What will be the changing role of retail in the current economy? 

Six leaders in the area of U.S. commercial and retail real estate development discuss the retail market in the wake of the current recession— including what kinds of retail are likely to succeed, how cities and suburbs are faring, and how demographic shifts affect retail business— and offer insights into how retailers can adapt in the new economy, especially given the rise of online shopping.

Contributing their expertise are James Bieri, president and CEO of the Bieri Company in Detroit; Anthony Buono, executive managing director of CB Richard Ellis in San Diego; Brad Hutensky, president and principal of the Hutensky Group in Hartford, Connecticut, and past chair of ULI’s Commercial and Retail Development Council (Blue Flight); Carol Schillne, first vice president of CB Richard Ellis in Anaheim, California; Ellen Sinreich, president and CEO of Green Edge LLC in New York City and current chair of the Commercial and Retail Development Council (Gold Flight); and Peter Thomas, founding principal and CFO of Vestar in Phoenix and past chair of the Commercial and Retail Development Council (Green Flight).

What types of retail will thrive and what types will die?

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Ellen Sinreich: The retail that I see thriving is value-oriented retail. Retailers like Walmart and Costco are expanding. Luxury retailers have taken a big hit, like Saks Fifth Avenue, Neiman Marcus. Any retailer that hasn’t aggressively responded by controlling inventory, getting rid of underperforming stores, and really being focused on price and customer service has not fared as well in this downturn.

 

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Brad Hutensky: We’re coming back to a time when fundamentals matter a lot more than capital. That means quality tenants, quality locations, easy access, high visibility, good layouts. When there was a lot of cheap, available capital, some projects could be built because they got funded rather than because there was a true demand for that project and that location.

 

Nyren_5 Carol Schillne: The retailers that thrive are the ones that reinvent themselves. For example, CVS has expanded its health and beauty section with some higher-end products at a more acceptable price than in a department store. Target has stayed in the discount sector but differentiated itself by focusing on fashion. Toward the end of last year, you read a lot about luxury sales being off and lifestyle centers being dead, but there’s still evidence that that’s not all true. Tiffany’s profits are up, and there are still quite a few of those retailers expanding, particularly on a global basis. Retailers that are paying attention to their brand, understanding where their customers are going, and have sound financial statements are in a strong position.
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Anthony Buono: Retail brands will thrive or die depending on their relevancy to the consumer. Tiffany and CVS are two very different brands, one appealing to luxury and the other a necessity, but both have one thing in common—they are relevant to the consumer, in the United States and abroad. That relevancy is the most vital element to success.

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Peter Thomas: The ones that we see having challenges are media related—bookstores, video stores—because so much of that can be ordered online and delivered to your home easily, or downloaded to the Kindle and the iPad.

 

 

Nyren_8 James Bieri: Consumers are holding on to their dollars very closely, so off-price retailers will rule the day in the next few years. Most of the department stores are opening more offprice stores. Value-driven businesses like T.J. Maxx, Bed Bath & Beyond, Ross Dress for Less will continue to grow. Vertical retailers will continue to do well, like Coach, Tiffany’s, J. Crew—well-run businesses that manufacture most of their own goods and control the entire process. Fast fashion retailers, such as Forever 21, H&M, Aeropostale, will continue to do well, as will the well-run multi-brand retailers like the Buckle and Sephora.

What are cities doing to attract retail, and which strategies will be successful?

Thomas: I think you’ll continue to see public/private partnerships. Projects will not happen without them, especially during these difficult times. Successful strategies are tax increment financing and sales tax recycle to help with infrastructure; you will continue to see these.

Hutensky: There is a new bill before the U.S. House of Representatives, H.R. 4839, that is intended to fix the tax increment financing process. The current federal tax code exempts corporations from paying income taxes on economic development incentives they receive from state or local governments, but the language for the original bill passed in 1954 didn’t include LLCs [limited liability companies] and partnerships, so capital that these entities receive from incentives is taxable income. That’s a problem because LLCs and partnerships are the preferred entities for developers today.

Schillne: Cities have had a wakeup call with the amount of sales tax dollars that they have lost, particularly in California where the state has taken money out of city budgets. Now they can’t be antigrowth. They have to know their residents and their shopping habits. Cities have to be proactive in reaching out to consultants if they don’t have capabilities on staff. One of the most successful tools is gap analysis, which can help cities understand what types of goods and services their residents are buying and how much they are spending in surrounding communities. By quantifying the gap, cities can understand what retailers they can attract.

Bieri: Cities can hire consultants to help them understand the vagaries of retail. They can improve permitting procedures so it’s quicker for people to get into business. They can concentrate on reducing crime and improving safety and aesthetics. They can support mass transit, business improvement districts, and community benefit districts.

Do trends favor urban retail or suburban retail?

Thomas: I don’t see a big migration of retail going back to the urban areas. I still think that the suburbs can be successful and that there’s nothing like a good grocery-anchored shopping center with good shops. They’ll continue to do well.

Sinreich: Location-based retail that is accessible to mass transit is going to become more valuable than retail in outlying areas. I think that trend will accelerate, especially if oil prices go up and people start to pay a lot more for gas. People are going to want to live, work, play, and shop in easily accessible, proximate locations. If you have to drive far to get someplace, that location will suffer when gas prices increase as compared to stores that are convenient and easily accessible.

Schillne: Some suburbs are challenged because they are overretailed. The suburbs have to be more prudent in addressing the vacancies that they have. Some urban retail is going through a metamorphosis. Now people are spending more time downtown, especially for the dining experiences. Five years ago, some cities were antigrowth. They didn’t want any chain stores or drugstores, and now they have changed their tune. I hope what grows out of this is more of a partnership between the private sector and the public sector in building retail that is relevant.

Hutensky: Something that’s being talked about in Congress now is the Main Street Fairness Act, which would allow states to collect sales taxes from out-of-state remote sellers. If you are a suburb or a big city, you ought to be pretty focused on that, because why would you want the stores in your town to be at a disadvantage to online retailers in another state?

How are changing demographics affecting retail?

Thomas: The demographic that is affecting retail now and will continue to, as it always has, is people in the high-consumption years, whether it’s defined as 25 to 40 years of age or the 30-to-45 age group. The young adults entering that age have never lived without the internet. For them, the internet and the smartphone are just a way of life. The companies that use this technology, whether it’s YouTube or Twitter, to market their products will be the successful retailers.

Bieri: The baby boomers have pretty much shut their wallets, and that has hurt some businesses. One demographic that hasn’t changed is the teenagers. Because so many mothers are working, they drop their kids off at the mall. That’s become the downtown, the place to hang out. Stores focused on teenagers are continuing to do well.

Sinreich: As baby boomers get older, they are less concerned with accumulating material goods and more interested in experiences. Everybody is looking for ways to relax. Travel, spirituality, giving back—experiences that speak to those desires will be meaningful. So the retailers that provide an experience along with something to purchase will be rewarded. Also, the newly emerging generations care a lot more about sustainability, and they are going to spend their dollars in a sustainable way if they have that choice.

Hutensky: The far bigger question is how are the changes in the consumer affecting retail, because that’s having a profound effect. Homes are consumers’ greatest assets in most cases, and that value has gone down, as have the values of their retirement funds. They may have lost their job, or they’re less comfortable that they’re going to keep their source of income. All of those things are reducing consumer confidence and at the same time increasing the savings rate, and that has had a very negative on retail sales. That’s far more important than changing demographics.

Buono: The Hispanic and Asian influence in the United States creates all sorts of new retail opportunities. Many of those grocery concepts do more sales per square foot than traditional grocers. The other big themes are health, wellness, and beauty. There is a plethora of health and wellness concepts popping up all over the place. That’s appealing directly to the baby boomer, because they want to be healthier.

Will retailers have to fundamentally change their product line and approach to marketing to the consumer?

Bieri: They have already. Phillips–Van Heusen bought Tommy Hilfiger, which is going to continue as an exclusive supplier to Macy’s. We’re going to see large manufacturers absorb other small brands. Retailers are going to try other things to entice the consumer, whether it’s better credit terms, better delivery terms, gift with purchase, or in-store specials. Retailers should also follow the lead of Urban Outfitters, building product lines around a certain kind of consumer, with brands such as Anthropologie and Free People.

Sinreich: Stores will become more experiential places where people might go to touch and feel merchandise, but they won’t bring it home from there. Instead, they’ll order it online and have it delivered from a central distribution warehouse.

Do you see the percentage of retail that is online shopping continuing to increase?

Buono: I recently saw a chart developed by our firm’s researchers, CBRE Econometric Advisors, that compared the year-to-year growth in sales made through online shopping to the growth in sales made through real estate retail. Since the recession, the growth in online sales has bounced back much more strongly. This is the first recession since the internet became fully integrated into the retail world, so The baby boomers have pretty much shut their wallets, and that has hurt some businesses. now we are seeing how consumers behave in this environment. It’s not terrific news for real estate. But retail real estate is still generating 95 percent of the retail sales in the U.S.

Thomas: With media-related retail, we’ll see a moderate increase in online shopping, not a significant increase. It’s leveling off. Last year, there was a small increase in online shopping compared to prior years, whereas each year before that there were significant increases. People will price and learn about products online. They’ll find the best camera for their needs, for example, and then they will go out and shop to see if they can find it at a competitive price. But they will still buy it in the store because they want to touch it, feel it, use it.

Bieri: We’ll see more goods delivered online, with better delivery systems, but that will never replace the experience of shopping. Part of the appeal of shopping is the interaction with others, and as our society becomes more fragmented, shopping is a crucial way that people can interact with fellow human beings.

What does all this mean for the sticks and bricks?

Thomas: The sticks and bricks retail centers that are going to thrive are those that provide people with a complete experience. It hits all five senses—you can smell the bread baking, the coffee being made, there are waterfalls and nice landscaping and outdoor fireplaces and social areas where people can meet. There’s entertainment—whether it’s a movie theater or an outdoor performance—and good restaurants are key.

Bieri: The big issue is the continued consolidation of retail and the lack of new concepts. The banks aren’t lending and people’s homes have less value. That’s where a lot of entrepreneurs got capital to start up small businesses. For the near term, I don’t see a big increase in retail development. I see continued challenging vacancies on a lot of properties, and I don’t think that rents have stabilized yet. As leases started in the ten years proceeding 2008 come up for renewal, owners will have difficulty in getting those same rents without strong economic growth, because a retail space is worth what a retailer can produce in sales. Retailers will continue to downsize their store sizes, focusing on lean inventories and trying new concepts, as they have this past year with pop-up stores. The great properties will continue to demand high lease rates; the lesser properties will continue to lag in occupancy and return.

What else do you see in retail’s future?

Sinreich: Sustainability is going to be a differentiating factor among retailers, and those that are getting their act together are going to be rewarded. I’m in the market to buy new dining room chairs, and I went to one retailer and the salesperson looked at me like I had two heads when I asked about their carbon footprint. At another retailer, the salesperson could tell me about the company’s emphasis on sustainable harvesting of wood and low VOCs [volatile organic compounds]. That made a huge difference to me.

Thomas: There will be a point in the near future where there will be a supply-constrained market because of the lack of new construction for an extended period. Thriving retailers [today] continue to absorb viable space in this market. Retailers will have to explore unconventional locations or pay rents that justify new construction.

Hutensky: There is about $1.4 trillion of debt on bank balance sheets that will mature over the next three or four years, and probably half of that has a property value that is less than the face amount of the loan. That’s going to have a pretty profound effect on the investment market, on capital, on which properties are successful. The FDIC [Federal Deposit Insurance Corporation] recently ruled to make it easier for banks to extend loans and keep working with borrowers, but at some point banks will have to either recognize loans as losses or sell them. So the greatest impact will be on many of the medium-sized and smaller banks that cannot afford to recognize all those losses. Until this loss recognition occurs, loans and properties will not trade and credit will be tight.