By Garrick Brown, Vice President of Retail Research, Americas
We’ve had more closure announcements and bankruptcies announced over the past couple of weeks (HH Gregg, Finish Line and Marsh among others). We’ve also had a bunch of merger and acquisition activity (Stage Stores took half of Gordman’s stores—good news for landlords, Darden buying Cheddar’s—possible good news for landlords if it turns out to be an expansion play). Meanwhile rumors of more looming bankruptcies (Rue21 and Gymboree both might declare bankruptcy this week) and acquisitions (Panera might be on the block and Coach might be buying Kate Spade) also hit. This is going to be the norm for a while. In terms of the closures we are seeing, I think the apparel and department store categories are going to be firmly in consolidation mode for another year or two. There are exceptions on the discount side of things clearly… the real pain is being hit by the mid-price guys. But more closures, more bankruptcies and a whole lot M&QA activity is still to come. On the M&A side of things, some acquisitions are going to be about consolidation. Some, however, may end up spurring bricks-and-mortar growth as deeper pockets players pick up promising concepts. And, a lot of it may just be neutral… rumors are still flying around that Sprouts might be selling to Albertson’s. I am guessing if that deal takes place Albertson’s keeps that Sprouts banner and maybe rebrands a chunk of its locations nationally—whether or not this would spur much organic growth is a question mark. Likewise, rumors are that organic sector leader Whole Foods may also be in play. If they were gobbled up by one of the big guys, I don’t see anything but the expansion of that banner—but would the lion’s share of that likely be in existing storefronts (assuming the buyer was a Kroger or a Safeway? Probably.
The long and short of it is that outside of the dollar store, discount and off-price world, the growth we are seeing out there is mostly from new, upstart concepts that, to some degree, are flying under the radar. It’s happening, but not in huge numbers or numbers that can keep pace with the concepts in closure mode. But not all of the marketplace is in shrink mode. I am going to be hosting a webinar in a couple of weeks (see the Circuit Plugs section of the Newsline for more information on registering for the event) where I will break down who is growing, who is shrinking, where, why, and what the impact is going to be on various retail real estate sectors over the next year or two. But while the big picture is not as bleak as some may have described, it certainly isn’t rosy. There are, indeed, a lot of retailers and landlords singing the blues right now.
We have just wrapped up putting together our new Q1 2017 statistics and will have new reports out in the next week or so… but a couple of the stats you may actually find surprising. Without wanting to give too much away as our new report will have the full story (if you are on this mailing list, you will get a copy of our new Q1 US National Shopping Center report), but the reality is this current wave of closures has had little impact on non-mall properties so far. There are challenges there, but the outlook for neighborhood/community or power centers is radically different than what I see for malls in the years ahead. That said, regardless of what kind of retail space we are talking about, the biggest differentiator in terms of current and future performance remains class. But before I get into all of that, let’s start with a quick peek at the luxury marketplace.
The New York retail market certainly consists of a whole lot more than just luxury retail, but its traditional high street markets (Fifth Avenue, Madison Avenue, Times Square, et al) have always been a solid bellwether for what is to come from that sector. Certainly the news that Ralph Lauren was closing its Fifth Avenue store this week has stoked the concerns of many. Yet, with stock market performance up and tax cuts likely on the way from the Trump administration, many are betting on a solid luxury retail uptick ahead. This sector certainly has not faced the same challenges as the mid-tier players have, but to say that the ascent of eCommerce and the consumer focus on value hasn’t impacted them is simply wrong.
Here is what is interesting about what we see in our latest numbers for New York’s High Street submarkets; Upper Fifth Avenue’s Availability Rate (includes available space that may or may not be vacant, but is on the market) has climbed from 31.0% to 32.8% over the past year. The average asking rent has fallen from $1,234 per square foot (PSF) to $1,185 PSF. Lower Fifth Avenue’s availability rate has increased from 13.0% to 17.4% over the past twelve months. Its’ average asking rent has actually climbed from $3,035 PSF to $3,123 PSF. Madison Avenue’s availability rate has climbed from 17.1% to 22.9% over the past year with asking rents there falling from $1,487 PSF to $1,407 PSF.
Asking rents falling in two of those three submarkets is to be expected with these types of increases in availability. The fact that rents climbed for Lower Fifth Avenue is less a sign of actual deals getting done than that of landlords holding out. Certainly one thing that these numbers do not show is that landlords are offering higher concessions, tenant improvement allowances, free rent and almost any other inducement as they try to keep rent levels up. I think some of that is to be expected any time the market is in flux. Landlords do not want to see rents going backwards for obvious reasons. In this case I also think that many are holding out in the hopes of a luxury retail revival to hit over the course of this year. But is that really going to happen?
Again, the luxury sector certainly has not been as negatively impacted by the acceleration of NewCommerce as have mid-priced players but this is due to a number of factors.
First among them is the fact that the mid-price guys are also being squeezed from the bottom. At times it has appeared (to me, at least) that almost all the headlines about department store closures and apparel chain bankruptcies have emphasized eCommerce as the cause, but seemingly few tell the full story of how the race to the bottom with discount pricing has arguably been just as damaging to many of these brands. Sure, Amazon will supplant Macy’s as the number one apparel retailer in the United States this year… but current trajectories indicate that T.J. Maxx will be in that number two slot sometime in the next three to four years and my suspicion is that may accelerate.
Secondly, consumer surveys continue to indicate that retail brand loyalty tends to be highest for iconic luxury brands. That is probably partially because, in addition to the prestige of the merchandise itself, strong levels of customer service have always remained part of the formula for luxury retail. One of the great challenges for the mid-level department stores and apparel chains currently downsizing is that pressure to maximize profits over the past 30 years has meant the gradual erosion of service levels. Most commission sales departments went away, wages for sales staff went down and service went away. Unfortunately, it leaves not much of a value proposition to consumers for the mid-price commodity chains at a time in which experience (customer service being key) is more important than ever for retail success.
Of course, the luxury sector also happens to benefit from the fact that a large part of its consumer base has not followed the same trends of working or middle class shoppers; while they are not averse to value, they have not been the consumer group driving the “race to the bottom” trend in discounting. That’s not to say luxury brands haven’t been impacted; aspirational shoppers (mostly from the middle to upper-middle class) have always been part of their core business and many of those have gone away.
But fewer aspirational shoppers isn’t the only problem facing luxury retail. International travel is trending downward because of the strong US dollar and this is impacting the luxury sector negatively. And while luxury hasn’t felt the same impact of NewCommerce as many other retail categories, it is naturally having an impact and will continue to do so heading into the future. It is doubtful that eCommerce penetration in the luxury sector will ever come close to that we will ultimately see in the department store and mainstream apparel sectors, but luxury has not been unscathed and the impact is only going to increase going forward.
The big question for luxury today is whether continued strong economic growth in the US help to boost the trend of slowing growth that has been in place over the past couple of years. This question becomes even more challenging to answer when you factor in the continued encroachment of eCommerce and the need for luxury retailers to rethink their NewCommerce strategies compared against the likely impact of tax reform policies proposed by the Trump administration. Tax cuts are not likely to face the same challenges that the administration faced in its first attempt at pushing through healthcare reform… It is unclear what will eventually be passed, but it is the investor class that likely will get the biggest breaks… and that is where the elite, luxury consumer is. This is all positive news for luxury retailers, but assuming there is a nice uptick in their sales… will those sales be made in their physical stores… or online?
My take is that luxury gets a boost in the States, but remember most of these brands are global. They will continue to face challenges elsewhere… and they are still going to be facing challenges in the United States. The dollar will remain strong most likely over the next 18 months… which means global travel retail will continue to be sluggish. And eCommerce isn’t going away… I know there are some people out there trying to say this sector is going to explode with growth ahead (most of them lame stock sheets trying to sucker you into investing and building up broker fees in my opinion), but I see all of these pros and cons essentially cancelling each other out in the coming year. I see more of the same. I see flat. I see bricks-and-mortar expansion or contraction in either direction being minimal. At least that is a step up from what is in store for the mid-price apparel guys. Will that be enough to stop a rent reset in the nation’s high street luxury shopping district? I would guess not… especially if these districts (and they are) are increasingly facing competition from upstart alternative urban submarkets… or, as you know what I like to call them… the Cool Streets.
All this being said, the nation’s non-mall shopping center market has yet to feel this current closure wave translate into soaring vacancy levels. Our preliminary numbers for Q1 2017 indicate a national non-mall shopping center vacancy rate of 7.3%. That is the same level posted three months ago. Of course, besides the fact that most of the contraction happening now is focused on users that typically are mall, lifestyle or urban tenants, this is because many of the bankruptcies that will have an impact (like HH Gregg, typically a power center user) simply haven’t quite hit the market yet. Those will be hitting in time for Q2 numbers… but remember that we still have quite a few retail categories in growth mode. Among them are off-price apparel concepts like Ross, Marshall’s, TJ Maxx, Nordstrom Rack, Macy’s Backstage, etc. Power centers with 30,000 SF vacancies have a decent tenant pool to go to. Meanwhile, grocery consolidation may be occurring in terms of majors buying up competitors, but so far we are seeing mainstream grocers looking to beef up niche offerings like organic… that means less of a danger from cannibalization. For example, assuming the rumors are true and Albertson’s does end up buying Sprouts I would be shocked if they did not want to keep those two distinct brands separate and, if anything, perhaps add some more Sprouts banners.
Now, there are a number of challenges that are going to be facing the power center and neighborhood/community center landlords of America in the next couple of years. I will get into those in more detail in the upcoming report and webinar, but one thing I did see in the Q1 numbers that actually mirrored what we saw in our NYC stats is that the average asking rent did not fall for non-mall shopping centers. It now stands at $20.66 PSF (this is assuming spaces of 10,000 SF or less and is averaged nationally) and is actually up a notch from the $20.48 PSF mark of last quarter. We do use rolling averages, so this might be a factor in why we did not see a decline. The uptick is so modest as to potentially be within the realm of error, but what I think is happening is that landlords are holding out for now.
Anecdotally, I am hearing across the board and from virtually every market that deals are taking longer to get done right now. Certainly, if you are the landlord of a Class A center of any type you are in a much stronger position to negotiate. And most retailers in growth mode are looking to Class A properties first, regardless of the shopping center type. Against this backdrop I have heard concerns about landlords overplaying their hand and about tenants who think they have more power in a deal than they really do. The fact is the pendulum is moving in favor of tenants but it is moving at different speeds depending on the asset class, depending upon the retail category and depending on the location. And I suspect this is going to be an impediment to deal volume for at least the first half of the year. That’s enough of my ramblings for the week.
We will have the new Q1 2017 USA National Shopping Center Report out to you shortly. In the meantime, here are some links you might find useful…
Cushman & Wakefield’s Q4 2016 USA National Shopping Center Report.
Our Bricks vs. Clicks Webcast Series Part I and II explores the impact of the 2016 holiday shopping season and eCommerce on supply chain and bricks-and-mortar retail. Bricks vs. Clicks reviews and further analyzes relevant data points, shopping trends and effects on the industry and its consumers in 2017.
Our Main Streets across the World Report tracks high street retail around the world and breaks out the globe’s premier shopping districts by continent and average asking rent.
Cool Streets of North America Report and accompanying video series.
This post is commentary from the latest weekly edition of our Cushman & Wakefield Retail Newsline, which you can subscribe to for free by e-mailing email@example.com.
Garrick serves as Vice President of Retail Research for the Americas. He speaks frequently at industry events and has been a keynote speaker at symposiums, conferences and market forecasting events for groups like the Appraisal Institute, Urban Land Institute, CREW, ICSC and PRSM. He is also a member of Lambda Alpha International, an invitation-only land use society for those who are involved in the ownership, management, regulation and conservation of land, but also those who are involved in its development, redevelopment and preservation.