REAL ESTATE

Yaromir Steiner on the shrinking middle class

BY Yaromir Steiner

Despite a decade of sustained economic growth, retail turbulence persists. Consolidation, closures, and realignments. The emergence of new retail concepts. The clash between brick-and-mortar, online, and mobile retail channels. All this has contributed to a feeling of uncertainty across the industry.

Media and analysts attribute this turmoil to the impact of online and mobile sales. Experts suggest brick-and-mortar retail is overbuilt by 20%. While conventional wisdom suggests a connection between these issues, I believe it’s an incomplete explanation for what’s really happening. More stores are opening than closing. Research from IHL Group shows that “North American retailers will open 12,663 stores and close 8,828 stores in 2018, for a net increase of 3,835 store locations.” Discussing excess retail space requires important context.

Most excess space is in traditional malls, a struggling sector comprising 15% of the market. In other words, this isn’t industry-wide oversupply, it’s supply-and-demand imbalance. Power centers and grocery-anchored centers are in higher demand than ever. Asymmetry is an issue, but it’s not a crisis. Imbalance also offers a silver lining: a better understanding of the power of well-executed mixed-use projects. A carefully curated retail mix enhances corollary uses.

What’s behind so-called shifting consumer demands? The biggest issue is a dramatic decrease in available discretionary income, which can be directly attributed to a shrinking middle class. The trend is alarming.

Between 1945 and 1980, the bottom 90% of Americans claimed 70% of all declared income. Beginning in the 1980s, changing economic policies had altered income distribution. By 2015, that bottom 90% claimed around 50% of all income—a 20-percentage-point reduction! That decrease largely came from those who traditionally spent a large portion of their paychecks on retail. Meanwhile, the top 10 % have boosted declared income by more than 65%, but their increased retail spending is comparatively minimal.

Against that backdrop, the rise of discount retailers makes perfect sense. Like an ocean liner, industry momentum takes time to change course. The ‘80s and ‘90s saw continued construction, even while middle-class demand waned. With 10-year leases standard, it’s easy to see how outdated brick-and-mortar concepts kept going forward until marketplace gravity exerted its inevitable tug.

Middle class shrinkage is harder on traditional retailers than it is on online competitors. Digital accounts for just a fractional percentage of all retail sales, and the impact of digital dollars is more complicated than is often portrayed. Online-only brands rarely compete directly with brick-and-mortar, and some competitive losses are offset by brick-and-mortar brands enhancing their own online and mobile platforms. With traditional brick-and-mortar brands getting better at price-matching, streamlined delivery, and convenient pickup, true omnichannel retail is moving from theory to practice with remarkable speed.

The current of innovation flows both ways. Growing numbers of acclaimed online-only successes now recognize that they need brick-and-mortar locations to maximize their potential. Lifestyle brand Marine Layer, shoe startup Allbirds, and mattress retailer Casper are recent examples. Formerly online-only brands creatively leverage brick-and-mortar locations, with “showroom” or fitting room concepts—using physical locations to connect with new markets and audiences.

As this “channel-neutral” approach spreads, it’s become clear that Amazon isn’t killing traditional retail. It’s prompting it to evolve. Online and in-line aren’t in competition. Indeed, they are increasingly interwoven.

Excluding mail-order and brick-and-mortar online numbers, true online-only sales account for around 4% of overall retail sales. While that may double in the next decade, the impact should be negligible.

Retail developers should proactively adapt to new demographic and industry realities. New consumer-facing technologies make it easier to shop brick-and-mortar. Target and Walmart have been reorganizing themselves as essentially in-store distribution centers. Last year, most of Target’s online holiday sales shipped from stores, not warehouses. It’ll be interesting to see how that store-network model evolves alongside the very different Amazon warehouse model.

Retailers are identifying their function as efficient merchandise distributors and/or suppliers of unique/customized experiences. This emerging self-awareness inspires new concepts and forces retail developers to adjust their thinking about the environments they create. From fluidity and uncertainty comes inspiration and innovation. The future is bright and exciting—for those who embrace change.

Yaromir Steiner is the founder and CEO of Columbus, Ohio-based Steiner + Associates.

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Cushman acquires food and beverage consultancy

BY Al Urbanski

Recognizing the increasing role that food, beverage, and entertainment tenants play in retail centers, Cushman & Wakefield has acquired a top consulting firm in that arena.

The services of Colicchio Consulting are now available via Cushman’s Retail Services platform. The firm, founded by Phil Colicchio (chef Tom’s brother) and Trip Schneck, specializes in food hall development, events, and restaurant curation. Its projects include New York’s Made Hotel and Gotham Food Hall West (above).

The pair will now use Cushman as a base from which to guide clients in the strategic evaluation and selection, and engagement of food and entertainments options for real estate projects.

“Today’s consumers clearly favor curated, locals-only experiences, and … Phil and Trip’s unique credentials underscore our unwavering commitment to meet that growing demand,” said Cushman senior managing director Katie Mahon.

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Stephen Lebovitz on redevelopment

BY Stephen Lebovitz

The recent wave of anchor store closures has everyone buzzing about what mall landlords will do with all that empty space. Many are fearful of the challenges that a dark anchor store may present. The truth is, landlords have been preparing for these store closures long before they made headlines.

In late 2013, we proactively purchased the Sears locations at two of our premier properties for redevelopment. We wanted to do something truly transformative — bring in a mix of dining, entertainment and new-to-market retail that would underscore each property’s dominant position in its market and set it apart from the competition.

At CoolSprings Galleria, a 1.1-million-sq.-ft. super-regional center located in a booming and affluent area of Nashville, we welcomed Music-City firsts like American Girl and King’s Bowling and Entertainment — a unique restaurant, bar and entertainment operator — as well as dining experiences such as The Cheesecake Factory, Connors Steak and Seafood, and Kona Grill. Following the opening, the additional traffic drawn by the new attractions resulted in an 18% increase in sales per sq. ft. at the entire center, and that growth has only continued.

In 2012, prior to the redevelopment, sales per sq. ft. at the property were $459. At the end of 2017, they were $526 and have continued to increase in 2018. All of this is proof positive that the benefits of investing in redevelopments reach far beyond the four walls of a former anchor space.

In 2017 we purchased five Sears, two Sears Auto Centers, and three Macy’s stores for redevelopment. This proactive approach gives us control of the space while we evaluate plans to convert the underperforming stores into new retail, dining, entertainment, or other uses. To date, we have completed a redevelopment at one former Macy’s with construction underway at another former Macy’s, one of the former Sears and both Auto Centers. We expect to start construction on two additional former Sears in 2019.

CBL is not alone in its proactive approach to recapturing underperforming anchor locations for redevelopment. Since 2017, PREIT has replaced five Sears locations and has reached an agreement to recapture a sixth. Similarly, Washington Prime Group proactively gained control of eight Sears locations in 2018.

While recent bankruptcy activity has increased the pace of store closures and accelerated our redevelopment schedule, the real estate that is becoming available is well-located with excellent visibility, access and infrastructure. As a result, we have been able to attract high-quality replacement users and new concepts. We are working with a number of non-traditional uses through partnerships. Other developers, be it multi-family, storage or hotel, recognize the value of the real estate we have and are coming to us to take advantage of it.

What’s more, we’ve seen great cooperation and partnership by municipalities. Brookfield Square in Milwaukee is a fine example. We purchased the Sears store there as part of the 2017 sale-leaseback transaction. The City of Brookfield invested in the project by purchasing land for a conference center and hotel, which broke ground in October. This will be a significant draw to the area and will complement the broader redevelopment, which includes a luxury dine-in movie theater and WhirlyBall.

Similar to the success experienced at the project at CoolSprings Galleria, we’ve made tremendous progress with our anchor redevelopment program over the past three years. On average these projects take 18-36 months to complete and require an average investment of $8-10 million dollars. It’s a reasonable price to pay when you consider the average project return on cost is between 7-10 percent and this doesn’t even give any credit for the positive impact on the rest of the property.

It is understandable that the natural reaction is to worry when these stories break, and no landlord likes vacancies. Yet we see these vacancies as extraordinary opportunities to reinvest in, strengthen and transform our core assets.

Stephen Lebovitz is president and CEO of CBL Properties, based in Chattanooga, Tenn.

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