Thinking Outside The Box

For years now, the U.S. economy has seen an ongoing struggle between traditional retail stores and their nimbler, lower-overhead online counterparts. Last year, retail property giant Simon Properties (NYSE: SPG) made news by suing the state of Indiana over a dispute with its rivals—or, more accurately, it’s tenants’ rivals–Amazon.com (NASDAQ: AMZN). SPG is seeking, as they put it, greater fairness to taxpayers (in particular, the offline retailers who do pay taxes to the state.)

It is certainly unfair that Amazon, which does millions of dollars of business in the state of Indiana, is avoiding the taxes that Simon Properties and its retail tenants must pay. This legal move will likely prove another important chapter in the ongoing debate over how or if to tax an Internet retailer, which has become a pretty sticky issue. Typically, whether or not to tax is determined by an online retailer’s physical presence in a particular state.

I’m curious about SPG’s strategy in all this. Though the levy of taxes on Amazon’s business in Indiana may help the sales of brick-and-mortar retail stores a tiny bit, I’m doubtful an added tax on online goods will significantly boost the sales or value of  SPG’s numerous malls and shopping centers. The lawsuit, while warranted, seems more of a symbolic move—a gesture of solidarity toward the REIT’s many retail tenants. This lawsuit notwithstanding, it’s tough to fight a retail trend that looks like this:

chart2 300x199 Thinking Outside the Big Box

This graph only goes through 2009, but you get the idea.

Oftentimes, the market rewards creativity. If SPG and other such investors are interested in growing the value of their commercial real estate, the best strategy is to attract businesses that simply can’t be outsourced to cyberspace,As the Wall Street Journal reported many shopping centers and malls, including those owned by SPG and Jones Lang LaSalle (NYSE: JLL) are filling big-box and other retail vacancies with unconventional tenants, including a shooting range, an aquarium, go-kart tracks, fencing academies, and kid-friendly recreation centers.

While it seems a little optimistic to suggest a go-kart track could replace a Best Buy as the anchor of a shopping center, the fact remains that such properties must offer shoppers something that Amazon and its ilk cannot. Their value and their survival depend on it.

If this trend is any indication, then, the offline retail market has gone full circle, moving away from big-box homogeneity. So what will help save offline retail–and the commercial real estate firms that invest in and finance them? Surprise, surprise: small business. (credit to eric hawthorn)

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