Why Netflix’s path to upending the entertainment industry is a blueprint for retail landlords
While COVID-19 has profoundly impacted the retail industry, the fundamental issues that brick & mortar retail faced pre-pandemic were accelerated and magnified by COVID-19. While the effects will be enduring, retail brands are experiencing a once-in-a-generation changing of the guard, presenting tremendous opportunity for the retail ecosystem. The retail landlords who attract the best, new brands and change the way in which they engage with these retail tenants are on the cusp of radically changing retail’s future for the better. And, retail real estate leaders like Brookfield, Macerich, and Simon, are beginning to do just that.
While overall retail sales (stores and ecommerce combined) experienced a 10th straight year of gains, jumping from $4.0 trillion to over $6.2 trillion in a decade, brick & mortar sales endured a record 9,300 store closures in 2019. While Amazon was on its way to becoming a $1.7 trillion company, legacy retailers, like Barneys New York, were filing for bankruptcy in droves. COVID-19 accelerated all of this.
Retail real estate is at the center of our communities, and big shifts in retail result in profound consequences for many. Retail represents 29% of US GDP; 1 in 4 jobs depend on the retail sector; and an estimated $400 billion of critical state and local tax income comes from property taxes on retail real estate. But, retail can emerge stronger if retail landlords invest in their tenants, resulting in a more engaged, less transactional relationship between landlord and tenant.
You could say retail landlords have always been investors in retail brands because they invest capital in their properties and rent those properties to their retail tenants. If the brands do well, landlords get their rent. If the brands do not do well, landlords face vacant brick & mortar retail spaces as brands are forced to close their stores. But, retail brands are experiencing a once-in-a-generation changing of the guard and that’s where the opportunity awaits. While legacy brands like J.Crew or Victoria’s Secret are struggling to adapt, Shopify went from 41,000 merchants in 2012 to one million by the end of 2019. And Fifth Wall estimates that digitally native retailers have generated over $35 billion in annual sales and are growing at over 45% year over year. An investment and innovation mindset will help retail landlords attract and engage with this new guard of retail.
Consider how Netflix went from distributing content to directly investing in and owning it. This radical move upended the stagnant film and television industry leading the company to a $250+ billion market cap — this is a potential blueprint for retail landlords. When Netflix initially launched streaming, its content came from third parties. Later, to take full advantage of its digital platform, Netflix began investing directly into and actually owning the content. The initiative required significant amounts of capital ($15 billion in 2020) and redefined the entertainment industry, positionings itself at the very center. Studios that outright dismissed Netflix are now copying them years later. There is a similar revolutionary opportunity for retail landlords to combine distribution (their properties and visitors) with direct investment in content (brands that can serve as exciting new tenants).
For the retail landlord, investment could come in the form of percentage rent where the rent is based on the gross income of the tenant rather than a fixed monthly value. A landlord could give entrepreneurs leverage to open a new store by investing in a store buildout in exchange for an equity investment in the company. This “Netflix” mindset to investing in and curating a portfolio of brands will give landlords access to the critical data they need to underwrite this new wave of growing brands and retailers, and transform what has been a transactional leasing relationship into a high-trust, consultative partnership. This is what retailers today want, and it’s what they need from their landlords in order to expand and thrive.
To learn more about this topic, watch A Brave New World of Retail: Why Retail Landlords Must Now Invest In Brands & Retailers. Fifth Wall Co-Founder & Managing Partner Brendan Wallace explains why the business of being a retail landlord is about to look nothing like what it did in the past. Brendan shares thoughts on why landlords will need to start investing massively into emerging brands and retail concepts in order to survive and usher in a new wave of retail real estate.
Forward-looking statements and opinions as to real estate markets or any other matters, as expressed in this presentation, are those of the individual presenters, but are not necessarily the views of Fifth Wall as a firm, and cannot constitute a guarantee of future success or profitable results. As a result, investors should not rely on such forward-looking statements and/or opinions, or on anything else contained in this video, in making their investment decisions.
The information discussed above is presented solely for informational purposes and should not be interpreted as an offer or recommendation to buy or sell securities.
