Ravid Law Group presents our annual survey of the top real estate brokers throughout the country following the ICSC convention in Las Vegas. According to our experts, experiential stores, being different, food deliveries, and percentage rent deals are in. Sky-high rents and pure brick-and-mortar stores without online presence are out. Here’s what else they had to say:
Jay Luchs, Vice Chairman, Newmark Knight Frank:
Q: Are there any changes in the market that concern or excite you? If yes, explain.
A: Both. The concern is, as we all know, the internet has taken over. Amazon is real. The internet is making an impact on brick and mortar and is changing the real estate market. You can only reach so many people at so many stores. So you see B and C malls giving way to office buildings as is the case with the Westside Pavilion mall in L.A. that is being converted into an office complex for Google. You’ll still see class A centers succeed such as Century City and the Grove in L.A., Bal Harbour in Miami Beach, and Ala Moana in Hawaii. These better malls will do okay. But after that, landlords are going to struggle to find tenants. Even the better malls are reaching out to me looking for special tenants that don’t go everywhere. The focus for top malls is to be different and that’s their challenge. Hudson Yards in New York is a good example of a landlord that is doing some things that are different.
The concern isn’t that the retailers will all go away because many of them are going to get stronger and stronger and build online and be better than ever because of their online presence. But the difference between what retailers and landlords believe is the current reality is a big concern. There are still landlords out there that don’t believe the market has shifted and are still holding out for a dream – there is a major shift in market rents. The stubborn or troubled landlords are going to end up with vacancies. Landlords that are willing to accept the reality that it’s a tenant’s market and accept deals with lower rents will attract more brands to their centers and over a period of a few years more deals will get done again and things will get better. But right now, the disconnect is way off. This is also true for street locations. You have some streets in L.A. like Beverly Drive that could end up with a Robertson Boulevard effect of retailers fleeing to other areas if rents don’t go lower. You see the same thing in New York on Madison Avenue and 5th Avenue. Other areas are doing fine such as Flatiron and some pockets on Melrose where rents are stable.
The positives are that there is still room for cool brands and new stores and we are seeing it. Brands like Kith, Bathing Ape, Off White, Palace, Maxfield. There is a whole sneaker culture that is moving more to the high end. Even Louis Vuitton partnered with Supremes shoes and did a pop up store for two weeks which was a huge success with people lining up at 4 a.m. every day. Brands will evolve in today’s online world. Brands can now go viral online and explode quickly. I believe we will see incredible brands growing and be new and different. So it’s not that retail is dead. Landlords and tenants need to just come together on expectations of rents.
Q: Is the market generally better, worse, or about the same in 2019 as compared to what it was in 2018 and what it will be in 2020?
A: Mixed. It’s taken us a few years to adjust to the “takeover” of online. Although I don’t see as many big deals this year, I think there’s a shakeout taking place now, a bottoming out, and we’re at a point where we see people realizing where they stand. Old brands are going out, new brands are coming in, and rents are starting to stabilize more. As for next year, I’m seeing a lot of energy from new cool brands; there will only be a disaster if landlords and tenants don’t come together on rents. We still have the problem of too much space and too few tenants. This challenge continues and it’s up to us to do our best to bring people together on these issues.
Q: What should landlords/retailers do to improve their chances for success in the year to come?
A: Keep staying on top of trying to be different. A lot of top mall and retailers are doing it. For example, landlords are more open to doing percentage rent deals, and retailers are integrating their stores to appeal to wider audiences, they’re doing collaborations with other retailers.
Laura Pomerantz, Vice Chairman, Head of Strategic Accounts, Cushman & Wakefield:
Q: Are there any changes in the market that concern or excite you? If yes, explain.
A: Concerning to many brokers are the short term/pop up deals that many retailers are demanding. However, these pop ups can convert to permanent situations and often do. Physical locations began to focus less on stocking and moving inventory, and more on communicating brand values, collecting customer data, and providing personalized product experiences.
Q: Is the market generally better, worse, or about the same in 2019 as compared to what it was in 2018 and what it will be in 2020?
A: I think that the market is about the same in 2019 as 2018. Retailing is undergoing two significant shifts. The first is technological, and the other is changing of consumer behavior. Stores that understand and overcome both shifts will thrive. In 2020, we expect to see more instagrammable moments, continued strong Internet growth and continued evolution of Consumer expenditures. Shoppers underwent a “shift to thrift.” The future will bring more cashless stores, which favors the more affluent customer while discriminates against the more value customer.
Q: What should landlords/retailers do to improve their chances for success in the year to come?
A: Retailers that are on a successful road will understand and have a strategy for BOTH the clicks and the bricks!! Retailers should focus on customer experience, preferences, and definitely SERVICE. The reason service is a driving force in retail is because there is increased competition in all sectors but those that are customer centric will be the winners!!
John Auber, President of the Auber Group:
Q: Are there any changes in the market that concern or excite you? If yes, explain.
A: The Retail market is in the midst of a major evolution, one that I can’t compare to any other period during my career. Of concern is the continued bankruptcies and store closures, and the trade war with China, which will continue to put pressure on the industry. As the retail model continues to evolve into an omni-channel world, retailers will need fewer stores per market. Previously the only way to get goods to consumers was through physical stores, that is no longer the case. The consolidation of retail stores will result in a consolidation of retail venues. The combination will result in more impactful venues and in store experiences. However, what happens with the excess inventory of space? The repurposing of assets to their highest and best use will present their own set of challenges.
The flip side is a very exciting time for retailers who are at the forefront of the evolution, whether it be the digitally native retailers getting into brick and mortar or those mature brands developing their omni-channel strategies. Providing personalized services and prioritizing their guests as being of primary importance, will greatly influence the success of brands and shopping centers. Customers want to interact with knowledgeable sales staff to learn about brands, products and events, they are becoming more and more channel agnostic, researching, browsing and buying online and in physical stores. The best retailers of yesterday were fiercely concentrated on customer service. The best retailers of tomorrow will have the same characteristic with an emphasis on using omni-channel to allow for a more in-depth and ongoing relationship with their customer. 72.6% of Millennials and 69.5% of Gen Z think it’s important that a store remembers their preferences. As retailers improve, this expectation will increase further. Technology will enable this and other customer initiatives.
Omni-channel does not only apply to the retailer. Landlords who view their shopping centers as if they were a retailer and execute their own omni-channel strategy will ultimately be reaching the higher expectations of the consumer.
Q: Is the market generally better, worse, or about the same in 2019 as compared to what it was in 2018 and what it will be in 2020?
A: The Retail market sentiment is similar to 2018, however performance is pointing to be worse than 2018. The market continues to edit underperforming concepts (more closures announced already this year than all of 2018) and venues and sales for the first half of 2019 are not looking particularly strong, which will put further pressure on the second half and will likely affect pricing. Skeptical would be how I characterize 2020, I would expect further closures and consolidations. Given the economic and political uncertainty, I suspect the consumer to be more conservative with spending and further seek favorable pricing. To reiterate my point from above, retail is in the midst of a profound transformation and successful brands and shopping centers will be the ones that are moving to offer customers a seamless omni-channel experience and personalized services.
Q: What should landlords/retailers do to improve their chances for success in the year to come?
A: The Landlord-Retailer relationship has to evolve with what is happening with the customer relationship. Innovation and customer relevance have always been the key to successful retail. The days of separating online from offline sales is over, as our industry evolves with the convergence of digital and physical retail, the Landlord and Retailer relationship has to change to recognize the economics of the new day. It will be critical that retailers merge their retail channels (brick & mortar, online, wholesale) into a pure omni-channel instead of operating each channel separately, while at the same time the Landlord must approach their shopping center solution with the same perspective. In doing so, recognizing the cost / benefit as an operating entity, and working with each other to find the appropriate cost structure and share in the omni-channel performance. I think creating a true partnership will be the key to Retail being successful and facilitating its evolution. The challenge is all retailers and landlords are not at the same place in terms of operating. Evolution is the gradual development of something, especially from a simple to a more complex form. This takes time, and in my opinion, technology is the accelerant to the timeline.
As more retailers and landlords execute and perfect omni-channel, the physical store experience will take on a greater role of providing an experience, customer service and engagement, design and convenience, while the number of them will likely decrease due to optimization.
Johnny Siegel, Managing Member of Open Realty Advisors:
Q: Are there any changes in the market that concern or excite you? If yes, explain.
A: There are three things that come to mind: First, it is exciting to see the retailers that are “winning” still in this market. There are a number of retailers that continue to push forward in a “tenant friendly market” and see the current market swing as a buying opportunity. The retailers that resonate with consumers both online and in stores will continue to work to capture market share at a good price. Second, it will be interesting to see when the various costs of delivery, internet customer acquisition and sales tax laws finally catch up with the internet only retailers. The cost of physical retail will certainly compare more favorably as we go forward. Third, data is only getting better and more accessible. It will be exciting to see where it goes (other than simply tracking us everywhere) and how the retailers and landlords evolve in sharing what they know.
Q: Is the market generally better, worse, or about the same in 2019 as compared to what it was in 2018 and what it will be in 2020?
A: When taken as a whole, there is reason for confidence in the short and interim term for retail sales, with strong consumer confidence reports; the only caveat is a continued trade war. Overall, this year will be better than last year, especially when taking into account the desire of our political leaders to prop up the economy in the coming election year. Fortunately, the market turmoil is forcing change. Brands are reinventing themselves and new creative brands with stories behind them continue to emerge and resonate with customers. As to retailers with only bricks and mortar, the future remains quite shaky.
Q: What should landlords/retailers do to improve their chances for success in the year to come?
A: It’s kind of cliché at this point, but retailers have to create worthy experiences and be seamless. They have to reward customers for the time and effort to “get off the couch.” Once there, they have to surprise and delight the customer.
Real estate is still about the fundamentals. Go back to what a good location is and what it should cost. With the wind at everyone’s sails, some ignored the fundamentals and ended up with too many centers and too many brands with too many stores.
Derrick Moore, Senior Vice President, CBRE:
Q: Are there any changes in the market that concern or excite you? If yes, explain.
A: The news of this year and the trends that we’ve been seeing is the impact of the food and beverage industry. The focus is on how the consumer is electing to receive food and food amenities. For the first time in history, we’re spending more on dining out than we are on groceries and that’s had a significant impact even on how grocery stores are being programmed and how prevalent food and beverage has been in every kind of real estate decision. As a result, we’re witnessing a down-sizing on full service restaurants. Many restaurateurs are catering their operations toward a more quick delivery that includes use of mobile apps. Some are just choosing to have delivery kitchens or a very small consumer dining area. You might dine there but for the most part, you’re either picking up or one of the popular delivery service companies is delivering the food to your home. A real concern is rising costs of labor and insurance, and high cost to operate restaurants. Some applaud it and others feel that restaurants are being put into a disadvantage. Time will tell if it has a negative impact that reduces the number of restaurant offerings.
Q: Is the market generally better, worse, or about the same in 2019 as compared to what it was in 2018 and what it will be in 2020?
A: The market is still trying to get its legs back. Last year, there was so much talk about the click and brick strategies – how to find the right balance. Now a year later, more have figured it out but it is still not settled. There’s still plenty of uncertainty that will lead to more shake out in apparel and food and beverage. Perhaps the biggest change is in grocery stores that are expanding their offerings of quick service. You’re seeing a more diversified programming in malls with retail services including grocery stores and even health care spaces so that the experience becomes more of a one-stop shop.
Q: What should landlords/retailers do to improve their chances for success in the year to come?
A: Landlords are going to have to really think more creatively because tenants are asking for more in the way of tenant improvement dollars; more in the way of prepared space; higher standards of delivery conditions; free rent. We’re seeing a lot more tenants shifting more risk to landlords which is why you could be seeing a lot more vacancies because landlords have not been able to bridge their differences with some of these retailers.
Jeremy Ezra, Executive Vice President, RKF:
Q: Are there any changes in the market that concern or excite you? If yes, explain.
A: We are paying a lot of attention to new accounting rules that affect leases. Some of our clients are looking into synthetic leases driven by new accounting rules as a way to ease the impact of leases as a liability.
We are seeing more and more termination options in street deals. Several years ago, a termination option on a street deal was a unicorn. Today almost 50% of the deals we do in New York and other major markets have a 3 or 5 year kick-out.
There is still concern that some properties will go to foreclosure because of the out of control investment sales market that we saw through 2015. A lot of those landlords are in serious trouble because they substantially overpaid.
It’s been surprising to see the very desirable retail clients make offers that a few years ago would have been considered audacious but now landlords have been accepting them. This is a little more unique in New York because the sales market was so overheated but it is indicative of the overall softness everywhere throughout the country; it’s just not as dramatic everywhere else. We’re seeing major concessions in the form of more TI dollars, increased landlord work, and percentage rent deals that convert to fixed rent that we’ve never seen before. It’s not across the board; however, as we see a broader return to fundamentals. For example, if you’re looking for space in a high foot traffic significant office density market, and you are representing a quick service restaurant, especially in the 1,500-3,000 square foot range, the market is still tight and the rents have not dropped significantly because there are a lot of relevant brands, a lot of new brands competing for the same space. It helps if your operations do not require venting.
Q: Is the market generally better, worse, or about the same in 2019 as compared to what it was in 2018 and what it will be in 2020?
A: The market is about the same as it was last year but it will be better next year. This year and last year the market was soft; not good for developers but great for retailers. It’s been about as bad as it has been since the crisis in 2008 and 2009. But we are headed toward a better market because there are really exciting new brands including food and entertainment concepts and cutting edge internet-based retailers, while many traditional retailers have stabilized and may start to grow again more intelligently.
Q: What should landlords/retailers do to improve their chances for success in the year to come?
A: Landlords should be a little more open to retailers having more diverse use clauses to allow the retailers to appeal to their fast evolving customers. Landlords should avoid pigeonholing retailers to a limited use clause and stop over-controlling their centers so that retailers can adapt and have the flexibility to expand their offerings to their customers. At the end of the day, this builds productivity to the center and will be good for both sides.
Michael Townsend, President, Townsend & Associates:
Q: Are there any changes in the market that concern or excite you? If yes, explain.
A: Technology on every aspect imaginable and beyond is extraordinarily exciting and we are seeing fantastic implementations on every level. Most importantly examples of opportunities to open up new channels and have measurable data to monitor every dollar spent. It will be through technologies of what some perceived as retail’s greatest threat or simply as extraordinary upfront capex that will ultimately be landlords, merchants, and investors greatest tools.
More smart office services concepts in physical retail space and rise of co-living and basically nonexistent pure retail plays.
Q: Is the market generally better, worse, or about the same in 2019 as compared to what it was in 2018 and what it will be in 2020?
A: Same. Retail marketplaces are in bit of standoff between landlords and tenants. While pricing seems to be on day by day basis no two deals are alike. No two tenants or landlords are alike. In the end the customers really will ultimately decide values based on success of long term tenancy of any given deal.
Q: What should landlords/retailers do to improve their chances for success in the year to come?
A: Eat well, get plenty of exercise and a good night’s sleep. Rougher seas ahead as the pendulum will take a bit to settle down.
Leslie Mayer, Executive Managing Director, Cushman & Wakefield:
Q: Are there any changes in the market that concern or excite you? If yes, explain.
A: Everyone agrees that traditional retail and acquisition is yesterday’s news and it’s more fun to repurpose things or do with less. The use of rent or borrow what you need and return or pass it on is becoming popular amongst the younger generations as they are more fluid and portable in their lifestyles and careers. Accordingly, the styles, materials and products need to double down and be multi-purpose to make the cut of needs versus wants.
Q: Is the market generally better, worse, or about the same in 2019 as compared to what it was in 2018 and what it will be in 2020?
A: Retail has taken a hit as more consolidations and closures of traditional chain stores are announced. You now have existing tenants in shopping centers competing with their own landlords to sublease their spaces. Oftentimes their ability to undercut the landlord’s asking rents or subsidize a sublease makes their spaces more attractive . Big boxes are in some areas becoming more valuable as “fulfillment hubs” as the Amazon and instant delivery mind set becomes the expectation versus the exception.
Q: What should landlords/retailers do to improve their chances for success in the year to come?
A: Keep the centers and stores clean, safe, well-lit and interesting. People gravitate where they feel good and they can be social without necessarily sharing close space. As living options get smaller the common areas and public venues of shopping centers, office parks and green spaces will become more important. You want to be the place that people gravitate towards and return frequently.
Houman Mahboubi, Executive Vice President JLL, Retail:
The climate of the ICSC show was very active, healthy and engaging. It is truly the survival of the fittest environment right now. There is a lot of money out there ready and able to make deals; it is a function of who is ready to step up!