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Are Landlords Panicked about Retail? Not Really.

Around and around we go with headlines touting the death of retail one day and its inevitable resurgence the next. In those stories, we hear about how successful retailers are evolving to meet changing consumer behavior, but what about landlords? We took a moment to sit down with some of our retail leasing experts, who have represented landlords across every major market in the U.S., to get their take on the current retail environment through the eyes of their landlord clients. Spoiler alert - they depict a much more encouraging image of the retail real estate climate and some landlords are seeing big benefits from retail’s reinvention.

Digging into the Headlines

What is causing some retailers to decline is a lack of adaptation, causing consumers to pass them over for more relevant brands. Declining retailers are making up the majority of the headlines, but that doesn’t paint an accurate picture of what is happening for the bulk of retailers. In fact, according to an article in Forbes last month, there will be more than 4,000 net new store openings in 2017. This includes some brands that have been exclusively online, such as UNTUCkit, Warby Parker, Bonobos, and Fabletics, who are currently signing deals for physical stores across the nation. And as we all know, Amazon, the main disruptor in e-commerce, has made a big push into physical retail with their purchase of Whole Foods, proving that omni-channel is the recipe for success. It’s not bricks or clicks. The most successful retailers will be those who enhance consumers’ digital and physical experiences by creating relevant solutions to their ever-changing needs. Those physical stores will undoubtedly be designed to help customers with things that can’t be done online, such as offer services, build community relationships, and solve problems with previous transactions.

As consumers’ preferences have shifted to more experiential retail, they are seeking out those brands that have embraced the change. As it turns out, as long as they are flexible and working to attract those brands, landlords are actually faring pretty well, and retail real estate is just as relevant today as it ever has been.

Plans for 2017 Store Count Growth

Plans for 2017 Store Count Growth

 

Centers that are Thriving as Retail is Evolving

Many landlords are currently finding themselves in the right place at the right time to benefit from consumer shifts to more experiential retail. “What we are seeing is that our landlord clients who have in-town, urban, mixed-use properties are pretty confident,” said Lily Heimburger, vice president in SRS’ Atlanta office. “Those centers are naturally more experiential and they are adjusting to the shopping and dining preferences of consumers.”

In Southern California, Terrison Quinn, senior vice president and market leader in SRS’ Newport Beach office, says well-located community centers are performing well. “Many landlords will tell you that their portfolio has never been healthier and that the ‘doom and gloom’ headlines are exaggerated,” said Quinn. “Outside of community centers, we are working on a number of power and lifestyle centers that are seeing some tenant failures here and there, but we are also seeing new tenants emerge, some of which have historically been online-only retailers, such as Amazon.”

“We are experiencing record high rents in quality centers,” said Martin Smith, senior vice president and market leader in SRS’ Birmingham office. “We are as active as we have ever been, and in the urban core and in better centers at major intersections, landlords are actually hoping that some tenants can give back space due to the high level of demand.”

“There is a lot of development and we just don’t feel that there is any reason to panic,” said Adrienne Crawford, vice president in the Atlanta office. “Even our suburban spaces are busy and we have leases out for many properties. In our lower income markets we have properties that are nearly 100% leased.”

Centers that are Facing Challenges

On the flipside, centers with a struggling department store or big box retailer are going to have some challenges to overcome. “There just aren’t many retailers looking for large box opportunities right now, so we’re having to adapt and repurpose those spaces,” said Smith.

Power centers outside of the major metropolitan reach may be feeling the squeeze to make bigger changes as well.  “Many of those power centers have been operating with a model that is 10 years old. Suddenly, that model doesn’t really work any longer,” said Crawford. It’s no longer enough to build out a space, secure a tenant and collect rent.

“There is a real flight to quality for retailers,” said Smith. “They want to move to the good spaces and find the best real estate, so they are taking the opportunity to upgrade as space is becoming available.”

“Regional malls with a number of tired department stores have to start budgeting larger sums of money to re-purpose these boxes. The good news is that there will always be a demand for well-located retail real estate, even if that means converting some of that real estate to a use other than retail,” said Quinn.

How Landlords are Adjusting and Driving Traffic to the Center

Being on top of the trends in retail and ready to change with those fluctuations is key. “To stay relevant, you have to move fast and stay ahead of the curve,” said Heimburger. “If you are flexible, and open to different concepts, you are going to fare better.” Those different types of concepts might include cryotherapy centers, or new dining experiences that the area does not currently have. “Poke (raw fish salad that is popular in Hawaiian cuisine) concepts are huge right now, and we recently signed a lease for a ramen restaurant in one of our clients’ centers. Lines were wrapped around the corner when the restaurant opened.”

Michael Wheat, managing director of leasing and marketing for Cypress Equities, our sister company, says that they are always looking to add more reasons for people to visit the centers at a higher frequency. Grocers, fitness, and medical uses all drive traffic to the center as consumers make trips to those retailers more than once a week. “We are emphasizing the experience and have implemented an experiential retail division. These individuals are focused on securing things we can bring to the center that will drive people there daily. This would include an emphasis on dining and entertainment, but sometimes means a hybrid concept like a container park.”

Restaurant Industry Sales (in billions of current dollars)

Restaurant Industry Sales (in billions of current dollars)

The current love affair with dining out, and the abundance of emerging restaurant concepts are giving landlords encouragement. A recent survey by AlixPartners, a global business advisory firm, found that respondents reported the highest per meal spending average in the survey’s nine-year history. The National Restaurant Association has reported steady growth, with 2017 projected to hit nearly $800 billion in restaurant industry sales. With more money devoted to dining, the fashion and soft goods categories are facing competition for consumers’ dollars. There are always exceptions to the rule, though, as consumers gravitate towards off-price retailers. “Discounters such as TJ Maxx and Ross are showing strong year-over-year growth,” said Smith.

Getting Creative with Leases and Reimagining Spaces

Flexibility also extends to what landlords can offer within a lease, as tenants gain more control of what the deal will look like. “It’s mostly about trying out different terms, being flexible and creative, and offering different things to the tenants,” said Crawford.

Centers that now have a vacant big box have some opportunities to consider. “Breaking down the box into smaller spaces can accommodate more tenants,” said Smith.

“Boxes are good candidates for entertainment, like theaters and bowling alleys,” said Wheat. “They also could be developed into office space. We’re being proactive with those big box spaces, recently purchasing two boxes from a department store retailer with plans to redevelop them for entertainment concepts. We also have negotiated leases with boxes, cutting down their period in hopes to reclaim that space for different concepts sooner.”

With Everyone on the Same Page, Success is More Likely

A good rule of thumb in any leasing environment is for all parties to set expectations from the start. “We work to set expectations early on so we can be sure we’re all on the same page in regards to what the capabilities of a center are,” said Heimburger. “When we can work with the landlords and developers in the planning phase, it allows us to advise on space planning that will attract the right type of retailers before we start courting tenants.”

Attracting those key tenants requires retailer insight and local connections, an area in which SRS excels. “My landlords can rest assured that they are putting their properties’ future success in the hands of a company that has global retailer relationships and their property will be in front of the highest number of prospects possible,” said Smith. “We know what’s going on because of extensive networks in all major markets. We can reach those expanding retailers faster because our people are in the markets where they are having those early growth conversations.”

A Retail Renaissance

With the rate of change that retail is experiencing, a better term for what is happening right now might be a “retail renaissance.” We haven’t seen a disruption of this magnitude to the biggest players in retail in a very long time, and it’s touching all aspects of the industry. With a vastly different landscape forming, it is an exciting, challenging, and opportunistic time to work creatively with our clients to help them achieve their goals.

Ready to make your center a magnet for traffic-driving retailers and a model for long-term success? Learn more about our landlord representation services by visiting SRSRE.COM/LandlordRep or contact steve.dawkins@srsre.com.

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