last decade, manufacturing and service firms aligned space demand with corporate strategic goals. Cost reduction and rationalization followed. This was the result of an effort by academics, industry groups, and management consultants to correctly price and manage occupancy costs13. The results are favorable, and one large office user reported slashing occupancy costs by fifty percent.14 Senior management understands they can do with less space, that space costs have to align with corporate investment goals, and that all real estate decisions must promote shareholder value.

The Banks are going through the same space reduction process to achieve increased profitability made possible by technology. Traditional branch banking is being evaluated along with on-line banking and smaller units operating in supermarkets and other convenience locations. Many branch banks are redundant. In total they occupy more space, 250 million square feet, than general merchandise department stores15. One analyst predicts, "Half of today’s 60,000 branches will likely be gone by the end of the decade."16

In addition, branch transaction costs cannot begin to even compare with the cost of on-line banking. Wells Fargo reports that the cost of doing a transaction at a teller window is $1.07 but only $0.01 to do the same transaction over the Internet.17 No wonder banks are struggling to create incentives for moving customers on-line. Household on-line banking is rapidly increasing. In 1996, 2.5 million (3.1 %) of households banked on-line. By 2002, the number could reach 18 million (18.6%).18 These are very compelling reasons for bankers to rethink their business model of branch banking to reduce real estate and overhead costs.

Observing the re-engineering of corporate America and the branch banking system, one must ask when will fundamental change occur in retail?

2. The 3rd Transformation In Space Use.

Chief Financial Officers (CFO) of retail companies will react to the trend of substituting information technology for space. They know corporations pared their space costs by the use of new financial heuristics and metrics and the banks are rapidly eliminating branches. Secure on-line shopping gives them the opportunity to take these lessons and apply them to reformatting the sales channel away from stores. See Chart 3.

Encouraging their efforts are the prominent management consulting firms. For example, Deloitte & Touche examined the implications for on-line retailing.19 One observation is especially noteworthy. The report stated:

"…a retailer that has built up an advantage through superior store location and low cost leases will find this advantage is irrelevant, to the world of CIBER (Computer/Interactive-Based Electronic Retailing)."

This insight recognizes the essence of information technology’s impact on retail property. It erodes value by deflating the premium paid for location.

A 1994 analysis by McKinsey noted cost savings from space reduction.20 Thus, forward thinking CFOs will begin to consider the possibility of reformatting the sales channel to reduce occupancy costs.

a. Cybersurgeons.

Not only do retailers have to contend with their traditional competitors and emerging stealth adversaries but with the possibility of a new kind of corporate raider stalking them: the Cybersurgeon. Cybersurgeons will exploit the on-line channel to improve shareholder value. Retailers slow to implement change will be their prey. The Cybersurgeons will appear when market leaders like Wal-Mart demonstrate the channel’s viability.

b. Securities Analysts.

When the on-line channel begins to show a profit there will be calls for rationalizing space needs from analysts who follow retail debt and equities. Retail analysts will question management about their plans and demand to know why the company is not moving aggressively to exploit the opportunity. Likewise, retail REIT analysts will investigate the additional risks and impacts on cash flow from the threatened reduction in space. This will unsettle investors. Investors focusing on return will have a great interest in on-line shopping and other ways to leverage information technology to boost shareholder value.21

3. In-Store Sales Migration Will Drive the Decision.

The critical issue facing CFOs is estimating how much of in-store sales can migrate to cyberspace. They need to know how much of gross sales have to migrate on-line before a profitable store becomes unprofitable. For example, if only a 8-12% shift in sales made the store unprofitable it would raise questions about store usage, future expansion plans and leasing.

Some following retail are beginning to connect the dots. A February brokerage report on the Internet noted: "We believe that traditional retailers need to acknowledge the opportunity and/or threat of e-tailing [electronic retailing]. This is particularly true given that even a small percentage decline in same store sales levels can destroy the profitability of a retail store."22 The report emphasizes the point that a wholesale shift in shopping is not necessary to undermine store performance. Any analysis needs to focus on the specific goods sold and the retailer’s cost structure.

D. The Three Cs Of CyberRetailing.

A number of trends portend retailers moving on-line. Their success in cyberspace requires new competencies, among them mastering the Three Cs of CyberRetailing. See Chart 4.

1. Connectivity -- One To One Marketing.

The first "C" of CyberRetailing is Connectivity. Unlike radio, TV and print, the Internet allows for one-to-one marketing. An example would be when a potential buyer goes to the Hello Direct home page searching for a telephone accessory.23 The customer selects the item, fills out the order form, pays by credit card and ends the transaction. The company acknowledges the order by email and provides the shipping date. They now have a record and the beginning of a shopping pattern. Next time something comes up in that product category of possible interest to the customer, Hello Direct can send an email notifying the customer of a new product or specially priced item. The interactive nature of the medium allows the merchant to respond to the customer’s preferences over time and tailor their marketing. Interactive marketing is a tremendous incentive for retailers to move on-line.24

A second aspect of connectivity is transaction scalability. A merchant must be able to process a thousand, ten thousand or even one hundred thousand transactions per day. This is scalability. Useless the system can smoothly handle orders, customers will become frustrated and not come back to shop. AOL’s recent service problem is an example of not being unable to scale up fast enough to deal with a huge customer demand.

2. Competition.

The second "C" of CyberRetailing is Competition. Retailers seek to increase market share at the expense of their traditional competitors. However, increasing or defending market share also requires them to fight the battle in cyberspace.

a. Stealth Competitors

Retailers should fear the emergence of stealth competitors. The Internet makes them possible. One day they just appear on the consumer’s computer screen with an enticement to shop. Amazon.com is an example of a stealth competitor. It competes directly with Barnes & Noble, Crown Books, and Borders, but has no physical presence. The lack of real estate, store employees and additional overhead costs gives these retailers a competitive advantage based on dissimilar cost structures. See Chart 5.

Stealth competitors invite a price cutting death spiral. Amazon.com’s phenomenal success in capturing the "mindshare" (attention) of book buyers and the press likely forced the bricks and mortar retailer Barnes & Noble to go on-line. In a pre-emptive strike Amazon lowered prices and expanded selection to thwart the new entrant and maintain market share.25 This type of price cutting pattern will likely characterize on-line retailing as the established retailers enter the market further forcing down margins and profits.26

Start-ups are not the only stealth competitors to fear. Established retailers like Wal-Mart can quickly enter a market leveraging their cost and merchandising expertise with name recognition. This changes dramatically the meaning of guerrilla warfare. Whether traditional or stealth, retailers must offer the on-line channel to hinder others from skimming their sales.

3. Cost -- Real Estate Implications.

The third "C" of CyberRetailing is Cost. There is likely to be significant savings from on-line versus in-store transaction costs. For example, the merchant charge for on-line credit card payments may be less than the charge for in-store and catalog purchases.27 Other reductions will occur in personnel, distribution, and inventory expenses. This will focus attention on occupancy costs. In other words, is the space profitable? Should the retailer consolidate or expand locations? Should they downsize store formats into showrooms? Should they change their leasing strategy?

a. Rethinking the Retail Lease.

The lease is the glue that holds the landlord and retailer together. So long as tenants needed physical space, it works reasonably well. However, if retailers have the option of moving between physical space and cyberspace, then tenants are going to start thinking about leasing strategy and lease provisions in a whole new way.



Rent is the first issue. Retailers observing the disintermediation and reintermediation induced by information technology could say to landlords: "We need to convert our fixed rent obligation to a variable rent obligation to give us the flexibility for meeting our strategic goals."

It is almost impossible to contemplate such a dramatic and disruptive change to this fundamental tenant obligation and its impact on lenders. However, some smart Ph.D. working in the finance department is likely thinking: "If we could just convert the rent from a fixed obligation to a variable cost wouldn’t that improve cash flow and the balance sheet." Thus, one consequence for leasing is to potentially change the notion of the fixed rent obligation.

In addition, percentage rent is also an issue.28 Tenants will be very reluctant to part with any of their on-line sales profit.

The second issue facing landlords is the lease becoming a series of short-term commitments. Lease terms are shorter than they were ten years ago in many instances, and as the on-line sales channel begins to burgeon the term may get even shorter. Perhaps tenants would bargain for a three to five year lease with multiple short-term options.

The third issue is space. Channel reformation requires flexibility to configure the channel mix. Retailers will need the right to expand and contract their space and relocate within a project.

The fourth issue relates to exit strategy. Channel reform necessitates the right of early termination. Rejecting burdensome leases in bankruptcy could accomplish the same goal.

Many other lease provisions will need to change if retailers move aggressively to implement on-line shopping as part of reformatting the sales channel. The diminished value of location shifts the negotiating power to the tenants. The growth of on-line shopping works to the detriment of landlords.

IV. How Will Landlords Respond?

If consumers want to move on-line and retailers are considering channel reformation what is the landlord’s response? First, it is necessary to analyze the issues properly. This involves using new metaphors to think through the problem. Second, the landlord has to develop a screening technique to identify existing and prospective tenants subject to on-line shopping’s influence. Third, property owners need to evaluate whether there are better uses for the property.

A. Change Metaphors.

Effective strategy requires property owners to understand on-line shopping’s consequences. However, trying to fathom the forces unleashed is difficult since cyberspace is the antithesis of real estate: it is intangible. There is no there there! Thus, our metaphors imprison our thinking. We use metaphors to call up visual images allowing us to understand and experience one kind of thing in terms of another. Using a real estate metaphor like cybermall creates confusion. The image of the mall bears no relationship to the void of cyberspace. The Tired & Wired examples below suggests how our metaphors and terminology must change before we can understand the role of retail space in a wired world.



B. Create a Tenant Screen.

The best tenants in the on-line shopping age will be those who offer goods and services not easily migrating to cyberspace, add value in the store, and provide unique services. Using a screen to vet retailers can assist property owners in choosing tenants likely to remain and thrive in their space.

Landlords should ask:

1. Who are the tenant's customers?

2. What is their level of technical sophistication?

3. Are they going on-line? If so, then there will be an incentive for the retailer to develop a cyberchannel.

4. Is it more convenient or cheaper for the customer to purchase on-line?

5. What is the merchant selling?

6. Where does it fit on the continuum? Does the merchant offer commodity goods and services of a known quality or sable coats?

7. Does the retailer add value to the product or service? The more value added in the store, the less likely sales will move rapidly to cyberspace.

8. Could the tenant operate the store in a different format taking less space?

On-line ordering allows retailers to move to a showroom format with limited inventory. This is especially true for replenishment or add-on goods like office supplies, pet products, and computer parts. Also, many consumers are comfortable with waiting two or three days for delivery of non-impulse items. Big box retailers could adopt this strategy over the next several years.

Asking the questions suggested above offers forward-thinking property owners an intelligent way to speculate about desirable tenants.

C. If Not Retail, What Is the Next Best Use?

Owners and developers need to consider the adaptive reuse potential of the retail property. Does the tax code create economic disincentives for adaptive reuse?29 Will zoning and use restrictions and possible community objections stymie reuse? Will conversion to a new use generate sufficient returns?

Consider the five hundred thousand square foot regional mall when the rent no longer supports the property. Possible new uses include a theme residential development (Paris in the 1920s) with part of the parking lot converted into a green belt, a wellness and convalescent center (Health World), a continuing education and training facility (Learning Land), and a one-stop interment and vertical cemetery (the Necropolis). See Chart 6. Big boxes present a similar challenge. 30

Developers looking ahead should design multiple purpose flexibility into buildings. Retail properties lacking versatility could suffer a legacy use discount on disposition.

V. Plan For Change.

It does not matter whether consumers push the retailers on-line or the retailers pull the consumers there, since on-line shopping challenges the geocentric shopping pattern. In three to five years, retailers will start reformatting their sales channel away from stores. It will be in response to poor store performance due to sales moving to cyberspace. On-line shopping will first manifest itself with commodity goods retailers. Later, other retailers on the continuum will feel the pressure from cyberspace. Landlords need to do more than ask who will survive in this new environment. They need to pick the retailers who will thrive. Now is the time to plan for competition from cyberspace.

Further Readings.

Don Tapscott, The Digital Economy: Promise and Peril in the Age of Networked Intelligence, McGraw-Hill, 1995.

Franklin Becker and Michael Joroff, Reinventing the Workplace, The Industrial Development Research Foundation, 1995.

Ravi Kalakota and Andrew B. Whinston, Electronic Commerce: A Manager’s Guide, Barry D. Libert and Evelyn C. Alberding, Technology and Real Estate-The End of an Era, The Technology Supplement, Institutional Real Estate, FALL 1996.

The Cybercritic http://www.mediacentral.com/index/CatalogAge published by Catalog Age. (Reviews retail Web sites for content, ease of use, etc.)

Nonstore Retailing: Implications of the Internet, ICSC Research Quarterly, Vol. 3, No. 3, FALL 1996, pp. 7-11.

Economic Impact: U.S. Direct Marketing Today, Direct Marketing Association, 1996 (http://www.the-dma.org).

Karen Southwick, Jeff Bezos, Amazon.com, Upside, October 1996, pp. 29-34.

Arnulf Grubler, Time for a Change: Rates of Diffusion of Ideas, Technologies and Social Behaviors, WP-95-82, International Institute for Applied System Analysis, Laxenburg, Austria, 1995.

Kenneth M. Lusht and Darryl Farber, Information Technology and Urban Structure, Real Estate Finance, Spring 1996, pp. 13-20.

Stephen A. Pyhrr, PhD, Waldo L. Born, PhD, Rudy R. Robinson III, MAI and Scott R. Lucas, Real Property Valuation in a Changing Economic and Market Cycle, The Appraisal Journal, January 1996, pp. 14-24).

Stephen E. Roulac, Real Estate Market Cycles, Transformation Forces and Structural Change, The Journal of Real Estate Portfolio Management, Vol. 2, No. 1, 1996, pp. 1-17.

Mark Borsuk, The Challenge of Information Technology to Retail Property, Urban Land, February 1997, pp. 21-25, 50.

Nathan Rosenberg, Innovation’s uncertain terrain, The McKinsey Quarterly, 1995, No. 3, pp. 171-185.

1. 1626 Vallejo Street, San Francisco, CA 94123-5116. (415) 922-4740 / FAX 922-1485 / mborsuk@ix.netcom.com. Mark Borsuk, is Managing Director of The Real Estate Transformation Group, a firm advising landlords, tenants and lenders on strategies for the information age. In addition to consulting, Mark is a retail leasing broker and attorney practicing in San Francisco.

2. "Startling Increase" in Internet Shopping Reported in New CommerceNet/Nielsen Media Research Survey, CommerceNet, March 12, 1997 http://www.commerce.net/work/pilot/nielsen_96/press_97.html.

3. Constance L. Hays, A new magazine reviewing commercial Internet sites may prove to be ahead of the curve, New York Times, Monday, April 21, 1997, page C9.

4. NFO Interactive Study, January 1997.

5. Bill Roberts, Last Chance to Get Organized for E-Commerce?, WEB Week, Vol. 3, Issue 1, January 6, 1997 http://www.webweek.com/current/special/commerce.html Joseph Alba, etal., Interactive Home Shopping and the Retail Industry, Marketing Science Institute, University of Florida, Gainesville, 1996; Fred Phillips, et al., Electronically Connecting Retailers and Customers, Oregon Graduate Institute of Science and Technology, 1996 http://www.cse.ogi.edu/~benning/ECOMM/home.html Stephen E. Roulac, The Shape of Things To Come: Retail Real Estate in the Twenty-first Century, John D. Benjamin (ed), Megatrends in Retail Real Estate, Kluwer Academic Publishers, Boston, 1996; William C. Wheaton, Telecommunications Technology and Real Estate: Some Perspective (WP63), MIT Center for Real Estate, 1996.

6. Technographicstm Predicts Consumers’ Technology Behaviors, Forrester Research, Inc., January 27, 1997 http://www.forrester.com/pressrel/970127pt.htm

7. Shelly Reese, Peapod Demonstrates Potential of On-Line Grocery Shopping, Stores, January 1997, pp. 48-52.

8. Robert W. Baldwin and C. Victor Chang, Locking the e-safe, IEEE Spectrum, February 1997, page 45.

9. Time Clark, SET pilots to scale into rollouts, C/NET, April 18, 1997 http://www.news.com/News/Item/0,4,9863.html

10. Richard Tomkins, Wal-Mart plans big expansion of Internet shopping, Financial Times, Thursday, March 27, 1997, page 19.

11. Roberto E. Arista, The Consumer Product Direct Marketing Industry: Its Size , Growth, and Share of the U.S. Retail Trade Market, MIT Center for Real Estate, March, 1997.

12. Carol Hildebrand, Moore’s Law, CIO, December 15, 1996/January 1,1997, p. 96.

13. Barry D. Libert and William J. Ribaudo, New Skills for Real Estate, Arthur Andersen Real Estate Services Group ; http://www.arthurandersen.com/bus_info/industry/resg/trends/BBJR_2.htm M. Apgar IV, Managing Real Estate to Build Value, Harvard Business Review, Vol. 73, No. 6, November-December 1995, pp. 162-179.

14. Barry D. Libert and Evelyn C. Alberding, From Physical Assets To Virtual Assets: Real Estate Finance In The Information Age, The Real Estate Finance Journal, Fall 1996, page 31.

15. Lenny Mendonca and Partricia Nakache, Branch banking is not a dinosaur, The McKinsey Quarterly, No 1., 1996, page 138.

16. Libert and Alberding, supra.

17. Mark Calvey, Wells Fargo online service starts to click on customers, San Francisco Business Times, February 7-13, 1997, page 4.

18. Tim Clark, Fear drives banks to the Net, C/NET, April 30, 1997 http://www.news.com/News/Item/0,4,10215,00.html.

19. Deloitte & Touche Consulting Group, Electronic Consumerism: The Consumer is Winning,!…Who is Losing?, June 1996, page 15. http://www.dttus.com/dttus/hot/consumer.htm.

20. Christiana Smith Shi and Andrew M. Salesky, Building a strategy for electronic home shopping, The McKinsey Quarterly, 1994, No. 4, pp. 77-95.

21. Andersen Consulting, Creating Customer and Shareholder Value in Today’s Retail Marketplace, Stores, January, 1997, pp. A9-A11; Todd Barrett, Who’s Minding the Store, Stanford Business School Magazine, September, 1996; Ian A. Cameron, Linking CRE Decisions to Financial Business Measures: Two Case Studies, Arthur Andersen Corporate Real Estate Executive Report, Vol. 2, No. 2, Summer 1994, pp. 5-6.

22. Lauren Cooks Levitan, et al., E-TAILING: The Electronic Advantage, Robertson Stephens & Co., February 14, 1997.

23. http://www.hello-direct.com.

24. Alexa Kierzkowski, et al., Marketing to the Digital Consumer, The McKinsey Quarterly, 1996, No. 3, pp. 5-21.

25. Web Book Giant Fighting Off Competitors, New York Times, Monday, March 24, 1997, page C9.

26. Robert A. Garda and Michael V. Marn, Price wars, The McKinsey Quarterly, 1993, No. 3, pp. 87-100.

27. Time Clark, SET pilots to scale into rollouts, supra.

28. Get Percentage Rent on Tenant’s Internet Sales, Commercial Lease Law Insider, March 1997, page 6.

29. Mark Borsuk, Real Estate Tax Policy for the Information Age, Real Estate Review, Vol. 25, No. 4, Winter 1996, pp. 73-78.

30. Richard Knitter, When you find out the answer, you will make more money than Bill Gates!, Great Realty Advisors http://www.greatrealty.com/vacantboxes.htm.

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