print header

# 1 Commercial Real Estate Information Company

  • Find Properties 
  • Market Properties 
  • Analyze Properties 
Products
Commercial Real Estate News

Shopping Center Investors, Retailers Focus On Attracting More Consumer Spending in 2016

Landlords, Store Chains Increasingly Seek to Turn Physical Shopping Experience Into 'Treasure Hunt' With a Host of New Entertainment, Food and Convenience Options
December 29, 2015
With increasingly confident U.S. shoppers running up credit card debt again, retailers are hopeful that consumption of retail goods and services will continue to build in 2016.

Shopping center landlords in turn are hopeful demand for physical retail space remains strong, with demand expected to outpace an escalating but still modest level of new store construction and deliveries in 2016, according to JLL’s James Cook, Americas director of retail research, in the firm's development outlook for the coming year.

"We’ll continue to see slow and steady upticks in national occupancy, driven by the expansion of the U.S. economy along with the continued low levels of new supply, with construction of retail space still at historical lows," according to Cook.

But, it is no longer enough just for retailers to expect a good location will attract shoppers.

"Retailers and shopping centers will focus even more energy on the dual poles of desire of the American consumer for value on the one hand and entertainment on the other," Cook noted. "Stores with the strongest path to growth next year include those that can offer both."

And of course, food. Up to 30% of a mall's gross leasable area is now allocated to restaurants, market hall concepts and other food-related retail, said Anjee Solanki, national director of retail services for Colliers International.

In addition to low prices, shoppers want a "treasure hunt experience" that delivers surprises, fun and entertainment along with their discounts, Cook said.

No map can circumvent the reality that shoppers are no longer bringing their own treasure to the cash register in large enough quantities to keep certain bricks-and-mortar stores open. Several economists have forecasted, for instance, that Amazon will surpass Macy’s as the top U.S. retailer of apparel by 2017, Solanki noted.

While aggregate gross demand for physical store space will tick upward slightly in 2016 across most retail categories, stores closures will also rise -- likely to their highest level since the Great Recession -- as a result of mergers and consolidation, "right-sizing" to accommodate omnichannel retail and the demise of weaker chains.

The end result will be relatively flat net occupancy growth in 2016, predicts Garrick Brown, vice president, retail research of the Americas for Cushman & Wakefield.

The luxury and discount ends of the retail spectrum will again drive expansion, with grocery stores, restaurants and service related businesses with limited exposure to e-commerce such as fitness centers also continuing to see strong gains, Brown added.

"Luxury and upscale retail concepts will continue to expand, with nearly all of their growth occurring in urban settings, or at the nation’s elite shopping centers, mostly super regional malls and lifestyle centers," Brown said. "Off-price, discount and value-oriented retail will continue to drive most bricks-and-mortar growth, with the lion’s share focused in suburban power, regional and neighborhood/community centers."

The coming year will bring a renewed focus on redevelopment of existing centers, expansion when possible and repositioning of shopping center properties and introduction of new retailers and formats by owners to create buzz and ambiance to better serve their trade areas.

However, the size of shopping centers delivered next year will be smaller than in past years as most anchor tenants remain on the sidelines and many other retailers continue to down-size their space needs, said Grant Gary, president of brokerage services for The Woodmont Co., based in Fort Worth, TX.

"Restaurants, especially fast casual; grocery, fitness, fast fashion and discount apparel, will be the growth categories," said Gary.

While everyday necessity-based retail like grocers, drug and fuel and value-oriented retailers will continue to expand, there's a limit to the rental rates these retailers can and will pay, several retail brokers mentioned.

"We are hearing from many retailers that they want to expand but are having challenges finding locations that meet their parameters," said Brad Umansky, president of Progressive Real Estate Partners, a Rancho Cucamonga, CA-based boutique retail brokerage firm. "At the same time, some retailers are also being cautious about stepping up to pay the rents that are necessary to support redevelopment and new development. This dynamic is creating a balancing act within the marketplace."

Value and off-price retailers like T.J. Maxx and Ross Dress for Less have long mastered the 'treasure hunt' strategy by sprinkling in higher-end products with their rapidly changing merchandise mix in an effort to keep customers coming back. However, this retail sector is becoming increasingly crowded as department stores and apparel retailers have opened their own value concepts, with the successful Nordstrom Rack format now joined by numerous new players, including Saks OFF 5TH, Macy’s Backstage and the recently announced Find@Lord&Taylor.

Tim Blum, executive vice president of retail development for Chicago-based HSA Commercial Real Estate, noted that even as the economy has improved, many consumers have remained bargain hunters. "We’re now seeing that reflected in the tenant mix of retail centers across the country,” Blum said.

RBC Capital Markets estimates that the off-price apparel and footwear market alone reached almost $45 billion in revenue in 2015, up more than 40% from 2009. One of the newest off-price concepts, J. Crew Mercantile, chose the new HSA-developed Mayfair Collection in Wauwatosa, WI, for its second U.S. location.

At the opposite end of the shopping spectrum, luxury stores have consistently attracted shoppers. Next year, high-end retailers are expected to accelerate the shift into more "experiential" retail settings focused on giving visitors more reasons to linger and explore at malls and shopping centers by offering a wider array of restaurants and entertainment venues, said Faith Hope Consolo, chairman of Douglas Elliman Real Estate’s Retail Group.

To that end, mall owners such as Simon Property Group have created dedicated luxury "wings" within malls anchored by chains such as Neiman Marcus, and many owners and retailers have invested in sophisticated mobile apps to give tech-savvy shoppers a virtual treasure map to find everything from valet parking to deep discount on merchandise or services.

"The major trends for 2016 will continue to be luxury retail, entertainment and food, with convenience tying it all together," Consolo said. "Clearly, conventional retail has stepped up its game to compete with, and more importantly, complement online retail."

Investors Shop for Retail Values


Value will again be a focal point not only for shoppers seeking bargains, but increasingly for investors seeking returns amid the rapid rush of new capital pouring into retail real estate that should total $50 billion in investment sales transactions for 2015.

"In the coming year, we expect more of that investment money is going to find its way from malls and large shopping centers down to smaller strip and neighborhood centers," said CoStar Portfolio Strategy Senior Real Estate Economist Ryan McCullough, citing one of the company's predictions for 2016.

So far, sales of these smaller centers have been much lower as a percentage of total investment volume than in previous cycles, in part because new groups of investors and their financial backers have favored large, stabilized shopping centers with national credit retail tenants. Malls and power centers have accounted for about half of retail investment in recent years, a disproportionately high share compared to past periods.

"We think liquidity will swing back in favor of the smaller centers next year," McCullough said.

One reason is that yields, which were virtually identical between different shopping center types during the last real estate cycle, are now starting to spread. Investor enthusiasm for large centers has opened a gap between returns on large and small centers. Over the past six months, for example, capitalization rates for power centers in CoStar's national index of the largest markets have averaged 5.9%. Cap rates for neighborhood centers have averaged 7% and an even higher 7.5% for strip centers.

Another main reason is strengthening retail fundamentals. Small centers are now where the growth is at. Neighborhood and strip centers have logged 17 million square feet of absorption over the last four quarters, the highest in seven years and the most of any retail subtype. An improving housing market, with homes serving as a primary source of financing for the small business owners that make up the bulk of in-line tenancy, is helping improve the health of these smaller center, as is the declining number of closed grocery stores.

"While big centers still present a compelling value proposition in 2016, more smart money will be looking small," McCullough said.

The "going small" trend will result in an increasing number of large anchor and big box spaces being demised into smaller footprints to house multiple junior anchor uses, says Matthew Mousavi, senior managing director with Faris Lee Investments.

"Vacant outparcels and phases are being built out, and we are witnessing a change in the traditional mall to more of a lifestyle oriented focus, with many outparcels being leased to new restaurant and entertainment uses, a trend we expect to continue, driven in large part by the millennial demographic," Mousavi said.

GET IN TOUCH        Contact CoStar News Team:   News@CoStar.com

 Find us on 

Welcome To CoStar's
Industry-Focused,
Award-Winning News

Winner of three Journalism Awards from the National Association of Real Estate Editors (NAREE)

Award-Winning News