🔒Despite brick-and-mortar struggles, realty pro D’Addabbo launches new ground-up retail development firm

Last year was another record year for online retail.

Amid the pandemic, e-commerce sales in the U.S. alone saw a meteoric 44% increase, to $861.1 billion, nearly triple the 15.1% jump in 2019.

Over the past decade, annual growth in U.S. retail e-commerce has been steadily climbing between 13% to 15% and has nearly doubled from 7.2% of total retail sales in the U.S. in 2010 to more than 14.3% by the end of 2018, according to Digital Commerce 360, a research firm that tracks retail and e-commerce.

While online retail trends — coupled with the mobile technology habits of Millennials and Gen Y and the closure of many anchor stores at malls nationwide — may indicate a brick-and-mortar retail model that’s on life support, the reality is that commercial retail real estate development is still alive and active.

In fact, over the past 10 years, the retail real estate industry has grown annually between 4% to 5%, according to data from Boston Consulting Group. That’s made some developers like Mark D’Addabbo bullish on retail commercial development.

So much so that earlier this year, D’Addabbo, the former president and CEO of New England Retail Properties — a Wethersfield-based brokerage and retail development firm — started a new company, Mack Development LLC in West Hartford.

He plans to focus nearly exclusively on new ground-up retail development, with an emphasis on Tractor Supply Co. locations, including new stores currently in development in Simsbury and Litchfield. The retailer, whose offerings include farm and animal feed supplies, clothing, tools and fencing, has 19 existing locations in Connecticut.

“Value-oriented retailers are doing well and growing,” D’Addabbo said, noting that not only are discount and bulk supply retailers like Costco expanding their number of locations, but many new locations are also getting larger. Off-price discount stores, for instance, like Dollar General are aggressively pursuing new development with more than 2,900 real estate projects in its pipeline, including 1,500 new stores, 1,750 remodels and 100 store relocations.

Tractor Supply Co., D’Addabbo says, has been building between 80 and 100 new locations a year for several years. He’s worked with developing new sites for the retailer since 2005.

Digital transformation

“The retail real estate market is in better shape than people think,” says Tim McNamara, a retail real estate broker with Farmington-based SullivanHayesNE. While he says some commercial real estate landlords may be providing retail tenants with additional flexibility or discounted rents, especially amid the pandemic, he’s not seeing any fire sales in many retail sectors.

The deepest impact in retail space has been felt in malls, which had been in decline pre-COVID but accelerated during the pandemic.

Large apparel and department stores, often mall anchor tenants, were most adversely affected over the past year when mall vacancy rates hit 10.1% in the third quarter, a 20-year high. Industry research firm Coresight estimates that 20% of America’s roughly 1,000 malls will close in the next three to five years.

McNamara says many retailers are feeling the pressure to grow their digital presence, particularly to appeal to both Gen Y and Gen Z, the latter group known as digital natives.

Gen Z alone, which already accounts for $147 billion in direct spending in the U.S., according to consulting firm Barkley Inc., is expected to become America’s largest generation — at 80 million strong — by 2034, Morgan Stanley estimates.

Both Gen Y and Z expect retailers to offer payment technology, a digital-first approach and digital sales channels that are fast and reliable. Retailers are taking note: Nearly 90% of industry executives surveyed by Deloitte said that digital acceleration is a top priority in 2021. The report noted that concepts like 3D virtual showrooms, mobile and express returns and cashier-less stores are all on the table.

But McNamara, who has worked with retail giants like Home Depot, Dick’s Sporting Goods and Starbucks, says in-store amenities — like a coffee bar for showrooms — and reward programs for customer loyalty are increasingly important, as are product-related in-store experiences.

He points as an example to outdoor and adventure gear retailer, REI, who he has worked with.

“The experience can be less about buying an item and more about teaching [a class] about the adventure or leisure so [customers] can learn to do those things, which in turn drives a need to buy the inventory,” he said.

And it’s not just Baby Boomers and Gen X flocking to stores. Gen Z is, too. In fact, 81% of Gen Z, ages 14 to 24, prefer to shop in stores, they say, largely for mental health reasons and to disconnect from social media, according to recent surveys by A.T. Kearney, a global consulting firm.

That’s good news, McNamara says, because retail is a cornerstone of thriving communities, providing not only a tax base but an aesthetic as well.

“Ordering everything from a computer is a bit insular,” he said. “And if Americans just want the convenience of things delivered to their homes, we’ll be dealing with a lot of empty storefronts and blight as a result.”

Project pipeline

D’Addabbo said he does not foresee that happening anytime soon, especially in more rural communities where land is often less expensive than urban centers, which face the dual challenges of higher lease rates and the uncertain return of a remote suburban workforce.

D’Addabbo currently has new ground-up development projects in the works in every New England state but Maine and a pipeline of revenue for the next 18 months. He said his biggest concern these days is less about whether consumers will walk through the doors of his team’s new Tractor Supply Co. developments when they open later this year, but rather the costs of constructing those buildings.

Amid pandemic supply-chain disruptions, the price of materials like steel have skyrocketed making new-store development — which can run several million dollars — an even bigger investment risk than retrofitting existing properties or simply leasing property his firm owns.

But after nearly 40 years in the retail property industry, including the last 15 in retail property development, D’Addabbo said he is comfortable hedging his bets on the strength of brick-and-mortar retail. He expects to increase gross revenue by 50% over the next two years and has 100 acres of developable property in Litchfield for both commercial and residential use.