The Changing Retail Landscape
By: Ellen Rand, contributing editor, Development.
In 2012, Apple stores posted the highest sales-per-square-foot of all retailers in the United States, according to research and consulting firm RetailSails. It exemplifies the retail trend of the store as a showroom and an entertainment destination for consumers. Shown here is an Apple store on the Upper West Side of New York City.
The world of shopping has changed. We can now shop anytime and anywhere — on smartphones, tablets or computers — as the holiday 2012 season showed more of us doing. What does that mean for retail real estate? What are the prospects this year for retailers and the property owners who house them? Which retailers are likely to succeed in a rapidly changing environment and where do they want to be?
Developers, owners, research analysts and retail real estate service providers echoed a number of common themes, discussed below.
The “barbell” phenomenon has intensified: that is, the continuing decline of the middle ground of retailers, caught in a world that is neither luxury- nor value-oriented. Sales of consumer goods perceived to be commodities — which increasingly includes video games, books, electronics and office supplies — are migrating online. Class B and C malls that have housed middle-ground retailers are also wedged between the discount and luxury retail worlds.
Although e-commerce still accounts for less than 10 percent of retail sales in the United States, the pace of dramatic change in the way people shop online will continue to influence retail trends and subsequently, the fate of retail real estate for the foreseeable future. (According to comScore, U.S. online holiday spending between 2011 and 2012 grew 14 percent to $42.3 billion.)
The downtown Silver Spring, MD urban redevelopment project features more than 175 free events annually. This project was a joint redevelopment effort by The Peterson Companies, Argo Investment Company and Foulger-Pratt.
Retailers who have been able to seamlessly integrate their bricks and mortar stores with their online and mobile presence (the “omni-channel” approach), such as Macy’s and Gap, have been able to engage customers successfully, while those who haven’t are on their way to becoming as extinct as dinosaurs. That includes certain once-venerated department stores, such as Sears and J.C. Penney, as well as former large big box retailers, such as Barnes & Noble.
Expect to see modest improvement in retail leasing, occupancy and rent growth, more likely in the second half of the year. Continued economic improvement, especially in the housing market, should begin to fuel consumer demand. As is the case in other commercial real estate categories, there has not been a glut of new retail construction in the last few years that might have skewed the supply/demand equation.
The fiercest competition, and most dramatic changes, will take place among food retailers. Some retailers are likely to go bankrupt and close stores, while the more prominent value retailers — drug and convenience stores, dollar stores and titans like Walmart and Target — are focusing more on food and blurring the lines between retail categories.
Retailers are looking to expand in urban markets as well as into markets experiencing population and job growth. They have little appetite for suburban growth. At the same time, retailers are looking to shrink their footprints and design smaller stores to suit urban locales.
Destination Retail Evolving
Class B and C malls may be an endangered species, but experts say that Class A malls are definitely here to stay. Matthew Winn, senior managing director, U.S. Retail Services Leader at Cushman & Wakefield, advised developers and owners to stay in the “fortress” areas of the world: in urban, high-value suburban locations, or in the dominant grocery-anchored center in a market. The rest, he said, will languish and probably get repurposed.
Class A malls are being reinvented, reinforcing their “destination” status with more space devoted to restaurants and entertainment, such as movie theaters and playgrounds for children. Garrick Brown, director of research at Cassidy Turley in San Francisco and research director for Terranomics, warned that Class A centers can morph into Class B pretty quickly, if they lose anchors and the smaller stores around them. The key is to be the trophy center in a market, perceived as a real destination and a distinct place people want to visit.
One developer acting on this belief is The Peterson Companies, in Fairfax, VA. The firm is developing the Promenade at Virginia Gateway in Gainesville, a 300,000-square-foot lifestyle center slated to open in 2013. The center will feature an upscale mix of retail, dining and a 14-screen Regal movie theater as well as pedestrian-friendly streets and a dedicated events plaza. One of the restaurants, La Tagliatella, a European-based Italian restaurant concept, will be one of the first of 10 to open in the United States
Jon Peterson, senior vice president, commercial development at The Peterson Companies, and a member of the NAIOP Retail Task Force, also noted how critical it is to feature numerous activities at retail centers on weekends. For example, the company is in the process of acquiring carousels, and employs an events manager to create entertainment opportunities for families in the Washington, D.C. market.
Peterson expects that many tenants at the mid-point of their lease-term will opt to reduce their footprint, so generally there is not as much need for retail space as there once was. Although he expects square footage per capita to drop over the next five to 10 years, in some cases dramatically, Peterson believes that Virginia is one of the few pockets where new construction is warranted.
Lifestyle centers such as Fairfax Corner fully integrate entertainment, retail, office and residential in a cohesive ensemble of pedestrian-friendly streets, public plazas and architecturally striking buildings.
Trish Blasi, president of Borghese Investments LLC, concurs that retailers are looking to reduce their space. If a lease is coming up for renewal and the retailer wants to reduce its space from 25,000 to 15,000 square feet, the challenge for the landlord is allocating the remaining 10,000 square feet. Blasi noted that the cost to subdivide it can be significant, giving the landlord a multi-layered challenge. Blasi does see good opportunities for well-located retail, backfilling space left by Circuit City, Barnes & Noble and Linens ‘n Things. As for the plans of Borghese Investments LLC, they are focused on a mixed-use, transit-oriented urban redevelopment in Miami.
The Peterson Companies’ experience notwithstanding, lifestyle centers have taken a beating post-recession. As Ann Natunewicz, vice president of retail services in the San Francisco office of Colliers International, pointed out, these centers are designed as suburban retail projects with a discretionary product mix. Some have been too small to generate critical mass, while others were built with financing where the loan-to-value ratios proved to be unrealistic. Moreover, the retailers in these centers have typically been targeted to women in their 30s and 40s, who reduced their spending once the recession hit. According to Daniel Mermel, principal, Sivan Properties based on Long Island, and a member of the NAIOP Retail Task Force, lifestyle centers in the northeast have been problematic because the weather is simply not as amenable as it is in California, Florida and Texas. The very term “lifestyle center” itself is almost outdated, noted Blasi.
Value, Value, Value
While holiday 2012 retail sales may have been less than stellar (the National Retail Federation estimated those sales at $579.8 billion, a three percent increase over 2011), they showed that the value-end of the retail spectrum was at once highly competitive and for many, very successful. Dan Hurwitz, CEO of DDR, an owner and manager of 459 value-oriented shopping centers representing 116 million square feet in 39 states, Puerto Rico and Brazil, reported in a recent interview on CNBC that the more successful retailers in 2012 were: TJ Maxx, Marshalls, Home Goods, Ross Stores, Nordstrom Rack and Old Navy. “Target may have been a little off on their sales, but the retailer has strong margins and didn’t take big markdowns and give away merchandise. That’s very important to DDR as a landlord because tenants pay their rent with margin, not necessarily with comp store sales,” noted Hurwitz.
Walmart Express stores are less than one-tenth the size of Walmart supercenters and offer groceries and general merchandise, such as tools, as well as pharmacies.
He also noted that the momentum is slowing among the dollar stores because the other retailers are getting smarter about allowing them as a permitted use on their lease. That makes it difficult to offer prime real estate to dollar stores and will affect their ability to find the locations they’re looking for.
Convenience and drug stores have become hyper-competitive. Sivan Properties deals primarily with single-tenant retailers and Daniel Mermel reported that drug stores, convenience and food tenants are still expanding. He believes that in the boroughs of New York City, or in other gateway urban markets like Washington, D.C., for example, the markets are under-retailed with respect to population.
Sivan continues to seek high-quality tenants who Mermel described as having a place in the world, regardless of the economy. Single-tenant, net lease properties are favored by investors these days because they are perceived to be a safe product: a five percent return looks desirable in today’s world, he pointed out.
Walmart plans to open 500 Neighborhood Market stores by 2016 to compete with food retailers and dollar stores.
Big boxes are shrinking and drugstores are expanding. Retailers like Walmart and Staples are creating smaller formats to appeal to the urban demographic and to compete, in Walmart’s case, with dollar stores. Walmart is accelerating the expansion of small stores, particularly its Neighborhood Market stores, with plans to open 500 Neighborhood Market stores and 12 Express stores by fiscal 2016. These stores range in size from 10,000 to 55,000 square feet.
Meanwhile, drugstores like Walgreens are expanding their footprint. For example, a new 23,500-square-foot Walgreens opened in Hollywood, CA, replacing a former Borders location. The store sells sushi, alcohol and a myriad of other non-drugstore-like consumer goods. It is part of the current strategy of the chain — to transform the role the pharmacy plays as a center for health and wellness services in the community, as well as offering expanded grocery items, fresh food and higher-end beauty brands.
Expansions and Changing Lease Terms
According to Jones Lang LaSalle (JLL), retailers are expected to launch approximately 78,000 new locations in 2013 — a four-year high. The firm also estimates the pipeline of new retail projects at 52 million square feet, which would amount to a year-over-year increase of 150 percent. JLL expects Raleigh, Phoenix and Las Vegas to experience the greatest percentage of rent growth. Miami, Washington, D.C., San Francisco, Tampa, Hawaii and Boston will continue to see year-over-year rent growth.
The Chainlinks Retail Advisors 2013 Retail Outlook, noted that restaurants will account for about 40 percent of all new tenancy in the marketplace in 2013 (unit counts, not square footage). Garrick Brown, author of the report, expects to see neighborhood and community centers coming back by 2015, though not power centers.
“Capital expenditure plans among retailers are shifting, with a larger percentage spent on distribution networks and supply chains, because that is what is driving profits, as retailers integrate bricks and mortar with digital sales,” said Ann Natunewicz.
A Vision of Future Shopping
Driven by technology, shopping has become a brave new world, adding up to greater consumer control and engagement with retailers. Kevin Cantley, president of Cooper Carry and a member of the NAIOP Retail Task Force, and Angelo Carusi, partner of the firm, envision many of these changes — some of which can already be found in the retail environment. They include:
- Mobile and self-service check-outs. Some supermarkets already have smart carts that enable consumers to scan and charge items as they find them.
- Variable pricing between some online and bricks-and-mortar stores.
- More direct brand-to-consumer connections.
- Just-in-time manufacturing, including customizing fit and color of consumer items, as Converse sneakers currently does.
- Smart window shopping. If a store is closed but has a QR code in the window, consumers will be able to get more information about something they like and order it from the store online.
Other trends to look for:
Geofencing: Retailers or shopping centers that can text sale coupons or product location information to consumers who are in a store or shopping center and have signed up for the service.
Showrooming: The term typically applies to the consumer practice of looking at products or clothing in a store and then ordering them online, for perhaps a lesser price. (Retailers like Target and Best Buy have combated this practice by matching online pricing in their bricks-and-mortar stores.) But the term can also be applied to former online-only retailers who establish a bricks-and-mortar presence to highlight their products.
The mobile wallet: Enables consumers to make purchases with their smartphones, eliminating the need to carry cash and/or credit cards.
Perhaps the most prominent variant of the mobile wallet is Disney’s just-introduced set of “MagicBands,” which are RFID-enhanced wristbands worn by qualified guests that serve as an all-purpose admission ticket, hotel room key, FastPass (a reservation system to book a ride or attraction without waiting), and payment system for most purchases made on resort grounds. Of course, the bands will also enable Disney to gather comprehensive information on guests. That’s part of the brave new world, too.