CREJ - Retail Properties Quarterly - February 2018
Retail sales have been declining for several years nationwide, particularly in department stores. A look at U.S. department store performance from 1993-2017 highlights sales decelerating since 2000. A closer look shows that the downward trend has accelerated in recent years, since the Great Recession began mid-2008. There are many possible explanations for declining retail sales, which were discussed thoroughly at The Counselors of Real Estate Annual Convention, held in Montreal in September. Some attendees pointed to the overabundance of per-capita retail square footage in the U.S, which is at least twice that of Europe and Canada. Others blamed the country’s aging population, noting that spending in households with heads aged 65 or older is just half that of those headed by people 40 to 54 years of age. Most agreed that online sales have a significant impact. Back in 1993, online retail purchases accounted for just 1 percent of the total, whereas in 2017 online transactions peaked at 9 percent overall. Department stores historically have been the slowest in creating a viable online presence, which may explain why their store sales have been so negatively impacted by online retail. Some forward-looking stores have bucked this trend and changed their business models to create a dynamic and user-friendly online presence; the most prominent examples include retail giants Walmart and Nordstrom. Department stores – traditional anchors for regional malls – have been closing at historic rates, with over 300 announced in 2017, mainly from three major retail chains (Macy’s, J.C. Penney Co. and Sears). With only approximately 1,100 regional malls in the country – and that number is rapidly declining – a significant portion of malls are affected. There is a historic and ongoing trend of shuttered malls being transformed into mixed-use communities to create a work-live-play atmosphere with office, retail, hospitality and residential components. In Colorado, we have seen this evolution of older malls. Villa Italia, the megamall built in 1966 in Lakewood, was demolished in 2001 to make way for the lifestyle community Bel Mar. Southglenn Mall in Centennial, which originally opened in 1974, was closed in 2006 and succeeded by The Streets at SouthGlenn, another mixed-use lifestyle community. Declining retail sales have affected more than just department stores. Inline shops, predominantly in the electronics and apparel sectors, have felt pressure as well, with approximately 6,000 store closings announced as of third-quarter 2017. This thinning has led to high vacancies at many shopping centers. While bankruptcy declarations often precede closure announcements, many smaller inline retailers (whether located in regional malls or strip centers) that did not invest in a significant online presence are impacted negatively by missed opportunities with customers. Examples include Office Depot, American Eagle Outfitters, Bed Bath & Beyond, GameStop and Finish Line, all of which announced store closings last year. Inline retailers can be particularly vulnerable to online competition, as barriers to entry are much less strenuous for online retailers than brick-and-mortar establishments. Look at the successes of Fabletics, Allbird, Athleta, Birchbox and others for inspiration. Online retailers can focus their operating costs on advertising and building a brand name, deciding later if having a physical presence in a community is the appropriate next step. Conversely, a brick-and-mortar presence requires significant upfront investment in retail space and personnel, the highest budget line items along with merchandise. Since declining retail sales is not a new topic, much conversation throughout the retail industry, particularly in commercial real estate circles, has focused on how to manage this decline, with ample discussion around troubled mall redevelopment and tenant remerchandising. Retail operators know that proactively reconfiguring their tenant mixes is critical to maintaining a healthy asset and are looking to retail consultants to help creatively reposition their properties. Vacant department stores and big boxes often are reborn as another department store (as much as 20 percent of the time) and family clothing uses (15 percent). Entertainment uses also are dominant with full-service restaurants (14 percent), amusement and recreation (10 percent), and theaters (8 percent) rounding out the top five reuses. In the Denver market, our vacant boxes, whether grocery (Albertsons, Safeway and Walmart neighborhood markets) or other uses (Sports Authority, Gander Mountain), are appealing most to fitness (Chuze, VASA, Crunch Fitness, Planet Fitness) and entertainment uses (Main Event, Bowlero and some theaters). Denver’s retail market continued to expand in 2017 – with absorption and rental rates trending up and vacancies trending down; however, the market remains bifurcated. Because of limited new supply, there is high demand for second-generation space in well-located, Class A retail centers, which are full and thriving. Despite competition for premium space, Denver has attracted international retailers (IKEA, Uniqlo and H&M) as well as national ones (Whole Foods’ new flagship store in the Union Station neighborhood, Trader Joe’s, Cabela’s and Alamo Drafthouse). Conversely, aging Class B and C centers with poor demographics, often with vacant anchor space, continue to be challenged. Despite the many disruptions and concerns about the future of retail, 2018 is forecast to be a year of evolution and opportunity for retailers nimble enough to develop viable, new business models with emphasis on customer experience, technology tools and rightsizing brick-and-mortar stores. Raymond Cirz presented at the 2017 Counselors of Real Estate Annual Convention in Montreal in September.