Soaring online sales are continuing to shake things up in the retail real estate sector. The impact is significant - but by no means equal. There are some winners and losers emerging as retailers and landlords alike scramble to adapt to a changing marketplace.
Sales data is starting to paint a grim picture for brick-and-mortar retail. Overall, retail sales achieved a healthy growth rate of 4.1 percent during 2016. However, e-commerce is taking a bigger bite out of that total volume, with online sales that surged 14.3 percent last year, according to CBRE.
That shift is starting to have a more visible impact on retailer strategies and the demand for space. “When the whole internet scare started coming out about 10 years ago, everybody was relieved that the impact wasn't felt immediately,” says Steven K. Graul, CCIM, president and principal broker at Innovative Concept Associates, a restaurant real estate advisory firm based in Reston, Va. “But I think we are certainly feeling it over time.”
Part of that impact appears to be a tepid demand for space. The U.S. vacancy rate for neighborhood and community shopping centers was relatively flat last year, with a 10-basis point improvement to 9.9 percent, while asking rents increased 1.8 percent. The statistics for malls tell a similar story: a flat vacancy rate and very little change in asking or effective rents. The regional mall vacancy rate ended 2016 at 7.8 percent - no change from last quarter or from the fourth quarter of 2015 - while asking rents increased 2 percent for the year, according to Reis.
Retail has been hammered by a barrage of negative news related to retailer bankruptcies and store closures that run the gamut from giants such as Macy's and J.C. Penney to a slew of smaller shop tenants that include Payless Shoes, Wet Seal, and The Limited, to name a few. In fact, 2016 was the biggest year of closures for major chains since coming out of the recession, with 4,000 stores that were shuttered, according to Cushman & Wakefield. The company is predicting that store closures will increase by 25 percent this year to reach about 5,000 store closures.
It also is important to note that the outlook for retail is not all doom and gloom. “We have seen a lot of negative chatter in the market about retail,” says Spencer Levy, head of Research in the Americas at CBRE. “The negative chatter is caused by real softness in the B and C mall and B and C power center space. But if you exclude those areas, retail overall is strong. Institutional-quality retail properties, grocery-anchored centers, and neighborhood centers are doing very, very well, and we expect a good year in 2017.”
One factor giving retail a boost is the lack of new development, which has helped fuel absorption and rent growth in many metros. “I think the negative chatter on retail in particular is overblown,” Levy says. Categories such as restaurants, health and beauty, and off-price retailers also have continued to add new stores.
Fighting for Market Share
The battle between e-commerce and traditional retailers is heating up, and brick-and-mortar retailers are feeling the competitive pressure. However, there may not be one clear winner, as both sides are seeing the lines blur between online and offline sales.
Retailers such as Walmart, Home Depot, and Macy's are seeing their online sales rising faster than physical store sales. Meanwhile, e-commerce companies such as Fabletics and Warby Parker have stepped into the traditional retail arena and opened new stores.
The retail “revolution” is increasingly an evolution that is producing a hybrid model of retailers that can successfully manage both online and brick-and-mortar sales in their omni-channel platforms. “The most successful retailers are combining bricks and mortar and online to provide the consumer a complete model and choice,” says Howard Meier, CCIM, a principal at Realciprocity Advisors in Toronto.
Brick-and-mortar retailers are building out e-commerce platforms to offer customers the convenience of online shopping, while offering in-store pick-up of those purchases to continue to drive traffic to the physical stores. Some shoppers prefer to visit a store first to check out a product and then go online to make the purchase.
Malls also are adapting to that shift by positioning themselves as a social and entertainment hub and not just a place to buy things. Malls and shopping centers are adding social experiences, such as gyms and restaurants, that stay open much later than the retail stores, Meier notes.
Retailers are creating more in-store experiences. In Ontario, Canada, for example, several of the grocery chains have added event space where they hold cooking classes, wine tastings, and new product launches, as well as providing an area for childcare, he says.
Walls also are coming down between individual retailers. For example, a coffee shop might decide to locate a store within a bank, while drug stores are providing fresh food and take-out options.
“It is about getting the consumers into the store and keeping them there, so their dollars are spent all in one location,” Meier says. At the same time, retailers are figuring out that it is not one-size-fits-all in how and where consumers shop, he says.
Reinvention of Malls
Online sales have already taken a toll on power centers and battered big box categories such as office supply, electronics, bookstores, and home furnishings. That focus is now shifting to department stores, soft goods, and apparel retailers.
“Department stores are dying,” Graul says. “The age of department stores anchoring retail is all but over, and that has been coming for 20 years.” Retail soft goods uses seem to be following close behind the department stores - expanding and thriving only in the top 20 percent of regional markets and projects, he says.
The retail market is still reeling from major announcements in the past year that Macy's will close 100 stores, and J.C. Penney expects to close between 130 and 140 stores. Those closings have landlords scrambling to find new anchors that will draw traffic. For example, Macy's closed its 149,000-sf store at The Marketplace Mall in the Rochester, N.Y., metro at the end of 2016.
“That is a big dump of space. There is just not a backfill use for that square footage in new retailers,” says Ira Korn, CCIM, owner and managing broker at GENESEE Commercial Real Estate/CORFAC International in Rochester. In most cases, replacing one department store with another is simply not an option, as department store retailers across the board have curtailed new store growth.
Landlords are looking to redevelop those large spaces to smaller shops and junior anchors, as well as restaurants, entertainment, and alternatives such as an indoor golf range to create more of an entertainment district, according to Korn.
The A malls are continuing to do well in many metros, while the B and C malls have been hit hardest with the worst likely still to come, Graul notes. “The bottom 50 percent of regional malls are in for a tough ride,” he says. “The remainder will have to be re-invented, repositioned, redeveloped, or de-malled.”
Across the board, developers and landlords are working to internet-proof shopping centers with restaurants, entertainment, and service retail to help drive traffic to their centers and backfill empty spaces. “People go out because they want experiences, and restaurants and entertainment deliver that,” Graul says. “So that has become the real focus for new development.”
For example, Innovative Concepts Associates consulted on the redevelopment of Springfield Town Center in the Washington, D.C., metro that involved remerchandising 60,000 sf into new restaurant space. The new restaurant component now serves as a new anchor for the project, with tenants that include Yard House, Nando's Peri, Zinburger, and Dave & Buster's, among others.
Slowing New Development
Retail development remains thin by historical standards. New construction in the U.S. specific to neighborhood and community centers totaled just 9.6 msf in 2016, according to Reis. However, development is returning on a select basis, with some bright spots for growth, including grocery-anchored centers and vertical mixed-use and infill development in urban and close-in suburban neighborhoods.
Despite some soft spots in the market, construction has returned to some areas of Rochester. “There is more development than has taken place in a long time,” Korn says.
A new REI store is proposed off I-390 that is scheduled to open in fall 2018. New construction also is occurring in the city's College Town, a mixed-use district near the University of Rochester and University of Rochester Medical Center. College Town features new student housing and a hotel, along with retail and restaurant tenants such as Barnes & Noble, Verizon, Jimmy John's, and Texas de Brazil steakhouse.
Las Vegas also has seen retail development return along with its accelerating recovery. Some of the older big box developments that stalled out in the recession are now getting brought back to life.
Two of the hottest submarkets in Las Vegas are Southwest and Summerlin. Both areas have seen existing spaces fill in and new developments emerge. “Retailers are flocking to these areas because of the healthy demographics,” says Chris Jackson, CCIM, CPM, a broker at North American Commercial in Las Vegas.
However, some of the new projects coming to fruition are different in nature. Some developers are replacing traditional anchor tenants with an extra pad site that can accommodate a single tenant, such as a daycare or auto center, or a building that can house two to five smaller tenants.
“So, there are different types of footprints than we have seen in the past,” according to Jackson. That neighborhood center space is in demand from mobile phone providers, restaurants, and fitness centers, among other tenants. “There is definitely still demand for space, even if it is not credit tenant based,” he says.
Many retail markets have weathered the Great Recession and have stabilized, but they are still battling headwinds from e-commerce, changing consumer behavior, and shifting demographics. Retail experts also are keeping a close eye on retailers that may not be able to execute on new strategies that will help solidify their position in the new retail marketplace.
“I think there is some volatility ahead of us, and I think the retail landscape as a whole is going to change due to what's happening with online sales,” Jackson says.
Food Steps into Anchor Spot
by Beth Mattson-Teig
The explosive growth occurring in the restaurant industry in
recent years has helped to consume the vacant retail space hanging on the
Restaurants have eagerly stepped in to fill the gap as
demand from traditional retail tenants declined. In addition to occupying empty
space, restaurants have become a welcome solution to help drive traffic and are
more immune to the competitive pressures from Amazon and other online
retailers. Restaurant expansion is being fueled by consumers who are spending
more of their food dollar on dining out, as well as consumers who have a bigger
appetite for new tastes and concepts
“The consumer has gotten a lot more palate-educated even in
secondary and tertiary markets,” says Steven K. Graul, CCIM, president and principal
broker at Innovative Concept Associates, a restaurant real estate advisory firm
based in Reston, Va. “They want to eat better. They want to eat healthier.
Everyone wants culinary-driven food.”
So, even within the restaurant industry there is dynamic
change, he adds. Mall owners, in particular, are jumping on the rising “foodie” trend
and are revamping stodgy food courts and adding more restaurant tenants that
run the gamut from casual fare to full-service chef-operated concepts.
In fact, the volume of food, beverage, and entertainment
tenants at malls has jumped in the past decade from an average of about 10
percent of the merchandising mix in 2007 to roughly 20 percent today, according
to Cushman & Wakefield. However, there are signs that growth may be beginning
According to Reis, the rate of job growth for restaurants
decelerated in 2016 to 2.2 percent from 3.3 percent at the end of 2015. In
addition, some categories that have experienced heavy growth may be saturated
and headed for a shakeout. Restaurants that have not changed with the times
also may see fallout.
It is getting very tough to make money in the restaurant
industry with occupancy costs that are rising out of control and outstripping
the growth in sales, Graul notes. Restaurants are battling increased
competition and too many seats in many markets, as well as higher labor costs.
That could create some additional vacancies ahead, particularly among
full-service restaurants that are overpaying for real estate and cannot
generate the sales to support their high occupancy costs, he notes.
For example, gross asking rents of $75 psf are now typical
in the top suburban markets of Washington, D.C., which rival rents in the best
downtown D.C. locations, Graul says. That means a 6,000-sf restaurant would
have to generate about $6.5 million in sales to account for their overhead, and
there are very few restaurants out there doing that type of sales volume, he
says. “So margins are getting thinner and
thinner, and there is definitely a reckoning coming,” he