The growing popularity of buying products through the Internet and from bargain retailers is fueling big changes in the Inland Empire's retail real estate market, experts say.
With more people shopping and receiving media content on tablets and smartphones, the number of large brick- and-mortar stores is shrinking.
The vacancy rate at Inland Empire shopping centers and strip malls improved by a percentage point or two over the past year. But the sharp overall rise from 5 percent at the height of the market in 2007 to today's vacancy rate of about 9 percent is a direct result of technological advances and ramped-up competition from discounters like Costco and Walmart, according to experts.
Challenges facing this sector of the real estate market were among the highlights in area developer Randall Lewis' recent annual keynote speech in Rancho Cucamonga to the regional real estate community.
Lewis, vice president of the Lewis Operating Group of Companies, cited the high number of "for sale" and "for lease" signs on shopping center properties in the region. He projects "continued turmoil" as Internet sales grab more brick-and-mortar shopping dollars.
"Retailing is going through changes and so the Internet is taking a larger share, and it's expected that will continue," he said. "We're definitely seeing bookstores being challenged by companies like Amazon, and I think people are seeing electronics as a category that's been challenged.
We can look at companies that have gone out of the electronics business."
E-commerce's market share has grown to about 10 percent, a huge increase from a decade ago but still overshadowed by other economic factors, according to Tarique Hossain, an associate professor of marketing and international business at Cal Poly Pomona.
"That's certainly a contributor, but not anywhere near replacing the brick and mortar," Hossain said. "These retail stores expanded when the economy was strong and didn't predict the recession or how long the recession would last. Throw the e-commerce in the mix, and you have the recipe for a perfect storm."
The storm is hitting nationwide, he said, although he expects the effects to be different for different regions.
"You have much higher unemployment in San Bernardino (County) than in Orange County, for example," he said.
A weaker economy presents a challenge for retailers, but he said it also probably lessens the Internet's role.
"I would conjecture that e-commerce is probably correlated with high income and high education," he said. "Who's going to be more savvy about checking things quickly and be comfortable placing an order?
"If I were to guess, I would say Orange County is going to have more e-commerce than San Bernardino County."
Lewis and Brad Umansky, a real estate broker who owns Ontario-based Progressive Real Estate Partners, said one way to fight the trend is to offer more service-oriented business, such as massage businesses, fitness centers and medical services.
Businesses like Massage Envy, they said, are now taking over spaces once occupied by Blockbuster or Hollywood Video.
"We've seen fitness clubs take over locations that were previously occupied by grocery stores," Umansky said.
Stores that have to compete with bargain retailers face a lot of pressure, he said.
Shopping centers and strip malls, he said, will put more emphasis on services -- "could be nails or haircuts or legal services." And there will be a greater need "to have extraordinary customer service."
Lewis said the new service-oriented retailers will have to provide something that can seldom be found elsewhere.
"People should come there because they're treated right," he said. "And if there's a problem, they're going to fix it quickly or have a good return policy. It's going to put even more pressure on people to be great at service."
A related strategy would be to concentrate on higher-end or more-complicated products that can't be replicated online, said Hossain.
"Stores aren't really adjusting to the reality, in my opinion," he said. "On some products, you won't win, so let Amazon have them. Retailers need to concentrate and adjust."
Lewis said shopping centers are also tweaking their retail environments with a mix of high-end and low-end stores and medical businesses.
Grocery stores are also being challenged by competitors like Walmart, Target and Costco, which now offer produce and other foods.
"You've got new competitors in the high end, like Gelsons and Bristol Farms, and new and growing competitors at the low end like Costco, Target and Winco," Lewis said.
Jeff Bloom, Rancho Cucamonga's deputy city manager for economic and community development, said fewer and fewer retailers seem to want larger spaces because of the recent market changes.
An exception, Bloom said, has been the Hobby Lobby arts and crafts store at the Terra Vista Town Center at Haven Avenue and Foothill Boulevard.
"Fewer retailers want a large space," he said. "Therefore you try to encourage owners and developers to consider dividing them down to smaller spaces."
Bloom said local planners in recent years have focused on increasing more mixed- use development.
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