Exclusive: As Leasing Demand Picks Up, the Next Generation of Retail Tenants Takes Hold
By Matthew K. Harding
With demand from national, local and franchise companies across a broad range of categories picking up markedly in the Northeast, this is an opportune time to take a look at the movers and shakers that are defining the next generation of retail tenancy. And interestingly, the most successful concepts are embracing a new reality that leverages technology and creative approaches for reaching consumers.
Categories to watch
Grocers, affordable fitness chains, off-price retailers and fast-casual restaurants are among the most active categories looking to establish or expand their footprints in our market area. Specifically:
• Although there are a limited number of supermarket chains adding locations, ShopRite, Stop & Shop, and Whole Foods are active within the marketplace. Additionally, an assortment of smaller stores like Save-A-Lot, Trader Joe’s and Fresh Market continue to expand here.
• Gym concepts like Blink and Retro Fitness and others continue to expand rapidly here.
• Off-price retailers tend to have a very wide demographic reach, making them extremely popular with a broad range of consumers; in turn, chains such as Dollar Tree, Five Below, T.J. Maxx, dd's Discounts and HomeGoods continue to gain traction.
• Fast-casual eateries like Chipotle Mexican Grill and Noodles & Company are expanding as well. Starbucks is growing by adding free-standing stores with drive-thrus.
Yet while movement is picking up, the retail sector continues to feel the pressure of consolidations and bankruptcies. Chapter 11 announcements by RadioShack, Wet Seal and Cache were among the most prominent in early 2015.
In the case of RadioShack, it can be argued that the electronics category is one that continues to feel the impact of e-commerce’s rise. Yet some retailers in other “easily poachable” areas, like office supplies, have adapted to the new environment for bricks-and-mortar by right-sizing their stores with smaller footprints and fewer in-store SKUs. For example, we have seen Staples work to adjust its store size to the 15,000-sq.-ft. range – through new leases, relocations and downsizing of existing stores.
Embrace change to succeed
Undoubtedly, we are witnessing a paradigm shift in the ways retailers are doing business. The conversation has moved on from whether e-commerce is impacting bricks-and-mortar stores to how they are evolving to prosper in an increasingly online shopping-centric world. Those that embrace this change are finding ways to leverage resulting opportunities; those that do not are finding themselves left behind.
In a recent Levin Retail Sentiment Survey, we asked participants – store managers within our leasing and management portfolio – whether their company has adapted its business model in response to the growth of e-commerce. We were somewhat surprised, yet encouraged, when 44.0% of survey participants indicated that their organizations have changed to accommodate e-commerce in some way. These adaptations included increased collaboration between in-store and online operations (54.4%), added in-store pickup and return options (41.3%), altered in-store inventory (34.8%) and altered store prototypes (23.9%).
Based on how the percentages add up, it looks like retailers are making multiple changes to stay competitive. We like that the “increased collaboration” response garnered the highest percentage because it indicates that the relationship between online and in-store is becoming more symbiotic. The concept of omnichannel retailing, distinguished by cross-platform merchandising, is no longer the wave of the future but has become the state of the industry. And just as traditional brick-and-mortar stores are integrating with their online counterparts, those retailers born within the online marketplace – such as Warby Parker, Birchbox and even Amazon – are adding an offline presence with physical stores.
Additionally, retailers increasingly are emphasizing experience as a distinguishing characteristic of shopping in-store vs. online. Retailers and owners of retail properties continue to add out-of-home excitement to the shopping trip in all kinds of creative ways. Stores now are social gathering places, centers for knowledge, learning more information, a place for fun, or relaxation. Further, more retailers are buying into the store-within-a store-model (think Starbucks within Target or Tommy Bahama’s in-store restaurant and bar at its 5th Avenue Manhattan location), serving up coffee, food, cocktails and more along with their traditional merchandise.
Impact on real estate
In the face of strengthening demand, vacancies are declining and rents are trending up at quality properties. Spaces left by retailers who did not survive the downturn and resulting shakeout are backfilling quickly with tenants in the aforementioned active categories as well as a diverse range of service providers.
In turn, much of the "good" retail space has been absorbed – and what remains is commanding higher pricing. Well-located shopping centers with strong tenant mixes and curb appeal continue to draw retailers, consumers and investors.
At the same time, demand is also strengthening for properties in secondary positions (either because of location or other fundamentals). Landlords are becoming more creative in their approach to leasing these shopping centers, and are considering a wide variety of potential uses for the space. Additionally, we are beginning to witness stepped-up investment in B product as Class A demand outpaces supply, and owners work to distinguish their centers as attractive alternatives.
Entering the heart of 2015, we expect much of the current positive trending to continue. While we likely will hear about additional bankruptcies and consolidations within categories – facts of life for our industry – those retailers that are thriving and expanding will continue to do so. We look forward with great interest to seeing the creative ways they work to leverage opportunities within today’s evolving retail landscape.
Matthew K. Harding is president of Levin Management, North Plainfield, N.J. Follow Levin Management on Facebook and Twitter.