There are certainly corners of the real estate sector experiencing hard times with some reports proclaiming the demise of traditional shopping under the onslaught of e-commerce. This misses the complex and nuanced dynamics between virtual and built shopping environments. Yes, there have been store closings and ‘For Rent’ signs have cropped up at many retail properties. The sector’s fundamentals show some signs of late-cycle wear. A survey conducted by NREI and Marcus & Millichap found that 21 percent of investors believe properties will decline in value during the next cycle, the most of any asset category. Retail likewise led all categories in the number of investors expecting the sector’s values to remain unchanged, at 48 percent.
Retail fundamentals are surprisingly strong overall, however. Marcus & Millichap reports store openings, some 4,000 in all, outnumbering closings in 2017. A closer look at the sector suggests spaces are being vacated largely by formats that have failed to adapt to the new shopping environment or to attract customers through a robust combination of web and brick-and-mortar experience. Traditional retailers capturing the right mix are finding success. It is telling that seven of the National Retail Federation’s top 10 e-retailers for 2017 were traditional US-based brick-and-mortar stores: Home Depot, Best Buy and Nordstrom among them.
In the face of these challenges, brick-and-mortar retail property owners are proving a resourceful bunch latching onto new concepts in shopping and filling empty spaces with more flexible leases to attract temporary users, and digital technologies, often blamed for the brick-and-mortar shakeout, can be a powerful tool to maintain asset stability.
Fresh formats
The need for greater flexibility in leasing comes at a time of inventive new retail formats. Consider the rise of pop-up stores. By some estimates, these have grown into a $10 billion moneymaker. They are increasingly recognized as a means to extend a retailer’s brand, try out a new product line or address a seasonal demand. It is a game any retailer, old or newbie, can play: Nordstrom, Scott Paper, Kendrick Lamar and Kanye West are testing the waters. Pop-ups can settle in for a weekend or a year, giving landlords a route to signing a tenant for a conventional traditional five- or 10-year lease. This trend, along with other alternative applications such as ad displays on shuttered storefronts, helps shore up retail asset revenue. Versatility is another hallmark. The kiosk, their best-known format, is equally well suited to indoor malls and open-air settings. Pop-ups can also take up residence in traditional storefront locations, especially for longer-term stays.
Pop-ups are also much more than just a Band-Aid on struggling properties. They are often an event, featured on retailers’ websites and making appearances on YouTube. Digital channels lend immediacy and relevance both to the retailer and the retail asset. They have also given rise to new intermediaries, such as website PopUp Republic, geared to putting temporary tenant and landlord together. Such sites can even help landlords develop a pop-up concept to fill vacated space with formats tailored to the local market.
Leasing meets technology
Technology offers owners and retailers new tools to help them respond to rapid change. Leasing is one area where software applications provide unprecedented efficiency that can shorten time to market, helping retailers and landlords stay competitive. As retail evolves, so too will these open-ended systems. Traditional leases can take months to complete, but today’s new applications can expedite the process for both short- and long-term deals and can provide a holistic view of prospects and customers while giving potential tenants a virtual tour of available space. Landlords can access all customer relationship management data from within Outlook, saving time and boosting efficiency.
Software-based modules offer applications designed to streamline the leasing process for temporary and long-term retail tenants and operators. Yardi is developing new retail-focused products enabling the user to enter a new tenant prospect in less than 30 seconds. Potential tenants can view space options in Gantt chart form, along with availabilities and choices for daily, weekly or monthly leases. The transaction provides landlord and tenant with a signed contract in less than two minutes.
Owners are also turning to multi-use strategies to shore up assets in the face of widespread store closings. Multifamily and office uses are drawing heightened interest, particularly in malls where redefining use is a longstanding challenge. For some time, landlords have been ramping up the role of entertainment, particularly by expanding dining options and movie theaters, to help transform conventional shopping into an experiential retail strategy.
“Digital technologies… can be a powerful tool to maintain asset stability”
Brian Sutherland
New answers
The traditional retail options one might expect in a mall or shopping center are giving way to new-age concepts, breathing fresh life into otherwise tired assets. Forward-thinking retailers are at the forefront of these efforts. For example, customers in the market for an electric car can visit a Tesla Gallery for a virtual look at the automaker’s latest offerings; the gallery concept is an alternative to conventional dealerships, since Tesla faces widespread restrictions on selling its products directly to consumers. Shoppers can find Tesla Galleries in locations as diverse as Natick Mall in Massachusetts, Fashion Mall at Keystone, Indianapolis, and Village at Corte Madera in California, where it lives in close proximity to mall staples like Banana Republic and J Crew.
Fresh approaches provide answers to the shakeout among conventional retailers, especially department stores. Several large retail properties are part of the national competition for Amazon’s second North American headquarters. Valley View Mall, a now-demolished property in Dallas, for example, is the subject of a planned $4 billion office, hotel and entertainment project, and a 20-acre section of the larger plan, dubbed Amazon Park, is a proposed site for the new Amazon headquarters.
Retailers that adapt to changing shopping patterns and demographics stand a good chance of survival in this time of upheaval, and provide more options for worried landlords. In 2015, Kroger acquired a former Macy’s location at Kingsdale Shopping Center in Upper Arlington, Ohio, although specific plans to open a grocery store at the site are still pending. Whole Foods unveiled plans to launch its millennial-targeted 365 concept at College Mall in Bloomington, Indiana, and in another win for Natick Mall, Wegmans is taking over a store once occupied by JCPenney.
Another possibility for vacant store space is a merger of grocery and fulfillment concepts. Pick-up centers are a trail already blazed by Kroger and Walmart. Now Amazon is getting in on the act with Amazon Lockers; kiosks where customers can pick up and return nearly any item found on the Amazon website, including the Whole Foods inventory, as well as standard Amazon fare.
A more dangerous tactic is to retain long-term tenants with the lure of lower rent options. Here, public landlords run up against Wall Street, which wants to know when lease spreads are increasing. Although the space is filled or rented to a long-term tenant, the economics of a new deal do not necessarily match prior performance. A retail asset with a 95 percent occupancy rate can mask poor monetization.
Retail is in the midst of historic change, and one repercussion is a shakeout leaving shuttered storefronts in its wake. To lay this upheaval exclusively at the doorstep of e-commerce ignores the new dynamics of a market redefining itself. As some traditional brands downsize or disappear, new concepts are emerging to backfill space and meet customer demand.
This article was sponsored by Yardi Elevate. It appeared in the Investing in Retail supplement to the July 2018 edition of PERE magazine.
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