RETAIL SECTOR IS EVOLVING

TIPS FROM RETAIL EXPERTS

Retailers have to adapt, downsize and move to competitive business conditions

STORY
HIGHLIGHTS

Triple net lease investments are in high demand.

Why would stores like Walmart try to find space directly in the heart of major cities? Why would Cabelas move into a mall? How is the Internet constantly changing the retail landscape? The fact is that the retail sector in commercial real estate is evolving, and there are several factors driving that evolution in both the sales and leasing areas.

The big box chains desire to be in urban markets.

LEASING
Malls seek to fill space with non-traditional tenants. Smart retailers achieve success by combining traditional stores with e-commerce. Three trends drive the current leasing market, and each is examined in detail below.

MAXIMUM EFFICIENCIES IN SMALL SPACES

One of the main trends in leased retail space in 2013 is companies seeking smaller spaces so they can remain nimble and keep capital available in order to respond to a rapidly changing market. Depending on the industry, of course, its an adapt, downsize and move response to increasingly competitive business conditions, according to Rich Robins, Vice President - Retail Specialist Coldwell Banker Commercial NRT, Salt Lake City, Utah. Another driver for smaller leased retail space is the continued necessity for big box chains like Walmart to penetrate areas where space is limited and/or at a premium. Theyre pursuing a multichannel strategy to stock products bought at their bricks-and-mortar stores as well as quickly deliver online-ordered products.

Change in Retail Rental Rates

$19.25

RATES

$19.15 $19.05 $18.95 2009

Source: Reis

2010

2011

2012

2013*

YEAR

THE DIRT ON LAND SALES: Tips from Land Experts

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RETAIL SECTOR IS EVOLVING: Tips from Retail Experts

 Big box stores want to capture move-back-in trends in urban markets.

There are at least two factors prompting this strategy. One, there is a lack of growth and opportunity in their traditional customer base in suburban markets. Two, the big box stores want to capture business from moveback-in trends. That is, they see affluent young (and boomer) professionals moving back into urban areas due to the fundamental transformation of city economies from industry to services. This is also due to the professionals need for the diversity only an urban environment can provide. In essence, the big box firms are going where the money is. In terms of the urban environment, Walmart and Target are downsizing their stores from 100,000+ SF to 10,000 to 40,000 SF, depending on the location. More specifically, Walmarts Neighborhood Market stores have an average size of 38,000 while its smallest concept -Walmart Express - has store sizes averaging around 15,000 feet. Proof of the commitment to this downsizing strategy lies in the statement from Walmart President and CEO Bill Simons. He said the giant retailer plans to open more than 500 of the smaller stores within the next 18 months. Thats up from the current 290.1 The company continues to test and refine its Neighborhood Market and Walmart Express stores. As might be expected, a typical Neighborhood Market offers a smaller range of items than the larger stores with a focus on groceries and pharmacies. A typical Walmart Express gives customers convenient access for stock-up and fill-in shopping trips. A key part of Walmarts strategy is to stay flexible as much as possible and customize the Neighborhood and Express stores to local needs and competition. Further evidence of desire to exploit the move-back-in trend is shown in Target Corporations pursuit of a similar strategy to that of Walmarts. Walgreen and CVS Caremark are also focusing more on urban environments.

NON-TRADITIONAL TENANTS FILL VOID IN SPACE

Recently, there have some big-name retailers (Fashion Bug, Blockbuster, Food Lion, Sears) that have closed many stores, especially in malls. In turn, the affected malls are looking to non-traditional firms to fill this space. These non-traditionals include companies like outdoor recreation firms (BassPro and Cabelas), furniture stores, boutiques, specialty foods, wine bars and restaurants, etc. Historically, these businesses have owned their buildings, for the most part. The great benefit of a mall presence is that these facilities can give them freeway exposure, thus making it easier for customers to find their stores.

RETAIL SECTOR IS EVOLVING: Tips from Retail Experts

This creates the potential for a larger customer base and greater sales. Plus, they get great locations with low overhead. Add in the bonus of wandering mall customers, and its a perfect fit. In short, mall operators have found it necessary to get creative and seek new tenants in order to maintain and increase profitability while fending off incursions from online selling.

NEW WAY OF MERCHANDISING

 Retail is a tough balancing act.

For retailers these days, its a tough balancing act. Many of them have to downsize their spaces to cut costs, but, at the same time, maintain the proper sales volume. If they downsize too drastically, they limit sales and decrease profitability. A decline in independent retailers has been created due to the continued squeeze on their bottom lines. Because the big box stores and other large chains are taking a big bite out of the mom and pop market, the most successful retailers are the ones combining e-commerce with an in-store presence. Theyve realized that a stand-alone format is no longer viable because shoppers are now armed with apps that allow them to discover quickly whats on sale, what coupons are available, and what new products can be bought. Savvy retailers know that customers who can touch the merchandise in a store are likely to buy more online. This means they need to seek smaller spaces while shifting a heavier emphasis to marketing and promotion. In terms of the impact of the Internet on leasing, shoppers are better informed than ever, which creates pressure on retail margins. Todays customers are demanding two things from retailers - convenience and ease of use. This has caused businesses to increasingly to turn to non-traditional marketing methods like: Increased social media presence, including blogs and YouTube videos. Text messaging, highlighting deals and promotional codes. Barcode scanning by customer smart phones. Location-based social networking Mobile Apps imitating shopping experience. Separate Mobile Apps for discounts (Target Cartwheel) Retailers have focused heavily on social networking sites because they can control their own destiny and retain the ability to react quickly to any issues that may occur and more readily reward loyal customers.

N O N -T R A D I T I O N A L LY

MARKETING

Social media presence, including blogs and videos Text Messaging Barcode Scanning Location-based Social Networking Mobile Apps imitating Shopping Experience Separate Mobile Apps for Discounts

RETAIL SECTOR IS EVOLVING: Tips from Retail Experts

EXPANSION AND CONTRACTION

In 2013 and beyond, these Retail categories offer potential in terms of sales and leasing because of expansion. Apparel (off-price) Automotive service Dollar stores Health and fitness (including spa concepts) Niche grocery/small grocery ranging from discount to luxury and ethnic to organic. Also, according to Dave Labush in the northeast, the pharmacy chains (Walgreen, CVS, etc.) are blurring traditional trade lines by expanding grocery sections, thus taking a bite out of the business of independent retailers. Restaurants (fast food/fast casual lead the way) Pet supplies Pharmacy Sporting goods The trend is toward contraction in the following retail categories:2 Bookstores Do-it-yourself home stores Large grocery stores especially unionized smaller or regional chains Office supplies (going more e-commerce) Shipping/postal stores Stationary/gift shops Some casual dining concepts the old and stale lose out to new and fresh Video stores Stagnant middle class growth is causing the increasing bifurcation in the retail market. Mid-price point stores will see limited growth while luxury and discount retailers will continue to expand In summary, downsizing and the desire to penetrate different market environments, and the need to adjust to e-commerce are driving the retail lease market in many U.S. areas. On the upside overall, for the first time in five years, asking rents have risen across all property types in the U.S. Growth was strongest in the western markets such as Dallas, Denver, Phoenix, and San Diego. However, that growth was slow and isnt likely to increase greatly in the foreseeable future. Nationwide, net retail absorption dropped 17 million SF from the year before.

 Mid-price point stores will see limited growth while luxury and discount retailers will continue to expand

RETAIL SECTOR IS EVOLVING: Tips from Retail Experts

SALES
Sales of retail space depend greatly on location. According to T.C. Macker, Executive Vice President with Coldwell Banker Commercial WESTMAC in Los Angeles, the drivers behind considerable buyer demand include: Historically low interest rates and costs Low inventory of available properties Firm cap rates Investors seeking an alternative to skittish financial markets; theyre looking for safer, sounder investments and see West Coast properties as a great opportunity for their money This has created a situation where sales are on fire in areas like Los Angeles. In fact, Mr. Macker said, theres a very large unfilled buyer demand for bricks and mortar, and that this demand is not just limited to retail. Triple net lease investments are in high demand as well. Retail investment sales are also increasing in a big way in markets like Atlanta, Dallas, Denver, and Minneapolis. In the northeast (New Jersey), however, retail inventory is low, according to Dave Labush of David Labush of Coldwell Banker Commercial NRT in Westfield, NJ. Mr. Labush has seen a decline in independent retailers due to the squeeze on the bottom line by larger retail firms. Nationwide, demand for space has increased at a better rate than expected after the lingering impact of the Great Recession created a glut of space. This means the market is trending toward a balance of supply and demand. However, lack of new construction means that speculative retail is the most difficult kind of property to get financing for. This, of course, is a positive for existing properties and their landlords, creating higher rents and occupancies in prime locations and centers. In summary, low inventory, cheap debt, firm cap rates and investor demand are driving sales of retail properties on the West Coast (in particular) and nationwide (in general).

Theres a very large unfilled buyer demand for bricks and mortar,

RETAIL SECTOR IS EVOLVING: Tips from Retail Experts

FRED SCHMIDT

Fred Schmidt is President and COO of Coldwell Banker Commercial Affiliates. He is a veteran commercial real estate professional with more than 30 years of experience in the industry. He is a member of CoreNet Global, the leading professional association for the corporate real estate industry as well as IAMC and ICSC.

T.C. MACKER

T.C. Macker is an Executive Vice President with Coldwell Banker Commercial WESTMAC, specializing in investment sales and leasing. During his 16-year tenure in the commercial real estate industry, Mr. Macker is recognized as one of the premiere real estate advisors to private and institutional clients. Mr. Macker was ranked #4 out of approximately 2,800 agents Worldwide for 2012. tcmacker1@cbcworldwide.com

RICH ROBINS

For the past 42 years, Rich Robins has been involved in the leasing, development, and management of all types of shopping centers, office buildings, and properties throughout the West. Rich acquired his Certified Shopping Center Manager (CSM) designation from the ICSC in 1975. Robins expansive background and real estate involvement has enabled him to work with many national and regional tenants. rrobins@cbcworldwide.com

DAVID LABUSH

David Labush is a Sales Associate with Coldwell Banker Commercial NRT that is a highly successful veteran of the commercial real estate field. His belief is that real estate, first and foremost, is about service. Hes a licensed real estate agent and a member of the National Association of Realtors, New Jersey Association of Realtors, and the Garden State Multiple Listing Service Greater Union County Association of Realtors. dlabush@cbcworldwide.com

The Coldwell Banker Commercial organization is a worldwide leader in the commercial real estate industry, with a collaborative network of independently owned and operated affiliates. The Coldwell Banker Commercial organization comprises over 200 companies and more than 3,000 professionals throughout the United States as well as internationally. To find out more, go to www.cbcworldwide.com or phone 800-222-2162.

Source: http://www.thestreet.com/story/12034290/1/wal-mart-plans-500-us-neighborhood-market-stores.html Source: U.S. National Retail Report 2013, ChainLinks Retail Advisors

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