The current state of retail market trends in the Midwest
For anyone looking at the current state of retail in the Midwest, one of the most fascinating things to track is how some of the macro trends we see in the marketplace today are the end result of years (sometimes decades) of evolutionary change.
The good news is that the general state of retail in the Midwest remains relatively positive. Quality retail is always a good value, and that hasn’t changed (at least it hasn’t in the last 30 years I’ve been in the business). If you have a well-designed, well-located retail development, the odds are good that it’s healthy and there are unlikely to be any major challenges involved.
The compelling convenience of the internet, the growth of powerful online brands like Amazon, and the subsequent necessity of brick-and-mortar retailers establishing their own online component have all shaped the retail marketplace in ways both subtle and significant. But while online and mobile sales have certainly had some impact on brick-and-mortar, the overall percentage of sales remains fairly modest – and it’s certainly not something that prevents well-located neighborhood retail (such as grocery stores, carry-out restaurants, and service retail, like dry cleaners) from competing and thriving. That type of product is extremely healthy in the Midwest.
Taking a step out to look at regional retail, and the story changes somewhat. While quality product in prime locations remains quite positive, overbuilding remains somewhat of a threat in some Midwest markets. Wherever we have more square footage of big box retail available than retailers to fill it, the market can cross over a tipping point. Some of that excess space has been backfilled by value-driven retailers who see opportunities in A markets as prices drop.
Another factor contributing to the overabundance of supply in some markets is the fact that category killers that were historically focused on getting bigger are now working to become leaner and more efficient. With more retailers downsizing their operating platforms and focusing more on sales per square foot, bigger boxes have been more challenging to fill. Far and away the most challenged segment is B product in B or C locations. Many of those spaces will likely be forced to convert to alternative uses.
Fortunately, retail units are relatively easy to convert to other uses such as light industrial or office. Cities that are smart and adaptive will study their zoning ordinances and move in the direction of demand. The more forward thinking and flexible a community is, the better off they will be. In municipalities that are more set in their ways and resistant to exploring different uses, the outcome is rarely positive.
One particular bright spot for converting large space is in the storage sector, where storage operators are converting big-box retail into storage/rental businesses. This is a relatively new phenomenon, but it has intriguing potential. In my own market here in Southeast Michigan, a former Super K-Mart on Telegraph Road just south of 8 Mile recently traded to Storage USA. That’s a 150,000-sq.-ft. space state-of-the-art retail box traded to a Fortune 500 storage company that’s going to convert it to storage, a retail moving store and truck rental facility. The reality is that you simply aren’t going to find a 150,000-sq.-ft. retailer who wants to be in a B or C location – they don’t exist.
Another area where some of these large-format challenges are creating opportunities for others comes from the growth of outlots in areas where large office buildings and sizable retail projects are over-parked. We are seeing a movement, especially here in Michigan, where cities and planning departments are recognizing that and capitalizing on it. Out lots along the Big Beaver corridor and Telegraph Road are being filled with restaurant tenants like Five Guys, Potbelly, Jersey Mike’s and Qdoba and other smaller retailers.
While every Midwestern market is different and has its own unique characteristics, the same general trends are evident across the region. While supply exceeds demand in down-market communities and in some bigger formats, those mid-box and big-box retailers out there today are reasonably healthy – and most urban markets have done a reasonably good job-absorbing surplus.
A clear regional bright spot is Detroit, which is a very exciting development for someone that has watched the city closely for decades. The climate in Detroit right now is ripe for opportunity, and the development cycle has been logical and well-orchestrated. The greatest activity currently is in the core of the city’s central business district and is and spreading outward – exactly what you like to see. What’s happening the Foxtown area and along Woodward, with the new Red Wings arena, joining the existing downtown Lions and Tigers stadiums is generating huge demand drivers. Retail will follow, and there is little reason to think this will slow down anytime soon.
One wild card to keep an eye on as we move through 2016 is what seems to be an undercurrent of caution and uncertainty in the industry regarding the upcoming presidential election. It is tough to say how much political elections like this actually impact the retail marketplace, but it’s something to monitor going forward. Retail is obviously exquisitely sensitive to consumer sentiment, and it’s not unusual for consumers to be impacted by big events like this – particularly as the media coverage builds in the months leading up to the election.
Ron Goldstone is senior VP of the Farbman Group, a full-service real estate firm handling all facets of real estate transactions, from property management and leasing to acquisition and disposition. The firm manages more than 25 million square feet of office, retail, multi-family and industrial space throughout the Midwest.
Tiffany doesn’t sparkle with Q1 misses; will open 11 stores
Tiffany & Co. missed Wall Street expectations for profit and revenue in a lackluster start to fiscal 2016, but still plans to open 11 new stores worldwide.
The retailer reported net earnings of $87 million during the first quarter, down 17% from $105 million the same period a year earlier. Lower gross profit and higher selling, general and administrative (SG&A) expenses drove the reduction in profit.
Worldwide net sales declined 7% to $891.3 million, from $962.4 million and same-store sales declined 9%. In the Americas, total sales of $403 million were 9% below the prior year and same-store sales declined 10%.
In the U.S., softness in spending by both consumers and tourists contributed to dropping sales, while lower spending by tourists negatively impacted European sales. A significant decline in Hong Kong drove an overall sales decline in Asia-Pacific, while local customers actually drove a sales increase in Japan.
Looking ahead, during fiscal 2016 Tiffany expects to open 11 stores, relocate 10 stores and close six stores worldwide. The retailer also expects worldwide net sales to decline by a low-single-digit percentage from the prior year.
“As expected, this was a difficult quarter in terms of both sales and earnings growth,” said Frederic Cumenal, CEO Tiffany & Co. “We faced numerous challenges, including continued pressure from foreign tourist spending in Europe, the U.S. and Asia, particularly in Hong Kong. However, we are continuing to take actions that are intended to strengthen sales growth with local customers in the U.S. and around the world. From a strategic perspective, we believe that our initiatives will enhance our ability to provide our customers with extraordinary products and experiences and ultimately contribute to improved financial results. We remain focused on generating sustainable long-term sales and earnings growth.”
A fresh take on ‘Retailtainment’ and future of fun
Retail has been the foundation of shopping centers throughout their existence, but new entertainment concepts are making inroads in traditional retail venues.
Even in mixed-use venues, it is generally accepted that a critical mass of traditional retail is the highlight, and that other uses are complementary pieces, designed to drive traffic and support the retail component. While the industry has been slowly evolving away from that traditional model for some time now (dining and entertainment uses in particular have emerged as more significant pieces of the commercial puzzle) that trend has exploded in recent years. A wide range of dynamic and engaging new entertainment uses have sprung up, and have functioned as increasingly prominent features on the development landscape.
Today, entertainment is no longer a side dish: it’s the main course. And it’s a meal that landlords and commercial development decision-makers are increasingly interested in ordering. Entertainment concepts have evolved well beyond the movie theater, and creative new brands like Momentum Indoor Climbing, Pinstripes, Punch Bowl Social, iFLY indoor skydiving and Topgolf have captured imaginations and dollars as they expand across the country.
Entertainment brands have the advantage of generally strong appeal with Millennials and other younger shoppers, and more owners and operators appreciate the degree to which a strong entertainment component can drive traffic and create valuable synergies with traditional retail tenants. Entertainment introduces a social element that gives a center status as a destination. It gives people reasons to come and reasons to stay, presenting a new and different range of engaging activities and memorable experiences.
With that in mind, it’s not surprising that landlords are increasingly open to new entertainment concepts. Some have been proactive about exploring creative ways to fill gaps in their tenant roster with compelling entertainment brands. For example, the Southdale Center in Edina, Minnesota repurposed a 40,000-sq.-ft. space on the third floor of the mall from an old food court into a new Dave & Busters. The transformation was not without logistical and operational challenges, but the results have been extremely positive.
The rise of “retailtainment” is also prompting innovative development concepts that are almost entirely entertainment-based. One such project is the forthcoming 94 West Village in Albertville, Minnesota. Developed by Black Forest LLC and iP2 Entertainment, the 94 West Village will feature a mix of dynamic entertainment offerings, including a 50,000-sq.-ft. indoor water park and a “Back-Lot edutainment experience.” The project also includes a 275-room Marriot Hotel and convention center. All told, the 94 West Village offers about 100,000 square feet of entertainment space on 100 acres along I-94. Favorably positioned 45 minutes away from the Mall of America and immediately adjacent to the heavily trafficked Albertville Premium Outlets, the project presents an entertainment complement to a range of existing regional retail options.
While extending visits and keeping customers on site for longer periods of time is always the goal, the 94 West Village has the potential to keep visitors around for multiple days at a time. The hotel component makes it possible for a project that offers the purest expression of entertainment retail to function as a true stand-alone regional destination.
While the 94 West Village may be (thus far, anyway) an isolated example, the project’s promise illustrates just how significant the “retailtainment” trend has become – and hint at some of the places where it might be heading next.