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A wave of digital retailers is moving from the internet and into some of the empty mall space left vacant by companies in bankruptcy, like Sears and Payless ShoeSource, or trimming back their real estate, like Gap.
One venture capital firm is at the center of the new normal in retail as traditional sellers scale back their footprint while digitally native companies open some of their first brick-and-mortar locations.
Headquartered in Venice, California, Fifth Wall Ventures has backed more than a dozen businesses, including electronic scooter maker Lime, co-working platform Industrious and real estate analytics company VTS. It has $305 million in assets under management, investing mostly in tech and real estate. Now, it has its eyes set on retail.
Fifth Wall has raised $64.5 million as of November, and has a target of $200 million, for a new retail fund, according to a filing with the Securities and Exchange Commission.
So far, the firm has invested in facial company Heydey, shoe maker Taft, furniture brand Interior Define, shirt company Untuckit, hair salon chain Madison Reed and grocer and food delivery platform Foxtrot, according to its website. And it's just getting started, according to the firm's co-founder Brendan Wallace.
"In retail, there's a sea of change happening, where retail landlords are being exposed to the demise of bad brick-and-mortar retail," Wallace told CNBC.
But real estate owners have arguably been slow to move as stores keep going dark at malls. That's partly why Fifth Wall decided it could expand its business and create a new fund structure to raise capital and "promote collaboration" between landlords and burgeoning brands, Wallace said. Up-and-coming retailers — like Taft and Interior Define — want "expertise and connections to large retail landlords," he said. Fifth Wall aims to be the glue between the two industries.
Some real estate owners have been slow to accept the fact that the next wave of growth isn't going to come from traditional clothiers like Victoria's Secret and Gap, but from digital retailers — most of which are privately held. Already this year, roughly 4,300 store closures have been announced across a wide swath of consumer product sellers, ranging from J.C. Penney to Tesla. But online brands like Rebag, Rockets of Awesome and Cuyana are raising money with massive growth ambitions.
"There really isn't a fund that's expressly and explicitly focused on helping brands and technologies that are very young expand into brick and mortar," Wallace said. "There's no shortage of funds that can help with marketing and supply chain ... [but] we have dozens of large real estate corporations that we work with across our funds."
The third-biggest mall owner in the U.S., Macerich, is a limited partner in Fifth Wall and renting space to one of its investments — menswear company Untuckit, helping the apparel brand reach its goal of having 100 stores open in four years.
Building on the strengths of each other, Fifth Wall and Macerich have monthly meetings in Santa Monica to discuss hot brands coming to market — ones that are looking to open stores — and how they can all collaborate.
Macerich is "by far the most forward-looking and innovative" mall owner today, Wallace said. "They're using capital to build relationships with new technologies and new brands." One example of this is its newly launched business called BrandBox, where Macerich is carving out spaces at its malls for a handful of young brands to come together and sell there on a rotating basis.
Fifth Wall has beefed up its staff with former retail executives.
"Eighty-five percent of commerce is still happening offline," said Dan Wenhold, former head of retail at men's formalwear brand Black Tux who's now at Fifth Wall. "The majority of customers still shop offline. Brands have to go offline."
Consumers still sometimes like to go to stores to try things on and pick up orders.
"When you have someone coming into a store, ... you can tell the brand story in a different way," said Kevin Campos, the former chief retail officer at menswear brand Combatant Gentlemen who's also now at Fifth Wall. "If a brand is a religion, then the store is a church."
At the ShopTalk conference in Las Vegas this week, Fifth Wall will be launching some new tools for retailers and real estate owners, including a map of digitally native brands opening stores across the United States. Jones Lang LaSalle has estimated 850 stores will be opened by e-commerce retailers over the next five years, but it's been difficult to track this growth because many of these companies are moving stealthily or are just getting started.
"We hope to connect the dots by facilitating new partnerships that can empower a digitally native brand to thrive in its first physical space, or help more traditional companies realize the power of retail tech," Fifth Wall partner Natalie Bruss said.
Macerich is one of about a dozen of the leading retail real estate strategics invested in Fifth Wall, she said. Other limited partners include commercial real estate services firm CBRE, office building developer Hines, Lowe's, industrial real estate investment trust Prologis and homebuilder Lennar.