Colorado Real Estate Journal -
The retail industry has been experiencing a rapid rate of change brought about by new technology and changes in consumer behavior. The rise of a value conscious consumer has benefitted several groups of big-box or large-format retailers that are common to power centers all across the country. Value focused delivery of retail goods has proven to be a success for several power center merchandise categories; however, this same value-focus combined with the increasing ease of ordering goods online also has had an adverse effect for some merchandise categories. To better understand how these recent changes have impacted large-format retail, we have examined comparable store sales growth for several national retailers. The results are presented below based on merchandise categories. We also have examined changes in total store counts and average store sizing where information is available. Several trends are evident that will directly impact leasing activity and cash flow risk for power center retail assets. Fashion and soft goods.Discount and off-price fashion retailers generally reported strong first-quarter comparable store sales growth, continuing the high growth rates observed over the past three years. TJX Cos. (TJ Maxx, Home Goods, Marshalls) announced plans for 125 new locations this year. The average TJX store size has declined only slightly since 2008 and varies by concept, ranging from 25,000 square feet to 31,000 sf. Ross and Nordstrom Rack also exhibit similar high growth rates and increasing total store counts. The average size of a Ross is generally unchanged at approximately 30,000 sf. Kohl’s and Belk also compete within this segment, but in a larger format with additional departments. Kohl’s and Belk both exhibit lower growth rates for comparable-store sales when compared with the previous group of specialists. Belk has announced plans to replace two existing stores this year while Kohl’s plans to open 19 new stores. Shoes. DSW exhibited strong first-quarter comparable store sales growth, consistent with the past three years. The retailer announced plans to open 35 to 40 new stores this year. DSW has maintained an average store area of approximately 22,000 sf. Off Broadway Shoes is a privately owned company that competes with DSW. Off Broadway opened several new locations in recent years and now has a total of 60 locations. Pet supplies. PetSmart reported strong first-quarter comparable-store sales growth, consistent with results from the past three years. The average store size has decreased only slightly over this period to approximately 22,000 sf. The total store count increased by 45 stores in fiscal 2011. Petco also competes within this segment; however, Petco, which accounts for a much smaller market share, has been privately owned since 2006. Building materials. Home Depot showed a strong increase in first-quarter comparable-store sales growth, which will help an ongoing recovery toward prerecession sales levels. Lowe’s has followed a similar pattern at lower growth rates. Home Depot reported its total U.S. store count declined by two stores in the fiscal 2011 year, while Lowe’s reported an 11 store decline. Average store sizes have remained constant for both retailers. Office supplies. The office supply category is very competitive due to oversaturation and increasing use of online ordering. Staples is the leader within the category; however, we note flat comparable-store sales growth and a net reduction in the total store count in the first quarter of this year. OfficeMax and Office Depot both show declining comparable-store sales and an ongoing reduction in total store counts. Staples has announced a significant size reduction for the Dover store format, which is being reduced from 24,000 sf to 15,000 sf in size. Office Depot indicated that a new store size target of 5,000 sf to 15,000 sf, compared with an existing average of more than 20,000 sf. Consumer electronics. Circuit City and Ultimate Electronics are gone. Best Buy reported negative first-quarter growth for comparable-store sales and it is currently focused on survival and cost-cutting measures. The company recently announced plans to close 50 large-format stores and an analysis of recently constructed stores shows a trend toward the 30,000-sf and 36,000-sf prototypes. Best Buy also is attempting to sublease space within larger stores across the country to achieve a smaller footprint. What does it all mean? Clearly there are merchandise categories that are thriving as a result of changing consumer behavior and some that are exhibiting signs of sharp decline. For real estate investors, consideration of tenant composition has become an increasingly important factor. Comparable sales data and market participant interviews indicate that investors will pay a premium for category-dominant stores in growing merchandise categories and, conversely, will adjust for additional risk where the opposite may be true. Retail centers with a significant fashion component garner more attention from investors than retail centers lacking this category. The other key trend we have observed is that retailers that are losing market share to online competition are rapidly moving to a smaller footprint. This trend clearly impacts ongoing leasing and likely will impact design requirements for new developments. This trend also could manifest itself in the form of lower effective rents for older centers that have a higher ratio of retail stores greater than 40,000 sf in size. An ideal big-box size in the 15,000-sf to 40,000-sf range is becoming evident. This trend also could result in increased capital requirements for owners as prior-era spaces are reconfigured.