Alexander Babbage » “Centers of the Retail Universe” – SCT Magazine November 2014

“Centers of the Retail Universe” – SCT Magazine November 2014

The vast majority of sales are transacted in centers, a report notes, as e-tailers scramble to open stores.

By: Joel Groover

Cover-story-mallWhat’s a landlord to think when headlines like “Are Malls Over?” and “Stores Confront World with Less Foot Traffic” are cropping up on magazine covers, television news reports and in newspaper business sections? Edward Sonshine, CEO of Toronto-based RioCan REIT chalks it up to ignorance and the media’s need for dramatic storytelling.“Nobody over 35 can afford to work as a reporter anymore,” he said at an SCTLive panel discussion in Toronto, in September. “Our story is boring, and the growth of something new is more exciting. It annoys me, but I ignore it, as do investors; the numbers speak for themselves.” Sonshine’s firm owns and manages Canada’s largest portfolio of shopping centers, at 340 properties across 81 million square feet, including 13 million square feet in the U.S. and 16 properties under development.Consumers are ignoring the negative hype as well, visiting malls and other kinds of shopping centers in droves, though how they shop has changed significantly since the birth of the traditional shopping center in the 1950s. Shopping centers are performing well even as they undergo a profound evolution to keep pace with consumer habits, according to a new report by ICSC Research.

“The shopping center industry is vibrant and healthy,” writes Michael P. Kercheval, ICSC president and CEO, in the introduction to Shopping Centers: America’s First and Foremost Marketplace. “We believe [the industry] is poised for unprecedented success going forward — not in spite of e-commerce, but because of it.”

The 18-page report, available at ICSC.org, blends statistical data with big-picture analysis by a host of observers. And the big picture, the authors note, is quite encouraging. With new supply in America’s well-developed markets growing at its slowest pace in some 40 years last year, the relative lack of shopping center construction is restoring the supply-demand balance and helping to shore up occupancy rates. New tenants are likely to lease even more space in the U.S. over these next two years as retailers open an estimated 77,000 stores — a five-year high. Other positive trends include rising demand driven by strong population growth; the opportunity to tailor tenant mix to meet the needs of increasingly important demographic groups such as Hispanics and Millennials; and successful efforts of mall and shopping center landlords to broaden the appeal of their properties, in part through more-creative tenant mix. Growing interest in brick-and-mortar space among formerly online-only retailers such as Athleta, Bonobos, Boston Proper and Warby Parker is also fueling growth. Shoppers at Bonobos’ 10 brick-and-mortar stores spend about twice as much as its online customers, CEO Andy Dunn says. And even Amazon.com reportedly is taking over a building in New York City where customers can pick up orders placed online.

Though the report’s focus is the U.S., the rest of the world can draw sanguine conclusions from it as well. After all, if the shopping center industry is thriving in the most developed market in the world, it follows that things are likely to be equally if not more vibrant in the less developed markets. The physical store remains the primary source of merchandise everywhere as developers all over the world work overtime erecting shopping centers.

Given the ubiquitous story line that e-commerce is killing brick-and-mortar retail, assertions that online sales could actually help the industry might seem counterintuitive. But precisely because online retail offers such an easy and convenient way to buy commoditized goods, its popularity has forced developers to think harder about how to create high-energy experiences at their properties, says Mark Toro, the partner who heads the Atlanta office of Cincinnati-based North American Properties. The long-term effect of this pressure from online retailers is a paradigm shift that will strengthen the industry, he says. “Instead of providing the most convenient, quickest way to shop,” he said, “we’re providing guests with a place to be, which extends dwell times.”

Regional centers will continue to focus on the experiential dimensions of their properties by adding restaurants, entertainment and outdoor spaces and the like, says the ICSC report. Neighborhood centers, by contrast, will keep leveraging convenience. Indeed, convenience-oriented shopping centers still dominate the industry. As of January 2014, they accounted for roughly 100,000, or 88 percent, of the shopping center properties in the U.S., the report notes. “Those centers provide local consumer needs — grocery, dry cleaners, barbers, community banking, shipping services and thousands of other services of which the vast majority do not compete with non-store channels,” says the report.

Meanwhile, the trend toward integrating retail with nonretail uses will continue to evolve. North American Properties’ Avalon mixed-use project is an example. The first phase of this $600 million property opened in the Atlanta suburb of Alpharetta last month. The 500,000-square-foot retail component brims with bars and restaurants, fashion boutiques, service providers and fitness and lifestyle tenants, plus a Whole Foods market. North American Properties has encouraged retailers at Avalon to make maximum use of the property’s public spaces, Toro says: Lululemon is free to conduct yoga classes outdoors on the plaza, and sporting-goods retailer Orvis may teach fly-fishing in the Avalon fountain. “Today your customer can buy stuff sitting in traffic or putting on her makeup,” Toro said. “But humans are social animals. If we want to have an experience, we have to go to a public space and commune. That is what people are craving, because they are so isolated in their online worlds.”

The ICSC report seeks to place the challenge posed by those online worlds in perspective. The report’s authors cite several sources to paint the Internet as an ally of brick-and-mortar retailers, not an enemy to be feared. On average, they note, omni-channel customers tend to shop three times more frequently and to spend three-and-a-half times more than do single-channel shoppers. “The Internet and e-commerce are providing consumers and retailers with brand-new tools that enhance the shopping experience and ultimately drive sales in stores,” Kercheval writes. “The retailers that survive and thrive will be those who are best able to seamlessly integrate the physical and virtual channels.”

And yet the brick-and-mortar store still enjoys certain advantages over the screen: In-store conversion rates continue to be four times higher than online-only conversion rates, the authors note: “Consumers still prefer in-store shopping. Ninety-four percent of total retail spending happens within the four walls of a physical store.” (Last year online retail sales came to some $263 billion — only 6 percent of total retail sales, according to the U.S. Commerce Department; in-store sales accounted for all the rest — some $4.3 trillion in total.) But why is in-store spending still so popular if shopping online is supposed to be so much easier and more efficient? A survey conducted by ICSC and research firm Alexander Babbage in April sought to find out. Asked to cite some of the most important factors influencing their decisions to shop in stores rather than buying merchandise online, nearly three-quarters of the respondents said they wanted to touch or try on the merchandise before buying; nearly 60 percent said it was easier to find items inside a physical store, and an equal percentage said they like being able to combine shopping with other errands. About 40 percent described shopping with friends and family as a fun activity. The report cites other studies emphasizing the symbiotic benefits of those omni-channel strategies that retailers and developers alike are pursuing now.

Of course, none of this is to suggest that all shopping centers are bound to succeed moving forward. “The world is littered with dying or dead retail centers — enclosed regional malls, strip centers and others that the world has passed by,” Toro said. But even these have been replaced by better shopping centers, not by the Internet. Smart strategies continue to enable the owners of well-located properties to ramp up their productivity. Retail REITs in particular have maintained strong property performance amid the challenges of the Internet age, thanks largely to savvy management, according to Brad Case, senior vice president of research and industry information at NAREIT. “The REIT industry as a whole has produced returns averaging nearly 11 percent per year for more than 20 years,” said Case, “and yet retail REITs have produced returns averaging 11.82 percent per year — even better than an industry that has done very well overall.” This compares to average annual returns of just 8.65 percent for institutionally owned (i.e., non-REIT) retail properties on an unlevered basis, Case says. “Some of that difference can be attributed to the fact that REITs use leverage, but not all of it,” he said. “It’s not enough to sit back and wait for rents to come in. If you do, the Internet may just eat your lunch. What retail REITs have done is use the Internet, and everything else available, to optimize the experience and entice consumers to spend in their tenants’ stores.”

And at properties of all types and sizes, reinvestment continues to reap dividends as well, whether that involves a new facade for a neighborhood center, or a grand expansion at a regional mall. Mall of America, already the biggest retail and entertainment destination in the country, announced in March a $325 million expansion, the most significant construction project at that property since 1992. This expansion, slated to open next August, will include high-end retailers, a 342-room hotel, an office tower, new dining options, a tourist welcome center and an event space.

Meanwhile Simon announced in January that 25 redevelopment and expansion projects were under way at its properties in the U.S., Asia and Mexico, at a cost of about $1.1 billion. One such project is the redevelopment of the firm’s Roosevelt Field, in Garden City, N.Y., which is to include the addition of a Neiman Marcus.

Other reinvestment projects are all about experimentation. As Kercheval observes in the ICSC report, the demand for a “third place” alternative to the home or the office is strong among U.S. consumers. Toward that end Westfield in October announced plans to create just such a third place: the 35,000-square-foot Bespoke, at Westfield San Francisco Centre. Its shared work spaces for entrepreneurs will include dedicated and shared desks as well as private offices, plus 14 conference rooms and more. The so-called demo area will be for playing about with the latest gizmos in a space rich with touch surfaces, digital walls and the like. The 18,000-square-foot event space will offer digital screens and other high-tech infrastructure. Bespoke opens in the spring.

But anyone thus wishing to raise the bar and redesign properties with a view to the future faces a formidable task, according to Roy Higgs, president of an eponymous design firm in the Baltimore area. “The most meaningful customer experience is often defined, at least initially, by the look or feel of the shopping center,” he said.

Attempts to capture the nostalgia of Main Street can be formulaic and stale, Higgs says. By contrast, treating the shopping center as a form of theater — backdrop, scenery, lighting and other dramatic elements — can help create the kind of place where people want to see and be seen, he says.

Urban sites have an advantage when it comes to leveraging lively public spaces, says Steve Backman, president of Tempe, Ariz.–based Cardon Development Group. Focused on public-private partnerships, Backman, who collaborated with partner Don Cardon on the CityScape mixed-use project in downtown Phoenix, says even interior-facing malls from the 1980s can make significant improvements by breaking up their cyclopean architecture. “The problem malls face as they seek to make a connection with the public is that they’re surrounded by such large seas of parking,” Backman said. “It is tough. But you do see malls that used to be bleak, fortress-looking buildings from the outside now turning spaces inside out.”

As Higgs sees it, U.S. developers could learn from the multilevel, mixed-use properties that are commonplace around the globe. Many of these include innovative entertainment, recreation and amusement uses that enliven the overall experience, he says. “From a merchandising standpoint, there can be no doubt that food-and-beverage is a key component for consideration to achieve a fulfilling customer experience,” he said. “In this regard, shopping center development overseas is, in many ways, ahead of developments in the United States.” Having just returned from Istanbul, Higgs cites that city’s proliferation of new shopping centers focused heavily on food-and-beverage.

Stateside, the mall sector is not focused exclusively on redevelopments and expansions. Slowly but surely, new malls are popping up around the country. Among the latest is The Mall at University Town Center, an 880,000-square-foot collaboration in Sarasota, Fla., between Taubman Centers and Benderson Development Co. Billed as a “beautiful, tech-savvy and shopper-friendly facility,” this two-level, enclosed mall opened last month with about 100 specialty stores and restaurants, half of which are unique to the market. Anchors include Dillard’s, Macy’s and Saks Fifth Avenue. Befitting today’s emphasis on context and complementary uses, the mall is part of a larger development with retail, dining, hotel and office space, and a rowing-competition facility. “The Sarasota market is currently underserved from a retail standpoint,” said COO William S. Taubman. “UTC will fill a long-standing shopping void in the local market.”

When the Taubman-operated City Creek Center mall made its debut in Salt Lake City in March 2012, it made headlines as the first major regional mall to open in the wake of the 2008 financial meltdown. The mall reportedly made $200 million in its first nine months of operation. The recession and real estate collapse had forced Howard Hughes Corp. to nix plans for a new mall in Las Vegas, but in October The Shops at Summerlin Centre finally opened for business. The 106-acre, 1.6 million-square-foot project contains 85 stores and restaurants. Like University Town Center, it is part of a larger mixed-use development. Meanwhile, Triple Five Group is moving ahead with its ambitious American Dream Meadowlands project, in the Meadowlands Sports Complex, East Rutherford, N.J. Construction crews are reportedly at work there on a makeover of the existing structure. The project, formerly known as Meadowlands Xanadu and owned by The Mills Corp. and others, stalled during the recession and sat dormant for five years. Today Triple Five’s plans for the multibillion-dollar project, which is slated to open in the fall of 2016, include about 300 stores, a 639,000-square-foot water and amusement park, an indoor ice rink, an indoor ski and snowboard park, a 26-screen movie theater and a concert hall.

The ICSC authors cite four reasons for continued optimism about shopping center performance: Shopping centers serve an economic and social need; experimentation with new formats, designs and technologies is aimed at yielding stronger shopping center performance; shopping centers are increasingly complementary to nonstore shopping; and shopping centers satisfy a range of consumer needs and desires. With all that being said, the authors are also frank about the need for retail properties to adapt to change.

“This transformation in the industry is bringing about one of the most exciting eras in the history of the shopping center,” the report concludes. “To paraphrase the often-cited retailer Allen Questrom, CEO and board member of several major retailers over his career, if the shopping center did not exist, we would be scrambling to invent it.”

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