Direct-to-consumer brands have become ubiquitous nationwide, seemingly more so than ever before. In 2020, DTC sales grew nearly 45% globally year-over-year. And KPMG estimates it will continue to grow at a CAGR of ~23% from 2019 through 2023. Shopify is a significant facilitator of the rise, easing the barrier of entry to sell directly to consumers. In its Q1 earnings report, its total revenue increased to $1.5 billion, up 25% from the year prior. However, many of these brands also see the advantage of a physical presence; higher order values, greater customer loyalty, and, more importantly, lower cost relative to ad spend.

 
According to Insider Intelligence, US advertising spending reached its eighth month of decline in February. Specifically, it dropped 8% year over year in February. Much of this can be attributed to rising costs in online advertising spending, driving brands to look elsewhere for marketing. And the benefit of a physical location is it can be both a marketing channel and a transactional touchpoint for customers.Therefore, direct-to-consumer brands are searching for retail real estate like never before.

 
More and more direct-to-consumer brands are opening stores.

 
A specific example of the growth in DTC stores is the jewelry sector. From January 2019 through January 2023, Blue Nile, Brilliant Earth, Gorjana, Kendra Scott, Mejuri, and Tiffany’s had a net increase in stores of 133, an increase of almost 70%, according to ChainXY. And only Kendra Scott and Tiffany’s had stores before 2019. Similarly, in the beauty sector and at the same time, Drybar, Glossier, LUSH, MAC, Sephora, and Ulta had a combined increase of 394 stores, up 15% from 2019, with most of that growth coming from Sephora and Ulta, which grew by 323 stores. Meanwhile, Glossier was opening a few of its first stores then.

 
These newer digitally native brands opening stores means a lot of equally popular brand names seeking the best retail real estate. The competition, therefore, becomes incredibly high in markets with minimal options for optimal, chic, and trendy real estate.

 
There is an increase in demand for high-quality shopping centers.

 
In 2022 the vacancy rate for retail real estate hit a low of 4.2%, while net absorption was 76 million square feet, the highest in a decade, indicating an overweighted demand versus supply. Malls still had high vacancy rates, many being class B and C real estate. However, the trendy DTC brands of today don’t want to be in those centers. They want the best of the best, which, unfortunately, is lacking, especially in secondary and tertiary markets.

 
“The last few years have shined a bright light on consumer shopping patterns, resulting in a flight to quality on both sides of the business. Brands are bringing exceptional experience-driven models to the table and are focused exclusively on the best retail venues in the US, Todd Norley, Vice President of WS Development, shared. “This has all coincided with a direct-to-consumer renaissance where the best new and existing brands are seeking standalone stores over other channels to thoughtfully enhance storytelling and ultimately grow their business. For example, Gorjana, Warby Parker, Vuori, and Faherty have all recently opened or signed leases at our properties in these markets [Tampa, Boston, Palm Beach],” he added.

 
Landlords are renovating and enhancing their tenant mix.

 
If a brand ends up on a waitlist at a top center, it can either wait, which may be years, or go elsewhere. So, many landlords at other surrounding centers are renovating their properties and bringing in newer, fresher tenants to try and attract the younger direct-to-consumer brands. An example of this is PREIT, a real estate investment trust that owns many large retail properties around the US and has been renovating properties, changing tenant mixes, and even adding multi-family developments to malls to improve overall property performance. One example is Springfield Town Center in Springfield, VA, where it plans to add apartments and a hotel to increase foot traffic and convenience to the community. Another is Moorestown Mall, which has already started redevelopment and plans to add 375 apartments to the property.

 
“In order to stay competitive with other major mall owners, we curate a mix of tenants with unique experiences at our properties. In addition, we focus on adding local businesses and small enterprises to contribute toward an inviting and inclusive atmosphere. As of the end of 2022, PREIT had a total of 140 Black-owned businesses operating in less than 20 properties. Another continuous focus for PREIT is transitioning to hybrid, mixed-use developments which offer a more sustainable business model and are less reliant on one form of tenancy, thereby enhancing property values.” Joseph Coradio, CEO of PREIT, shared.

 
Although many factors affect demand for retail real estate, it’s clear that the rise in direct-to-consumer brands is having a significant impact on the market. More specifically, a positive impact that’s leading to competition amongst desirable centers and creating opportunities for renovation and new development.

 
By Brin Snelling

 
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