It is difficult to witness the turmoil in US retailing without being concerned that a similar pattern will unfold in Europe. There has been a steady flow of bad news coming out of the country: falling sales for some of the nation’s biggest chains, bankruptcies, surges in store closures, rising vacancies, a slide in rents and weaker share prices of the largest mall operators.

We do not believe Europe will share a similar fate, however. There are key structural differences in bricks and mortar retailing in Europe that convince us that the storm across the Atlantic may remain largely localized and the impact in Europe will be moderate, particularly in urban locations.

The key differences between the US and European retailing landscape is a surfeit of retail space: 24 square feet for each American, which is nearly five times that of the UK, six times that of France and 12 times that of Germany.

After a long period of strong rental growth, which lifted the shares of mall REITs for the past seven years, average retail rents have risen to unsustainable levels in many locations. A large amount of this space is in secondary or tertiary areas, making tenants highly dependent on the local catchment. As US retailers face intense pressure on their margins from discounters and online platforms, many are downsizing or closing stores. Few locations are spared. A feature of US malls is a reliance on department stores as anchor tenants. Preferential leases are not stopping large chains from closing underperforming stores, leaving landlords with the difficult job of averting the ensuing decline and adapting the space for other uses or tenants.

It is not hard to see why Wall Street predicts that hundreds of these B-/C-class malls will close in the coming five years. By contrast, main street locations play a prominent role in European retail and shopping centers have a wider array of potential anchors, from hypermarkets to food, fashion, or leisure anchors, which ensures a stable and regular flow of necessitybased shoppers.

From these observations and our own first-hand experience, we conclude that the current woes in the US are due mainly to the end-of-cycle symptoms of over-supply and over-renting, which have been exacerbated by online shopping.

__In context__

The broad challenges posed by online retailing are neither new nor unknown. We should consider the current challenges in retailing in the context of how other sectors and industries are adapting to the disruption unleashed by technology. Just as hotels persist in the age of Airbnb by principally targeting different customer segments, technology that enables hotdesking and the ability to work remotely does not dispense with the need for offices. Far from it: even technology companies like Google continue to lease substantial amounts of space because they want to bring their staff together so that they can exchange ideas and collaborate. As a result, office landlords need to adapt their offer and provide greater flexibility.

Online commerce accounts for about 9 percent of retail sales in the US and this may increase to 11 percent by 2020, according to Global Data. Most European markets trail this evolution, but the UK, France and Germany – Europe’s three largest real estate markets – have comparable or even higher levels of online retail sales penetration. The impact has been on secondary locations, but, as ‘click-and-collect’ demonstrates in the UK, online and store sales are complementary, typically driving cross-channel sales. This underpins one of the key reasons why Amazon itself is opening physical stores.

Jeff Bezos founded Amazon in 1994 and built it into the largest online retailer. As successful as it is online, Amazon has opened pilot stores, demonstrating how a physical presence remains highly relevant for shoppers by offering them something that they cannot easily obtain online: a brand experience. This highlights how retailing is transforming into an experience business. While access to inventory is superior online, pick-ups and returns are still preferred from a physical store. This is why in-store purchases are still predicted to exceed 90 percent for most retailers. Consequently, retailers that have adopted an integrated omni-channel strategy built around a personalized customer journey will generally perform better.

Nevertheless, one of the key results of online retailing is the scaling back of a retailer’s overall footprint. According to CBRE, where once it took a network of 200 stores for a retail chain to cover the UK effectively in 1971, in 2011 it took a website and approximately 70 stores. In markets where online retailing has high penetration, location is a critical criteria for where retailers establish their stores.