“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.”

“The Young and the Restless” – SCT Magazine September 2014

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Shopping center owners may once have been tempted to take teenagers for granted. After all, generations of Americans have spent a good part of their formative years shopping and socializing at suburban malls. In fact, some of those malls attracted so many teens that landlords felt compelled to institute curfews and other restrictions to keep groups of kids from getting into mischief and putting off the older shoppers.

But today’s teens are in many ways different from what their elders were as adolescents, which has mall owners rethinking their marketing approach. For some, slumping sales among teen-oriented clothing chains has become a sobering reality, as these chains collectively occupy large blocks of space at regional malls. “Many of our malls are heavily dominated by the teen-focused apparel brands, and that category has carried our sales in a very big way,” said Jane Lisy, senior vice president of marketing at Forest City Enterprises. “The softness in that category was a real attention-getter for us.”

Forest City and research firm Alexander Babbage conducted an online study of shopping habits and preferences, in which about 1,000 young Americans between the ages of 13 and 24 participated. The survey revealed that malls continue to enjoy a lead over e-commerce venues among teens and young adults. Landlords simply need to make sure physical stores hold onto that lead, Lisy says. “Unless we, as developers, are going to find a whole new category of retailers, we had better figure out a way to make [youth-apparel] retailers healthier,” said Lisy. “Brick-and-mortar retailers still have an edge over Internet-only merchants — we just need to work harder to strengthen that gap.”

Physical stores are particularly appealing among the younger teens, in part because they naturally have fewer responsibilities and thus more time to shop in person than do older teens and 20-somethings, Lisy says. The survey found that 71 percent of monthly expenditures by shoppers age 13 to 17 occur at brick-and-mortar stores, versus 69 percent for those who are 18 to 24. Perhaps not surprisingly, and for the aforementioned reasons, those younger respondents are also more inclined to socialize at the mall than their older counterparts. 

But though teenagers still prefer to shop in person, studies indicate they are doing this less frequently than they were just before the recession, when yearly shopping trips numbered roughly 40 per teen; this has dropped to about 30 shopping trips per teen each year, according to a Piper Jaffray survey of some 7,500 respondents. Indeed, smartphones and laptops have surely changed the equation. “Fewer and fewer teens are going to the mall to just browse,” said Stephanie Wissink, a Piper Jaffray managing director and co-director of investment research. “They can browse at home. Teens are not constrained to what their local mall offers them — they now carry around a global shopping center in their pockets.” Teens frequently use the Internet to research goods they might like to buy before visiting a store, Wissink says. “Our research has shown that the number of trips to the mall is down, but when teens go to the mall, often they have ‘preshopped’ online,” she said.

Shopping center landlords are keenly aware they need to engage this -generation of digital natives both online and in person. Last year Westfield revised an app that enables users to customize the information they receive on their smartphones, by selecting only their favorite shops and restaurants from a list, and which also provides information about events, sales and new merchandise. “The teen shopper is probably one of the savviest consumer groups ever,” said Myf Ryan, Westfield’s director of marketing for the U.K. and Europe. “They are constantly connected online. The digital world is very much integrated into their daily lives.”

At its London shopping centers, Westfield has sought to encourage teens to linger by installing plush leather sofas, armchairs and coffee tables. Westfield London and Westfield Stratford City treat patrons to free concerts Thursday through Sunday. “For the teen shopper, it is very much about being and buying,” said Ryan. “We have been able to create spaces where they are happy just to sit, eat, look around and use their laptops or tablets.”

Today’s teens are shrewd shoppers, given their easy access to vast amounts of information and to retail venues. But they are also surprisingly frugal. Unlike those who grew up during boom times, this current generation of teens is feeling the lingering effects of a long and deep recession; the jobless rate among them is about 22 percent, according to Piper Jaffray.

The Forest City survey finds that those in the 13–17 age group are less brand-oriented and more price-sensitive than those who are 18 to 24. At the same time, respondents in both age groups say they are highly motivated to shop by sales and discounts. Gift cards are an especially popular incentive among them, as are promotional sales at their favorite stores. “This generation grew up during the recession, a time when everyone was trying to cut costs, including their parents,” said Lisy. “Even though our economy is recovering, these deal-seeking habits are still important to young shoppers.”

To help bolster visits and spending among teens, Forest City is working hard to inform them about promotions from the merchants at its malls. Forest City mall websites already incorporate the Facebook and Twitter feeds of such tenants as Abercrombie & Fitch and Aeropostale and also provide things like store coupons, complete with bar codes. At some properties, Forest City is trying to build on tenant promotions by offering mall gift cards, concert tickets and similar incentives to teen customers who spend a certain amount. “We should do a better job of making sure all the deals and discounts our retailers offer are clearly communicated to this demographic,” said Lisy. Teens do like to receive promotional offers and similar information by smartphone, even though mobile devices are also their least preferred method of online shopping, according to the Forest City survey.

Perhaps unsurprisingly, teenagers are fond of brands they think enable them to express their individuality, the Forest City survey reveals; this has helped make Nike a favorite. Among the reasons for the athletics-wear retailer’s popularity is that its partnerships with NBA stars promote clothing lines that help suburban kids cultivate an urban look. “What’s different about this generation of teens versus prior generations is that they are nonconformists,” said Wissink. “They seek experiences over products, and they align with brands that are practical, yet cool.”

None of this is lost on Glimcher Realty Trust, which is in the process of trademarking the term “experience retail” to describe its approach to development, leasing and management. Glimcher Realty wants its shopping centers to offer more than just a place to shop, says its CEO, Michael Glimcher. Furthermore, he says, today’s teens and young adults are “the custom generation” — they prize individuality and seek authenticity in their shopping and in other aspects of their lives. “This is not a group of people who want to do what everyone else is doing,” Glimcher said. “It’s about being authentic.”

Glimcher Realty commissioned a survey last year of about 3,000 respondents to examine what motivates people to visit malls. The survey showed that experiences such as dining out, taking in a movie or participating in community events are among the reasons many choose to go to a mall rather than shop online. The survey also revealed that shoppers want malls to offer farmer’s markets, live music and the like. Roughly half the respondents said they would visit a mall more often if its shops offered experiences such as yoga classes, cooking demonstrations and workshops.

Malls enjoy yet another distinct advantage over online venues in vying for young shoppers in the digital age. “This is an instant gratification,” said Glimcher. “We see young women buying clothes on Fridays and Saturdays that they plan to wear that night. Sometimes they wear outfits out of the store. You can’t do that online.”

ON DISPLAY
As shopping center owners and retailers work harder to woo and keep the attention of the teenage shopper, many are revisiting virtually every aspect of their approach. For some this has meant a renewed emphasis on merchandise displays. Forest City Enterprises, for one, plans to work more closely with its tenants to create compelling displays, especially during special events when teen traffic count is exceptionally high. The firm will gauge the effectiveness of these displays, which may include freestanding showcases throughout a property, by means of a cellphone tracking system to determine the impact on mall traffic, says Jane Lisy, the company’s senior vice president of marketing.

Last summer Forest City released the results of a survey on shopping habits among shoppers age 13 to 24, which revealed that teens are highly influenced by their peers (surprise!) and also by what they see in window displays. “Department stores used to spend a lot of money on compelling window displays, but have gotten away from that,” said Lisy. “Teens are impulsive — you put something shiny in front of them, and they want it.”

Some of the largest teen-oriented apparel chains are also reviewing the ways they go about drawing teens in. At many of its Hollister stores, parent Abercrombie & Fitch has removed the heavy shutters that are the trademark of that brand in an attempt to place greater emphasis on merchandise and create a more inviting storefront, says Stephanie Wissink, a Piper Jaffray managing director and co-director of investment research.

With teens making fewer shopping trips now than in the past, as some studies show, brick-and-mortar retailers need to be sure they are doing all they can to capitalize on each visit, Wissink says. Some may want to re-examine certain long-standing policies, such as prohibiting photography in their stores at a time when photos posted on social-media sites like Instagram draw the interest of many young people.

“Teens are looking for storefront windows to tell a story,” said Wissink, “about what a brand is delivering that season.”

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