Even as the economy continues on a path of slow improvement, brick-and-mortar retailers still find themselves in a real estate market with few vacancies and even fewer new malls under construction. In addition, corporate management remains reluctant to expend any more capital than it feels is absolutely necessary to meet immediate needs.
Despite this potentially grim scenario, smart retailers are still having success in optimizing and even growing their real estate portfolios. Careful assessment of lease values, fully understanding the dynamics of store locations, and investing in technologies that increase the breadth and depth of data analytics are all steps retailers can take to succeed in the current real estate environment. Several noted retail real estate advisers and technology experts make the following recommendations.
No Development Means Developing a Plan
In an era of scarce new development, it is imperative for retailers to understand the value of each individual store, as well as the value of their customers.
“Retailers are trying to understand where they need to consolidate,” said Andy Graiser, co-president and co-CEO of Melville, N.Y.-based commercial real estate advisory and investment group A&G Realty Partners. “They may have too many stores in light of the growth of omnichannel commerce and other factors. Retailers really have to start rethinking where they need — and don’t need — new stores.”
Graiser advises retailers to begin with an internal portfolio review, on a store-by-store basis.
“See where leases are coming up in the next couple of years and where there is a risk of increased rent or capital expenditures required to renew the lease,” said Graiser.
He also advised retailers to conduct a comprehensive psychographic review of their customers. “Look at your customer profiles and demographics,” he said, “and see what’s changed with your customers and your portfolio.”
In addition, retailers must be aware of locations that hold more real estate value than operational value.
“In Manhattan, leases have tremendous value because of their location,” said Graiser. “The store may not be operating well but it represents a real estate opportunity.”
Graiser said A&G Realty helps retailers define their real estate strategies.
“We challenge retailers regarding their portfolio growth strategies,” he concluded. “Through our questions, they begin to understand what it is they don’t know and to develop a strategy around the big questions; we then execute the strategy on a landlord-by-landlord basis, relative to where they should grow.”
One Size Does Not Fit All
When it comes to evaluating retail real estate portfolios, one size does not fit all. Corey Bialow, CEO of Needham, Mass.-based retail real estate consulting firm Bialow Real Estate L.L.C., says retailers’ size priorities have changed in recent years.
“There is a clear trend among many national retail chains to ‘rightsize’ their concepts,” said Bialow. “The ‘bigger is better’ expansion strategy that we saw a decade ago is a trend that has clearly reversed itself. Many prominent retail chains are reducing SKUs and merchandising more effectively out of a smaller footprint in order to lower operating costs as margins across the board are getting hurt by online shopping.”
According to Bialow, part of rightsiz-ing is knowing when to accept a deal and when to turn one down.
“The best advice I can give to any retailer who has initiated an expansion strategy is that in order to negotiate the best possible deal for their company, they need to be able to walk away from any one given site,” said Bialow. “The best deals are sometimes the ones you don’t make. The other important piece of advice I give to clients is to be decisive when evaluating a new location. If the site doesn’t meet your criteria, don’t try and fit a square peg in a round hole — just move on. On the flip side, when everything does fit your model and the deal is yours to make, don’t overanalyze; make a commitment or someone else will, as time kills deals.”
Bialow concluded by stressing the importance of real estate to retailers’ business strategies.
“Real estate is a business unto itself and is probably the single biggest contributing factor to a chain’s ultimate success or failure,” said Bialow. “My motto at Bialow Real Estate has always been ‘retailers should focus on retail,’ while we focus on what we know best — and that’s real estate!”
Location, Location, Location
Despite changes that have occurred in retail real estate during recent years, the universal real estate rule of “location, location, location” has not changed. But determining a good location for a new store, or assessing performance versus location characteristics of an existing store, is not a simple task. Fort Worth, Texas-based Buxton addresses the complexities of location assessment with its SCOUT touch platform custom predictive solution.
“Retailers are focused on growth in the right markets and trade areas,” said Stephen Polanski, senior VP of Buxton. “SCOUT helps them make decisions more quickly in the field and on tablets and smartphones — answering questions like ‘how many units can you have’ and ‘where would you be located in a perfect world.’”
Retailers can also use SCOUT to score sites with forecasts that show quantifiable opportunity based on customers, co-tenant mix and competition, gaining advantages with speed to market.
“Retailers can assess the ‘who’ and ‘where’ value of their best customers, using consumer data and sales performance data combined with Buxton’s household-level database to define what an opportunity looks like,” said Polanski. “They can quantify data elements into an answer, while evaluating the drive-time trade area and the impact of competition in their market.”
Polanski said retailers can also measure how new online customer interaction channels relate to their real estate footprint.
“New channels are the talk of the town,” said Polanski. “Retailers are tracking more data elements across all areas of the business. We make sure the entire organization is on the same page in terms of who their valuable customers are. Analysis could be driven by channel, geography or store by store. You can take the seasonality out of components and regionality out of the decision-making process. You can assess the operational efficiency of same-store performance and the potential of a given market trade area with data-driven points.”
Lease Is the Word
Understanding the value of leases, especially as they come up for renewal, is a crucial foundation of any retailer’s real estate strategy. Woodbury, N.Y.- and Boston-based real estate services provider DJM Real Estate works with retailers to take a holistic look at their portfolios, on a store-by-store basis.
“In some cases, a store may have real estate value, but not be performing well,” said Mark Dufton, CEO of DJM Real Estate, a Gordon Brothers Group company. “It may make sense to exit the location and take the real estate value off the table. Or a renewal might be coming up and the retailer could continue to leverage a store’s market standing where they can get leverage on restoration of the lease.”
To truly understand and maximize the value of their lease portfolios, Dufton advises retailers to follow several specific steps.
“First, retailers need to understand the market value of where they stand in their portfolio of leases,” Dufton said. “Their lease portfolio may be above, below or at market value. What they can do to get control back is a holistic portfolio analysis, so they can understand where they are in the real estate spectrum. They need to look at their portfolio on a store-by-store basis. There are always hidden gems you can leverage.”
Dufton said DJM offers a lease audit product that audits triple net charges as a category-based service.
“I can’t understand why anyone wouldn’t conduct such an audit,” said Dufton. “It’s a no-brainer to look at the biggest real estate problem, which is paying more than you should, and eliminating that. We do a deep dive into each business and examine where the problems lie. Since the beginning of this year, a lot of retailers have been trying to prune the bottom parts of their portfolios, but don’t know what that kind of reduction entails. You need to know the exit costs and develop a strategy.”
Spend Now or Pay Later
A continuing slow economic recovery is leading many retailers to make real estate spending decisions that are penny wise and pound foolish. According to Andy Thomas, president of Atlanta-based Virtual Premise, a wholly owned subsidiary of the Co-Star Group that provides cloud services-based real estate management software, too many retailers are continuing to make poor choices with their real estate technology budgets.
“Relative to 2013, it’s more of the same,” said Thomas. “It’s similar to last year in that the economy remains slow to recover. In some respects, that’s not all bad if you have a job, but companies continue to be tight with their purse strings, while the requirements they put on existing employees continue to increase.”
In this environment of doing “more with less,” Thomas said investing in real estate management technology that automates previously manual processes and generally improves operational efficiency is more important than ever. But many retailers don’t see it that way.
“Retailers are also getting stingy in capital spending at corporate level,” Thomas said. “They are not investing in technology the way they should at this point in the cycle. They need more technology.”
For 2014, Thomas said the retail industry’s real estate focus is finding great locations in a saturated market, as well as optimizing existing real estate portfolios as renewals approach.
“Not many new malls are opening, so they are expensive to occupy,” commented Thomas. “Retailers’ real estate technology priorities are the availability of appropriate data and a high-level reporting capability that allows them to utilize that information to drive efficiencies and better decisions.”
According to Thomas, retailers particularly need better accessibility and reportability in light of the upcoming changes to the International Financial Reporting Standards (IFRS) for real estate.
“No solution can currently provide everything retailers need for the IFRS changes, but we are helping them get the right data,” said Thomas.