The metamorphosis of retail real estate is well under way. This was the theme that emerged as 2018 came to a close and SCT interviewed several experts about the trends to watch in the year ahead.
Originally published in SCT Magazine. By Joel Groover, Contributor, Shopping Centers Today
The best retailers and landlords continue to boost performance by maximizing efficiencies on all fronts, they said. Some changes require tough decisions, such as when retailers jettison under-performing stores or when landlords sell off lower-tier assets. But such moves also tend to empower the companies to pursue new directions.
The past several years have been rough on retail. Roughly 20 major chains filed for bankruptcy in 2017, and last year the high-impact losses of large-format retailers Toys ‘R’ Us and Bon-Ton flung millions of square feet back onto the market.
Retail watchers will hardly be surprised if some troubled chains such as Sears shutter their operations this year, says Adam Ifshin, CEO of New York City–based DLC Management Corp., which owns, develops and manages open-air shopping centers across the country. As of late November, Sears had announced plans to close a total of 182 Sears and Kmart stores. The ax reportedly loomed over other locations as well. “In the old days of the store-closure business, everything looked like a reorganization,” Ifshin said. “Now you assume liquidation until shown otherwise.”
But observers also point to potential bright spots for retail in the year ahead. For starters, the shakeout is decelerating, Ifshin says. “Our watch list of troubled chains is a lot smaller than it used to be,” he said. “A lot of the underperforming retailers have been flushed out. At DLC we’ve had a lot of success backfilling boxes with other tenants that are much more viable going forward.”
In November Burlington, Mass.–based KeyPoint Partners published an analysis of vacancy patterns at 270 retail properties across eastern Massachusetts and found that 199 of them (74 percent) had vacancy rates of only 4 percent, on average, compared to a 10 percent average for the region overall. “In most circles [4 percent vacancy] is considered fully occupied,” wrote Robert F. Sheehan, KeyPoint’s vice president of research, in the report. “Put another way: Most centers are doing fine. The other 71 shopping centers have mainly been victims of recent or soon-to-be retail liquidations which, it could be argued, are attributable as much to natural retail evolution as to any Internet-driven tsunami.”
Indeed, major missteps are a big part of why certain chains have faltered, according to Ifshin. When retailers aggressively cut back on inventory and personnel, neglect to reinvest in their stores, and sell off their best-known brands, they harm only themselves, he argues. “Sears is the poster child of this,” Ifshin said. “They have been hacking off limbs for 20 years and are running out of appendages. You have to give people a compelling reason to come into the store.”
Other retailers did a poor job of site selection as they ramped up their store counts in the go-go years before the Great Recession, notes Mark Dufton, CEO of real estate at Boston-based Gordon Brothers, which provides valuations, dispositions, investments and other services for a variety of sectors, including retail. “There’s a science to site selection,” Dufton said. “That got lost in a search for growth. Now retailers are getting back to the fundamentals of the business.”
These days proposed store openings are subject to intense scrutiny from retailers’ real estate committees, often with involvement from the highest levels of the company, Dufton says. “In the past you would rarely see a CEO or CFO at a real estate committee meeting,” he said. “Today they’re involved in real estate more than ever. It’s encouraging.”
Moving forward, chains stand to benefit from ramping up the efficiency of their real estate portfolios, Dufton says. Smart strategies include pruning underperforming stores, buying out of vacant locations rather than letting them sit, bringing in auditors to eliminate any overcharges from landlords and renegotiating leases whenever possible, he says. “What retailers have tended to do in the past is, if their lease comes up for renewal and their landlord says, ‘Oh, it is only going to be another dollar a year,’ the retailer would just accept that,” Dufton said. “Today you need to look more carefully at what’s happening in the market and at the center. You could be paying double the market rate and not even know it.”
Another positive sign, observers say, is the way top retailers are spending aggressively to improve their stores. Back in 2017, a time when many were wringing their hands about the so-called retail apocalypse, Target CEO Brian Cornell moved to launch about a dozen new brands and to spend roughly $7 billion on in-store and other improvements. The goal, as described in a Target.com blog post, was to respond to changing consumer preferences and give shoppers more reasons to come to Target. “That is forward-thinking — looking in the windshield, as opposed to the rearview mirror,” Ifshin said. “Cornell is doing the three things good merchants always do: They invest in their store fleets, their people and their brands.”
Having already spent heavily on supply-chain logistics that are geared toward fulfilling online orders, more retailers are now investing in customer-facing improvements as well, says Melina Cordero, CBRE’s head of retail research for the Americas. “Online logistics and cost structures really eat away at margins,” she said. “Retailers are realizing that investing in the store — getting people in there — is ultimately going to save them money.” In the year ahead, Cordero predicts, top chains will seek to find innovative ways to drive store traffic — everything from major redesigns, to click-and-collect initiatives, to new loyalty programs. “These are all reinvestments that are closely linked to in-store traffic,” she said.
Moreover, observers predict that the likes of Burlington, Five Below, T.J.Maxx and other chains known for their rapidly changing “treasure hunt” merchandising strategies will continue their robust expansions this year. So, too, will tenants in such categories as health-and-fitness, food-and-beverage, entertainment, and medical or financial services, says Jeff Arsenault, an Avison Young principal who heads the firm’s retail services group for Boston and New England. He cites the rapid rollout in New England of Orangetheory Fitness, which offers group workouts based on high-intensity interval training.
“I’m representing Orangetheory Fitness for its rollout here,” Arsenault said. “We’ve completed over 30 studios in about a 28-month period.” Irish fast-fashion chain Primark has also opened Massachusetts stores, at Burlington Mall, Boston’s Downtown Crossing and South Shore Plaza. At Downtown Crossing, the Primark flagship store backfilled a vacant Filene’s department store, while the Primark store at Burlington Mall replaced a Sears. As it continues its U.S. rollout, Primark is a good candidate for backfilling other large-format spaces in New England, says Arsenault. “My understanding is that Primark has other sites it is considering,” he said. “These moves are certainly welcome to those landlords who have big-box vacancies.”
Retail experts see potential for stronger growth in the deep-discount sector. In particular, some landlords with large-format vacancies would do well to consider leasing space to fast-expanding Ollie’s Bargain Outlet, according to retail consultant Jeff Green, a partner at Hoffman Strategy Group. The Harrisburg, Pa.–based chain, which operates about 300 stores across 22 states, changes its inventory rapidly, in the manner of T.J.Maxx and Marshalls, says Green. “Ollie’s comp-store sales are running in the double digits, and they are doing upwards of 40 stores per year — in second-generation space,” he said. “They can go, not just into ‘B’ power centers, but also into ‘C’ centers. It shows that, no matter what is going on with the economy, value-oriented retail appeals to a wide swath of demographics. That is only going to continue in 2019.”