What are the most important things affecting retail right now? The International Council of Shopping Centers (ICSC) annual RECon convention aims to provide that answer and more to its 37,000 attendees who represent approximately 58 countries when it convenes May 21 through 24 in Las Vegas, Nevada. RECon is the world’s largest retail real estate convention and where real estate professionals gather for power deal making, endless networking and innovative education.
Five HFF producers who specialize in retail property transactions and who are attending this year's convention discuss below what is happening in retail today and, more important, what they think will happen tomorrow.
Barry Brown, senior managing director in HFF’s Dallas office and co-head of HFF’s Retail Group: Globally, we are seeing significant changes as there continues to be bankruptcy announcements and format changes as retailers refine their business models using multichannel distribution, e-commerce and brick-and-mortar real estate. Job growth continues to be strong in the major markets of Dallas, Austin and San Antonio. Obviously, Houston has been hit with the decrease in commodity prices and, therefore, slower job growth, but, that being said, Houston-area retail is still performing strong. We continue to keep an eye on border retail, which historically has had some of the strongest sales productivity in the nation. There are major concerns over the effect of potential trade wars, tariffs and “the wall,” but our space markets are performing well.
James Koury, senior managing director in HFF’s Boston office: Some retail submarkets in the Northeast have reached a point where they are overstored with retail anchor space in excess of 20,000 square feet. Landlords are constantly challenged when trying to maintain the occupancy and rent level in these spaces when leases mature – even when the location is profitable for the tenant and the center is located in a strong demographic environment. Frequently, the tenant chooses to downsize to a smaller space and, in the process, creates awkwardly configured vacancy and/or pressures the landlord to decrease their rent by threatening to move to another vacant box down the road where they are being lured with very attractive lease terms. And if a tenant should leave a center due to the closure of the entire chain (e.g. SportsAuthority), landlords are forced to either reconfigure the space to accommodate smaller tenants or demolish the space altogether and create leasable pad sites.
Clinton Mitchell, director in HFF’s Chicago office: In the Midwest, restaurant, entertainment, fitness and general household retailers are expanding as consumers validate that these retailing experiences are not replicable online. Retail centers are incorporating more residential and medical uses as data continues to support higher rents and tenant productivity when uses are integrated effectively. Grocery stores are fueling the majority of new development in the Midwest, while grocery-anchored offerings continue to generate the strongest demand from the investment community.
Chris Munley, managing director in HFF’s Philadelphia office: More stores in the Mid-Atlantic may close as retailers do not require nearly as many locations to “cover” a market given their and others online sales access. A combination of brick-and-mortar and online sales programs is the new normal. Most retailers will be downsizing “footprints” due to online capabilities and last-mile logistics in holding inventory. Regionally, we are still awaiting for this to run its course. Those who have been affected the most are power center or big box-oriented centers that are in mall peripheral locations. The forthcoming store closures have created shadow vacancy, which has allowed retailers optionality resulting in downward pressure on rents. But the benefit of the Mid-Atlantic is and always will be its ideal positioning from an infrastructure and demographic perspective. Retailers will always be attracted to markets that boast high-end density and disposable income levels. As jobs and young professionals continue to flock to major cities and urban hubs, the Mid-Atlantic will continue to thrive and benefit from the improving consumer dynamic to already strong fundamental base.
Brad Peterson, senior managing director and co-head of HFF’s Orlando office: There is continued strong leasing momentum in necessity, service and experiential retail. Landlords are continuing to focus on merchandising with retailers that create an “experience” and are e-commerce resistant or complementary. Investors are also seeking rent / NOI growth and the region’s strong population and employment growth in North and Central Florida has put us on the top of the geographic target list for most investors. The major metro areas in Central Florida – Orlando, Tampa and Jacksonville – are still strong and very attractive to retailers and investors.
Brown: There are many reasons not to count brick-and-mortar retail out! There certainly are a number of bankruptcies and the media loves to print bad news. This country does have significant over supply of retail space, but well-located shopping centers will not disappear…although their formats will evolve as they always have. There are many concepts that are growing /expanding such as large fitness centers and personal health care, such as spin, yoga and spas; others expanding are Nordstrom Rack, Ulta Beauty, T.J. Maxx, HomeGoods and another new concept TJX is developing.
Koury: Retail is going through a cleansing period and shedding unprofitable stores, which is good for the long-term health of the industry. The ones remaining over the next two to four years will be the strongest tenants with synergistic activity between their brick-and-mortar stores and online sales.
Mitchell: Retail has always been an evolving business since consumer preferences shift over time, and the integration of technology and information into our daily lives has altered consumer patterns. Retailers (like other businesses) will have to adapt to those changes in order to survive. From the real estate side, fundamentals are incredibly strong. Occupancies are near all-time highs, new development is at historical lows and rental rates (in most markets) are still below or at peak levels from 2007. Several investors that have exposure to tenants that have declared bankruptcy have had strong levels of interest to back fill those spaces (often at higher rents) because there are very few opportunities for stores to open new locations in the best submarkets.
Munley: The best economics for a retailer is an in-store purchase or online purchase with a return to a store for many reasons. Retailers do not make money on online sales due to the logistics costs. Hence the focus on “last mile.” Amazon’s entrance into brick-and-mortar locations and logistics infrastructure investing is a great example. The new normal will be a strong combination of online and brick-and-mortar locations.
Peterson: Retailer bankruptcies are no different than regular corporate bankruptcies, which also occur with frequency. Any business has to adapt to a change in their customer base, a change in preference of its customer base or changes made by competitors. If you don’t, you will fail. The majority of retailers that were around 50 years ago are no longer around, but there are plenty of other retailers now that have taken their place. People will continue to shop and spend money, and retailers need to continue to evolve and meet the changing needs of consumers like they have done in the past.
Brown: Experiential retail is growing; some of the interesting concept are Topgolf; bowling alleys like Lucky Strike; indoor shooting galleries; movie theaters with quality food and beverage; virtual reality concepts; KidZania, which takes up to 60,000 square feet; Escape Rooms and Wreck Rooms. Actually, once you get past all the negative headlines, there are some exciting changes coming to the retail industry.
Koury: The addition of more food and entertainment to centers in an attractive village format generates more of a lure to draw shoppers. Adding experiential retail can attract the shoppers who have lost interest in patronizing centers just to purchase an item they could otherwise buy online and have delivered to their front door the next day. They are creating exciting environments that people look forward to, as opposed to it feeling like a chore.
Mitchell: From a consumer perspective, new technology is creating exciting new efficiencies and business models that emphasize enhanced customer service and experience. Retailers that are winning are integrating technology into their physical stores and are providing customers with some sort of experience, whether that be convenience or a social interaction. A key trend in the industry to observe is retailers’ focus on providing a variety of options for the shopping experience. As an example, think about the grocery shopping experience for a busy family or professional; consumers can go to the store and purchase their list, order online and have it delivered to their residence, or order online and pick up in person. The power of that optionality and multi-channel shopping experience will be a key to future retail success.
Munley: There is a real entrepreneurial spirit among developers who are striving to be creative and curate a sense of place at retail-focused properties. The global market challenges have created opportunities to reposition existing assets into something new and exciting. For example, developing mixed-use assets by adding a residential component, creating an inherent consumer base or cross shopping opportunities through medical and/or creative office space. Or, alternatively, owners could simply keep the asset entirely retail, modify the orientation of the asset and thoughtfully consider the target consumer audience, their shopping habits and demands. As with anything else, in times of uncertainty, significant value-add opportunities arise to those that can see a greater vision.
Peterson: The most exciting things in retail today center around improving the “in-store” experience and the convergence of digital, physical and mobile strategies to provide an overall better shopping experience. Some stores are starting to use beacon technology to push promotions to customer’s mobile devices while they are in the store, and check-out processes and finding products in the store are being improved through mobile technology. Customers can also use mobile apps at several fast food outlets, such as Starbucks and Chick-fil-A, allowing customers to order and pay before picking up in the store creating a more efficient fulfillment. There are also new retail concepts that are changing the way we think of old retail concepts. iPic Theaters is a good example where they have changed the movie-going experience by offering gourmet dining and cocktails, which can be delivered right to your seat. Throughout history, the way that goods are bought and sold have been – and will continue – to morph. Changing demographics and consumer preferences combined with significant advances in technology are making this a very exciting time in the history of retail.
Brown: One major trend we will continue to see is shopping centers will have more restaurants and entertainment versus fashion. Consumers are still spending on retail, but there has been a major shift to expenditures on food/beverage and entertainment. We continue to have discussions over the impact on retail and consumer spending patterns. There are also a lot of questions regarding the configurations of shopping centers, including parking lots and drive-up lanes that will be needed to facilitate driverless cars and Uber-type transportation. Many believe there will be significantly less parking spaces needed. Other evolutions will be mixed-use product with higher density.
Koury: While neighborhood, grocery-anchored centers less than 120,000 square feet will still act as the backbone of brick-and-mortar retail, the most successful open-air centers will be grocery anchored in a lifestyle village format with plenty of food and entertainment. Also, a large strip center today is considered to be in the 400,000 to 700,000-plus square-foot-range. Within five years, a 250,000- to 400,000-square-foot center will be considered the "new large."
Mitchell: Evolving technology in the retail industry will be instrumental in enticing customers into stores and creating seamless omnichannel shopping experiences. Retailers that place an emphasis on unique, curated experiences and entertainment will thrive against competition. The market will continue to see more examples of technology driving traffic and sales to brick-and-mortar locations (e.g. beacon technology, mobile app ordering and using consumer data to stock and tailor store layouts/offering). Additionally, there will continue to be demand for integrating multiple uses, such as medical office, entertainment and multi-housing into existing centers.
Munley: We already see the early modification regionally through retailers becoming agnostic to property type and putting an even greater emphasis on being positioned at “main and main” or the dominant location within the submarket. Grocers are successfully operating at enclosed malls, and department and apparel tenants are successful in open air if it is the best retail real estate in the market. Additionally, the shift toward service- and entertainment-oriented retailers will continue to drive leasing activity. This trend has already been brought to the forefront of many successful properties, and those landlords who want to maintain high occupancy coupled with growing net operating incomes will focus on repositioning their assets to target service- and entertainment-oriented retailers.
Peterson: Retailers and landlords will continue to focus on an “experience” orientation in their operations. There will also be a continued focus on efficiency and technology in marketing and delivering goods to consumers. There often is a lot focus on how the internet is deteriorating brick-and-mortar retail sales, but there are many technological improvements that are actually enhancing it. Uber Eats and Prime Now are examples of another revenue model for restaurants.