Retail growth points to cities as housing starts fall
In the 1970s, the average age of Americans at their first marriages was 21 for women and 23 for men. Today those ages are 27 and 29, respectively. There’s a direct correlation, according to CoStar strategist Suzanne Mulvee, between those increasing numbers and the declining sales per square foot numbers at suburban malls.
“We’ve got more people doing things later in life. The trend has been pretty constant and the economic crisis will continue to drive it up,” says Mulvee, who consults for companies such as CBRE, JLL, and Cushman & Wakefield.
Average household incomes of Millennials haven’t risen on a comparative basis since 2000, while the lack of starter homes in the marketplace is forcing young adults to seek out small apartments in the city or shelter at home with mom and dad.
Housing starts fell by 3.7% in April, according to a report issued today by the Commerce Department, and building permits fell 1.8%. Single family home construction edged up 0.1% in the month to 894,000 units, but that’s a far cry from the nearly million-unit-a-month rate that had been established at the end of 2017.
Retailers, meanwhile, are faced with new strategic challenges with brick-and-mortar stores.
“It’s a totally different scenario than in the Eighties or Nineties when it was, ‘Let’s expand with more stores and be able to leverage ad dollars to build our brand,’” Mulvee said. “So many markets are oversaturated with retail and you have to take rifle shots to find markets for expansion.”
Urban markets are the first place retailers should look for productive, brand-enhancing locations, she advised.
“There’s an incredible imbalance between urban and suburban locations. Sales per square foot are up 23% in urban areas and down 12% in suburban areas,” Mulvee said.
Analysis: Grocery still puts the ‘grow’ in centers
Expansions were not on the menu for grocery stores in 2017, as openings dropped by 28.8%, according to JLL’s “2018 Grocery Tracker” report.
While this appears to be an abrupt drop-off for one of the hottest categories in retail, it’s rather unsurprising given the surge in openings that occurred in 2016.
For instance, square footage rose 16% in Texas in 2016 (detailed in chart below), so its 9% increase in 2017 counts as a decrease in growth.
Neither has the slowdown in openings decreased investors’ appetites for this asset class. In 2017, investment in grocery-anchored shopping centers increased 5.3% — one of the few retail property sectors to see growth in a year of low transaction volumes.
More than 38,000 supermarkets populate the United States. The ones that saw the greatest success participated in one or more of these trends:
Fresh foods at a slimmer price
Gluten free, vegan, paleo, and other diets are as popular as ever, but adherents are less willing to pay top dollar to maintain them. Grocers like Aldi, Lidl, and Grocery Outlet have been placing a greater emphasis on quality foods that don’t carry the typical high price tag. Aldi, which plans to invest $3.4 billion in store expansion over the next four years, recently launched a vegan line of foods called Earth Grown to tap into consumer’s renewed interest. The increased competition from these European giants and others is creating better options at reasonable prices for consumers.
Private labels stand out
Own brands allow grocery retailers to respond quickly to market changes while eliminating third-party costs. They help solve the age-old issue of razor-thin margins on center-store groceries and have the ability to build greater consumer loyalty. Albertsons’ private label, O Organics, recently eclipsed $1 billion in sales. The line experienced a 15% sales rise after adding 200 SKUs in 2017. Albertsons plans on adding as many as 500 more this year.
Let’s get “phygital”
Amazon’s acquisition of Whole Foods Market gives it the ability to test new ideas and concepts at greater frequency and speed, forcing innovation in an industry that has seen very little. Kroger introduced the digital shopping app Kroger Edge, opened its 1,000th ClickList curbside pickup operation, and saw digital sales more than double since the program’s inception.
Here’s what we envision for grocery in 2018:
These more nimbly fit into urban locations and in mixed-use projects that are pacing retail real estate growth. Some brands will continue expanding footprints, but traditional and legacy grocers may begin focusing on existing inventory and investing in improving the shopper experience.
This digital technology has been discussed at length in the media, but it’s tough to easily explain. For the grocery industry, blockchain has the capability of improving food safety, allowing products to be recalled more quickly, and improving inventory management. With blockchain’s ability to improve data management between stakeholders in the supply chain, the grocery industry is prime for integration.
Partnerships and consolidations
Supermarkets draw steady traffic — just the right environment for partnerships with other retail formats. Kroger’s proposed partnership with Ace Hardware could focus on innovation and technology that build upon digital networks, logistics, delivery, and customer engagement.
Expect more grocers to join the ranks of Kroger and Walmart in experimenting with checkout-free concepts. Walmart is expanding Scan & Go mobile checkout to 100 more stores, and Kroger’s Scan, Bag, Go will be in 400 stores in 2018. That said, only 5% of people are interested in shopping for groceries online, so no matter how far technology may go in determining the competitive set among supermarket chains, grocery stores will always require a strong physical presence.
Taylor Coyne researches retail and real estate trends for JLL. She recently co-authored a report on tech trends changing retail and the strategies behind renovating malls.
Trending topics: Pop-ups, wellness, shrinking stores and entrepreneurship
Smaller, faster, local — the retail projects of today and tomorrow are in many ways starting to resemble the small towns of yesteryear.
As shopping centers and downtowns seek to fill spaces left vacant by shuttered department stores and big boxes, they’re turning to new uses, new concepts and entrepreneurs to reinvent their experiences.
Jump to stories on these trending topics: pop-ups, wellness products and services, filling vacant mall space, shrinking stores and entrepreneurship.
Don’t refer to them as “temp tenants.” As retailers close or downsize permanent stores, shopping center owners are becoming increasingly amenable to pop-up shops, recognizing the opportunity to create excitement at their properties and perhaps incubate new long-term retailers.
“In all cases of specialty leasing, a more contemporary view is being understood of the worth of retail space, recognizing the inherent value of the advertising billboard it represents and how this consumer interface opportunity compares to brand-building space elsewhere, including online,” according to “Exploring New Leasing Models in an Omni-Channel World,” a report from the International Council of Shopping Centers.
Even well-established, high-end centers are devoting significant space to embryonic brands — both start-ups and new concepts from national and international brands, ICSC noted. Pop-up shops and short-term leases have found favor in malls, which now view them as complements to existing retailers and attractions for shoppers.
Lease terms, including length and co-tenancy, are becoming more flexible. The long-term lease of 10 years or more for a specialty shop is a memory, according to Arnaud Simeray, VP of strategic partnerships for Storefront, a New York-based online marketplace for short-term leasing with offices around the globe.
“Brands and landlords now want more flexibility,” Simeray said, adding that even three- to five-year leases require significant capital expenditures. Pop-ups tend to be less expensive to set up, and leases can be concluded more quickly. The short term also avoids co-tenancy concerns.
Pop-ups lower barriers to entry in major markets, Simeray said. Instead, brands such as Everlane are testing concepts and layouts with pop-ups, and now have permanent flagships in New York City and San Francisco, something the brand eschewed years ago. Established retailers are using pop-ups to continue to extend their reach without adding substantial space, he said.
“Nike has two flagships in New York. They have enough stores but are still focused on short-term experiences to drive traffic, announce collaborations, and showcase the brand in creative ways,” Simeray said.
Shopping center operators are also recognizing the importance of pop-ups. At Roosevelt Field in Garden City, N.Y., Simon has launched The [email protected] Field, a dedicated space for both entrepreneurial and established brands to pop up. Look for even more cooperation and acceptance of short-term leases in the future.
“Partnerships between retailers and landlords will increase in 2018,” CBRE notes in its 2018 Real Estate Market Outlook. Several factors are fueling the trend, according to CBRE: retailers demanding more flexibility in lease lengths and terms, landlords looking for ways to ensure the long-term viability of their tenants, and both sides seeking new ways to drive traffic and sales.
Driven by millennials’ focus on health and desire for socialization, the growing need for medical services by aging baby boomers, and a need to fill space, shopping centers in all categories — from malls to neighborhood projects — are adding wellness tenants. Boutique fitness operators, upscale equipment manufacturers like Peloton, spas and even medical offices are taking spaces previously reserved for more traditional tenants.
The number of gyms leased in shopping centers has doubled over the past five years, according to CoStar Group, and comprised 17% of the retail space leased by the most active tenants. While some large operators such as Lifetime Fitness are taking all or parts of former anchor spaces, small operators also are expanding. Boutique fitness concepts such as Club Pilates comprise nearly half of the overall health club market, according to an infographic from retail consultancy Traub.
Similarly, The Village at Westfield Topanga has a concentration of wellness tenants, including a UCLA Health clinic, YogaWorks, and a Skin Laundry facial clinic. And some developers are placing full medical facilities in centers, as the providers seek convenient locations with plenty of parking. PREIT has leased space to Main Line Health for an ambulatory care center at Exton (Pa.) Square Mall and an outpatient care center from Mercy Suburban Hospital at Plymouth Meeting (Pa.) Mall.
The former Macy’s at Auburn Mall in Worcester, Mass., is now occupied by Reliant Medical Group, which offers outpatient services. Vanderbilt University Medical Center occupies the entire second floor of One Hundred Oaks Mall in Nashville. The Runway at Playa Vista (Calif.) now has a Cedars-Sinai urgent care clinic.
Even department stores are following suit. Last summer, Saks Fifth Avenue opened a 16,000-sq.-ft. Wellery at its Fifth Avenue flagship in Manhattan, featuring fitness brands such as Peloton and Technogym, apparel from Bendable Body, a salt room, and even a medical spa.
It seems as though department store retailers are announcing more store closures every day. Macy’s has announced plans to shutter 11 stores this year, and J.C. Penney will close seven. Target is closing 12, but opening 35, according to Coresight Research. And look at this year’s extremes: Nordstrom announced it will close one store, while Sears/Kmart will close a total of 103 locations.
The result leaves landlords with well-located, vacant mall space, and they’re finding new uses for the large spaces, including traditional offices, co-working spaces, and perhaps supermarkets. Simon Property Group plans to replace a vacated J.C. Penney at King of Prussia with office, hotel, and other uses. Starwood Retail Partners replaced a long-closed Lord & Taylor at Fairlane Town Center in Dearborn, Mich., with office space for Ford Motor Co.
Less traditional office space is being considered as well. A former Sports Authority at Chicago’s Water Tower Place has been replaced by Cowork at the Mall, a 15,000-sq.-ft. office, showcase, and event space.
Another tried-and-true possibility is contact centers, which require high parking ratios, open floor plans, and easy access to transit and amenities, according to “Contact Center Outlook,” a 2018 report from JLL. “Vacant retail stores provide all three,” the report said.
The New York State Department of Taxation and Finance moved into a 70,000-sq.-ft. portion of a former Macy’s at Via Port Rotterdam in Schenectady, N.Y. TeleTech has leased 50,000 sq. ft. at Boulevard Mall in Las Vegas, while Bed Bath & Beyond has opened a 35,000-sq.-ft. contact center at a former Belk at West Oaks Mall in Ocoee, Fla.
At press time, Wegmans was set to open at Natick Mall in Natick, Mass., on April 29. And the supermarket already has locations at Montgomery Mall in Montgomery Township, Pa., and the open-air Hunt Valley Towne Centre in Cockeysville, Md. But it may not be a panacea. Three years after Kroger agreed to acquire a former Macy’s store at Kingsdale Shopping Center in Upper Arlington, Ohio, no progress has been made on construction, according to local reports.
As traditional retailers see an ever-growing percentage of sales coming from e-commerce, a number are looking to downsize their physical footprints to cut costs and enter tighter urban locations. However, some are doing so to test new concepts and focus on services that can’t be found online. From department stores to niche superstores, less is becoming more.
Macy’s has given space in a number of stores around the country to its Backstage outlet concept, offering discounted apparel, shoes, home goods, and more in a layout more similar to T.J. Maxx.
Nordstrom Local, the company’s newest concept, dispenses with merchandise altogether, instead focusing on the company’s reputation for service. With 3,000 sq. ft., the West Hollywood, Calif., prototype offers curbside click-and-collect, alterations and tailoring, Trunk Club for bespoke clothing personal stylists, a nail salon, and drinks.
“As the retail landscape continues to transform at an unprecedented pace, the one thing we know that remains constant is that customers continue to value great service, speed, and convenience,” said Shea Jensen, Nordstrom senior VP of customer experience who led the Nordstrom Local initiative. “We know there are more and more demands on a customer’s time and we wanted to offer our best services in a convenient location to meet their shopping needs. Finding new ways to engage with customers on their terms is more important to us now than ever.”
Even 5,000 sq. ft. may be too large. Sephora’s 2,000-sq.-ft. Sephora Studio on Boston’s Newbury Street focuses on personalized services by the retailer’s beauty advisors, supplemented by digital tools. Experts offer consultations and provide makeovers and mini-facials, while shoppers can order items not available in the studio for same-day pickup or home delivery. A curated selection of items is available for testing and purchase.
Others are pursuing a more traditional downsizing route: Kohl’s has announced plans to sublease space at five to 10 stores to grocer Aldi as part of its rightsizing efforts. Kohl’s has already downsized 300 stores, leading to comp sales similar to that of its average full-sized store, reported at the company’s fourth quarter conference call.
“We’re clearly seeing the benefits of amplifying the role and relevancy of our stores while focusing on improving their productivity in an omnichannel world,” Mansell said. “We believe in the power of our bricks-and-mortar stores in that future world.”
In the spirit of “every national tenant once had just one store,” shopping center owners and managers are looking local to diversify their tenant mixes and birth the chains of tomorrow.
While most regional and super-regional malls have long had retail incubation programs to find new local tenants, there is a growing focus on locating and supporting entrepreneurs. Food halls and dining are one example, with many landlords touting “chef-driven” restaurants.
Starwood Retail Partners is in the midst of its second “Battle of The Pop-Up” contest, now expanded through much of its portfolio. Local entrepreneurs apply for four months of free rent, utilities and fixturing at their malls. The first contest, held this past year at three centers, saw four winners gifted with space for the holiday selling season. Three are now negotiating for permanent spaces.
And the idea isn’t limited to malls. Kimco Realty’s “Kimco Entrepreneurs Year Start” program offers qualified entrepreneurs and first-time business owners one year of free rent and operational and financial support. The program even includes pre-built restaurant spaces. Tenants have included fitness centers, gourmet food shops and pet grooming salons.