More Trouble: Will Record Online Sale Numbers Transform Sticks & Bricks Retailing in 2012? I say “yes”

2012 should be the year when online sales broadly impacts "how" retailers view and use their "physical" stores.  This will impact both the owners AND the lenders.

Record online sales point to the need (RIGHT NOW) to take a different approach in reviewing and approving retail leases – which for lenders with shopping center and mall collateral, brings new challenges in underwriting leases at loan origination and during the life of the loan.  And also, in assessing the time period that it will take to lease empty retail space – both during the life of the loan AND after the lender owns the property (after foreclosure or deed in lieu).

Retail collateral, if not already at the bottom of the food chain, is nesting in a very rough spot.

Here are the early statistics of interest for this holiday season -

• 14% to 26% growth in online sales for various days & periods during the holiday season (over 2010) (reported by comScore on Dec 20)
• 10 days showed online sales exceeding $1Bill each day (reported by comScore on Dec. 20)
• 36% growth in individual online transactions (over 2010) (Investors.com)
• 16% increase in online sales on Christmas day (ABC reports on IBM study)

And one comment, just to make it personal:

• Human Vultures: Amazon has a "price check" app for your smartphone and tablet, which allows you to scan the bar code of a product (while you’re "in" a physical store) so that you can determine if the price for the product is cheaper on Amazon.  The app turns each of us into vultures – allowing us to pick over the physical store inventory, purchase only the store’s "loss leader" (that landed us in the store); but for any other product at "regular" pricing, we’ll fly away and buy from Amazon.  In a tough economy, we are very price focused. We are the enemy of sticks and bricks stores.

Technology changes everything, and retailing now is in the high beam.

This disruptive change in retailing should result in these changes for lenders and loan servicers:

• Underwriting: this adds an entirely new, and complex, factor for underwriting decisions, such as -
  • what is the retail tenant’s online strategy? What is the online strategy of its competitors?
  • do the sales figures include online sales or deliveries (purchased online but picked up at the store)?
  • to what extent should you consider future online sales or deliveries – merely going to the "health" of the tenant or also going to the rental to be paid under the lease?  Could any of this change?
  • how will this impact or influence small shop owners? Will they need to compete online? Will a web presence be required for underwriting a small shop tenant?
• Reviewing leases (during servicing & at loan origination): new lease clauses come into play.  For example -
  • does the percentage rent clauses carveout (or exclude) deliveries of goods purchased online but picked up at the store? What about purchases made at a terminal in the store?  Or on a smartphone in the store?
  • what is the retailer’s business model for the store?
  • will the retailer need LESS space at renewal?
• Loan Documents: how will this play out in loan document provisions describing the lease and the approval process (for new leases and lease amendments)?
• Dispositions:  how will this impact the disposition or sale of debt secured by retail space, or by foreclosed property that contains retail space?
• Retail California? Will retail space be viewed, to some extent, like a hotel (as an operating company?)  Will "checking out" of the loan and collateral be a challenge?

Sure, all these issues will be resolved over time; but until then, it will be tough times.

If you have comments or suggestions, please post them below.