Five Trends All Retail Owners Should Be Talking About In 2018
At Bisnow's Big Philly Retail event, real estate and retail executives had surprising revelations about the nature of retail's decline, the shape of its future and its relationship to the country's mass shooter epidemic.
1. Retail's decline is not a death, but a market correction
For what seems like years now, much has been made of the precipitous decline of retail in America. And while some argue about just how bad it has gotten, how much time there is before there is a meaningful turnaround and so forth, relatively few have interrogated just what retail's peak really was.
Over the past 40 years, the country's population has increased by 40%. Over that same time, the number of retail stores has increased by 180%, giving the U.S. by far the most stores per capita of any country on the planet.
"The U.S. is over-retailed," Metro Commercial principal Michael Gorman said. “That’s going to work itself out, as bad retail goes away, but there are still good retailers out there, and they want good real estate.”
Big-box stores and shopping centers in poor locations have been struggling and dying off for years, but well-located and prestigious centers like King of Prussia Mall are doing better than ever. For the overall picture to look less gloomy, certain changes need to occur.
“[Retailers] are expecting rents to drop, and they’re just waiting,” Gorman said.
For core areas like Philly's Walnut Street, landlords have found difficulty filling retail spaces because, in some cases, they feel the need to keep rents up with the levels that justified their investment. But the cool retailers that landlords covet often lack the balance sheet necessary to pay top dollar.
“It’s so competitive for food that the rents are being jacked up, so retail tenants have to get creative," honeygrow CEO Justin Rosenberg said. “So the question is, do we start going into a holding pattern or continue to grow?”
Below the top of the market, finding the best tenant is still paramount, but comes with a wildly different challenge.
“We're at rock bottom right now, and in order to recover, the bad retailers have to die," BET Investments President Michael Markman said. "They can’t hang on because the CEOs want a good legacy. They have to sell their locations so they can be repurposed, and that’s when you’ll see retail come back.”
A good tenant mix is crucial for the overall health of a shopping center, even if one store, like the Acme in the Granite Run Mall before BET Investments began redeveloping it into the Promenade at Granite Run, can remain successful.
“While the Granite Run Mall died — and it died, since we bought a $150M property for $24M, retailers went into surrounding markets — it was a mall that had trouble being filled, but while that happened, it still had $70M of revenue coming from it,” Markman said.
2. Mass shooters could very easily become a retail problem
Mass shootings have become a depressing constant in the American news cycle, to the point where the commercial real estate industry has had to reckon with what it can do to prepare. But little of that attention has been paid in the retail sector.
“Malls and shopping centers have been relatively immune to this epidemic so far — although last year, a guy in a Macy’s in Washington killed five people," Gorman said. "But we’ve been relatively immune.”
As the crowd grew visibly uncomfortable, Gorman continued his impassioned plea for awareness and action.
“Over the last year and a half, we’ve had three of the top five deadliest shootings in American history. And our government, at least on a federal level, is doing absolutely nothing … no gun control, no rollback of anything. Obviously I want this to end for the same reasons we all do.
“As a human I want this to end because it’s senseless violence, but from a retail perspective, once this happens in a mall once, twice, three times, customers will stop coming to the mall. It’s inevitable — malls are very vulnerable, they’re porous, they’re places where this could happen. And we have a conspiracy of inaction amongst our leadership.
"The reason I bring this up is that if people have another reason not to go to malls as compelling as, ‘You might get shot’ — once that starts happening, it will affect all of our businesses."
Gorman concluded by noting that most in attendance were likely members of the International Council of Shopping Centers, which donates hundreds of thousands of dollars to political campaigns of candidates likely to support its agenda.
“Reach out to your ICSC representative and regional presidents and ask them to care about the safety of your customers,” Gorman said.
3. Food is king, even in shopping centers
As brick-and-mortar retailers have struggled to cope with the rise of e-commerce, food has consistently proven itself to be immune from the disruption. Whether it is the freshness and convenience of grocery stores or the irreplaceable experience of a restaurant, food uses have taken up an outsized portion of retail space in recent years.
“There’s not a lot of ground-up spec retail happening, but we’re finding that, for new construction, it used to be 50-50 food and retail, and it’s now 70-30 for food versus retail,” Martin Architectural Group principal Drew Romanic said.
Much has been made of the transformative early success of the King of Prussia Town Center. Its draw has justified the construction of new apartment buildings nearby and even piqued preliminary interest in new office, all because it is a walkable retail village that is drawing customers. For all of the King of Prussia mall's success, it remains dominated by car traffic, as its massive parking structures can attest.
“When you drive or walk around [KoP Town Center], all the locations are food," Rosenberg said. "And it’s the same thing on Madison Avenue [in New York]. Food is hot, and it’s theoretically not being replaced by Amazon anytime soon.”
"Experiential retail" has become almost a cliché for how often it is used by real estate executives when defining what thrives in today's environment, but nowhere is it more concretely proven than in restaurants. Retailers that look to create experiences often start from a restaurant perspective: What is the difference between getting this product at home and going out to get it?
While every product type has its own answer — some have none — the certainty that restaurants provide has replaced previous attitudes toward their volatility when compared with traditional stores.
"In 2001, there were four sidewalk cafés in Philly's central business district," PREIT CEO Joe Coradino said. "Now, there are over 400, and the city is teeming with millennials."
4. Retail's growing dependence on multifamily
Location is more important than ever when it comes to retail, but for many developers, it is not enough to simply buy into an already established submarket. In order to create real value, many are turning to creating the location by building apartments, like Cedar Realty Trust.
“What we are trying to do is test the limits of our swim lane," Cedar Realty Trust President and CEO Bruce Schanzer said. "If you do what everyone else does, you’re average, and if you want to be above average, you have to be a little different.”
In Philadelphia, and plenty of other cities, apartment buildings with ground-floor retail are all but ubiquitous. Increasingly, retail real estate companies like Cedar, PREIT and Regency Centers are looking the other direction by putting apartments beside or on top of shopping centers.
“A mall is very horizontal, and they offer great locations," Coradino said, in reference to the 256 apartments PREIT is building adjacent to its Exton Square mall. "That’s a great opportunity to go vertical.”
PREIT's Fashion District Philadelphia will also have apartments on top of it, to go with the office and multifamily portions of the neighboring East Market development. But with its retail background, PREIT is looking to bring on a partner, just like Regency Centers is doing with several of its retail redevelopments.
“I’m sure we could do residential well, but we look for partners who can do it better,” Regency Regional Officer John Hricko said.
The challenge, especially in suburban developments, is in creating the retail mix to entice apartment tenants. It is not enough to rely on the surrounding neighborhood, like urban properties can.
“Your retail is so important, because you need your apartment tenants to want to live above it,” Markman said, noting the high majority of baby boomers among his tenants and the likelihood of millennials soon joining them in the suburbs. “So you have to think about where boomers want to shop, and you think about how millennials want to go to places that they can Instagram. So millennials want to go out and advertise how cool what they’re doing is.”
5. Apps? Apps!
Amazon has constantly challenged retailers to think about how to integrate technology into their businesses. The obvious, and perhaps toughest, element of that is in developing a supply chain for e-commerce that can hope to support the brick-and-mortar side. But that has its limitations.
"Amazon makes up 40% of all e-commerce sales, and they don’t make money off it," Markman said. "So it’s not a sustainable model. That means brick-and-mortar is necessary.”
Technology has been a vehicle for improving the retail experience for years. Beyond simply adorning a shop with LED screens to look modern, companies like IKEA have looked for tech partnerships to connect in more ways to modern consumers, like an Uber for putting together a bed frame.
“Over the last few weeks, we acquired TaskRabbit to make sure that we are responding to our customers’ desire to approach assembling our furniture in a different way, and to be a part of the gig economy,” IKEA Property President Angele Robinson-Gaylord said.
Far from rendering brick-and-mortar obsolete, such a use of technology could potentially increase IKEA's competitiveness by adding another human, experiential element to its process, thereby differentiating itself from the faceless internet.
Even restaurants have begun using apps to increase convenience and keep their consumers from getting their lunch at a nearby store that offers similar products.
"If the future of retail is majority food and fitness, and let’s say more food, then you need to stand out and execute and innovate in how you get your product out there," Rosenberg said. "And for that, you need apps and websites.”
Fast-casual restaurants have begun experimenting with brick-and-mortar locations that are only kitchens and delivery bases, minimizing the amount of space they need to rent and the amount of money they need to sink into creating an environment. All the sales from such locations would be online, like with honeygrow's temporary use of its own headquarters commissary as a miniature distribution center.
"An app can even push sales in less desirable locations," Rosenberg said.