By Garrick Brown, Vice President of Retail Research, Americas
Before I get started this week, I want to let you all know that we will be doing a webinar next Thursday (January 25th) at 3:00 PM Eastern Time that I would like to invite all of you to attend.
This webinar, Hardy Holiday Shopping Season: Is a Retail Revival on the Way? Will be hosted by me and my colleague, frequent collaborator and Cushman & Wakefield’s very own eCommerce guru, Ben Conwell. If you do not know Ben, he came to us from Amazon a few years ago after being one of the key guys responsible for their fulfillment center real estate growth. He called the Amazon/Whole Foods acquisition months before it happened and has an incredible track record of making accurate market predictions.
Final numbers for the 2017 Holiday Shopping Season are in. Retail sales increased by 5.5%, the largest growth we have seen since 2006. Meanwhile, there have been a number of other positive developments for the retail world. In this webinar we will provide a recap and analysis of this past holiday shopping season and will explore these recent positive developments as we explore what to expect from both online and bricks-and-mortar retailers in 2018.
News just broke that Simon has settled with Starbucks. While this is likely the best possible outcome for both parties on this particular case (details of the settlement have not been released) but it appears that Starbucks will be allowed to close those remaining Teavana stores. We don’t know if Starbucks is on the hook for an additional amount (in addition to paying off their lease obligations) or if there was some other arrangement made (perhaps new commitments for new locations in Simon centers), but Simon is the biggest winner of all sending a clear message to every retailer looking to strategically downsize this year; we are not going to make it easy for you. And you can rest assured that virtually every landlord (particularly mall landlords) was watching this with bated breath.
OK, time to complete my list of the Top 10 Things to Watch in Retail for 2018…(click here to review full details on the top five in Part One).
Ten Things to Watch in Retail in 2018:
1. SAME OR FEWER BANKRUPTCIES, BUT BIGGER IMPACT.
2. STRATEGIC CLOSURES TO INCREASE.
3. MORE LEGAL CHALLENGES TO RETAILER STRATEGIC CLOSINGS.
4. LUXURY RETAIL LIKELY TO SEE BOOST BY YEAR END.
5. THE CLICKBAIT CONUNDRUM: CHALLENGING NEWS HEADLINES NEGATIVELY IMPACTS SECTOR AS A WHOLE.
6. M&A ACTIVITY TO SKYROCKET FOR RETAILERS AND RETAIL REITS ALIKE.
Late last year Brookfield made a $14.8 billion bid for the two thirds of GGP it did not already own. GGP turned it down as that price fell below what they wanted (and about 20% below what many analysts thought would make sense). But such a move may still happen heading into 2018. The move makes sense; Brookfield already owns a third and GGP has a portfolio that consists primarily of Class A properties, many of them urban. Brookfield excels at urban mixed-use in addition to their retail holdings so this deal was a no-brainer save for pricing.
Meanwhile Westfield did accept the $15.7 billion ($24.7 billion including assumed debt) offer of Europe’s largest mall owner, Unibail-Rodamco. Reports have placed the value of Westfield’s 35 malls in the U.S. and U.K. at $32 billion. But this deal makes sense because challenging news headlines have had a negative impact on stock prices of retailers and retail REITs alike. This has been the case whether the operator has nothing but Class A properties in their portfolio or a slew of Class C challenges on their hands.
On the retail front we have already seen speculation that Amazon might buy Target, or Nordstrom, or the world. The reality is that any publicly traded retailer that is holding their own or even doing well is likely to currently have a valuation below where it really should be with a few exceptions,namely: dollar stores, off-price apparel, and discounters.
7. CONSOLIDATION AND CLOSURE TREND HITS MALLS HARDEST:
a. CLASS A WILL THRIVE
b. CLASS B MALLS WILL LOOK TO NON-TRADITIONAL TENANTS (WITH MOST SUCCEEDING).
c. CLASS C WILL FEEL MOST OF THE PAIN.
OK, do I really need to say anything else about this one? I’ve been a broken record on this… but no… not all malls are going to be feeling the pain this year and Class A projects will mostly benefit from department store space being returned. Enough said.
8. DEATH SPIRALS FOR WEAKEST MALLS TO RAMP UP; DEFAULTS INCREASE HEADING INTO FINAL HALF OF 2018 BUT THIS WILL BE AN EVEN BIGGER STORY IN 2019.
This is really the logical next step from the last point. We will see more malls going away. The more that challenged projects disappear from the landscape, the closer the market will move back to equilibrium. Yes, at an eventual tipping point it will be about addition by subtraction for remaining malls. Our challenge is also that we were over-retailed before any of these other challenges (aka e-commerce) hit the marketplace.
9. DEAD MALLS WILL OFFER REDEVELOPMENT OPPORTUNITIES AS MIXED-USE URBAN-FEEL, SUBURBAN LOCATIONS WITH SIGNIFICANTLY REDUCED RETAIL FOOTPRINTS.
“More retail,” you say. “Are you nuts?!” I might be. Most dying malls are located on critical commercial thoroughfares. The highest and best use for these properties will likely still be retail going forward. We had 1,350 malls a decade ago and we have 1,1,50 now. Roughly 150 of those 200 projects that “went away” actually just got converted to different shopping center types (power, lifestyle, entertainment and even neighborhood/community) or were otherwise reborn as mixed-use.
I think we will see 250 to 300 malls go away over the next five to seven years or so. But that 75% of those will be reborn—generally as mixed-use projects where a massively trimmed down retail presence is joined by multifamily, hospitality, office, medical and even educational space.
10. eGROCERIES WILL RAMP UP ( BUT THIS WILL MOSTLY BENEFIT BRICKS-AND-MORTAR). OFF-PRICE, DISCOUNT, DOLLAR STORES, EXPERIENTIAL RETAIL, FOOD AND BEVERAGE, ENTERTAINMENT, FITNESS, CLICKS-TO-BRICKS WILL ALSO BE WHITE HOT IN 2018.
2018 will be a year of challenges, but also of opportunities. The key is to always keep it in perspective or you will never see those opportunities.
Finally, we are bringing back our Annual Retail and Restaurant Expansion Guide. We have begun to pull together all the data we can find from over 3,000 major chains as to their growth plans this year. I would love to include your information in this year’s report if you are one of the many retailers or site selection professionals that receives the Newsline. Please drop me a line at email@example.com
And there are plenty of retail categories still in growth mode and even in categories in contraction, there are some outliers that are growing. Conversely the same is true if you are trying to make sense of Walmart’s closure of 63 Sam’s Club stores last week. Walmart has stated that they are converting ten of these to eCommerce fulfillment centers and are closing the others because they were either cannibalizing other Sam’s Club or Walmart locations or were underperformers.
Later in the year Amazon’s strategies for Whole Foods will become more apparent and I suspect we will see a few more acquisitions from grocers. I still think it likely that one of the major grocery chains acquires a meal kit operator like HelloFresh or Blue Apron. And surprise! While Amazon’s move with Whole Foods is already disrupting the grocery business, it will almost certainly be a net gain for the retail real estate world.
We recently released a piece that looks at the likely impact of the tax bill that is currently before Congress. Click here to check it out.
And just yesterday we released our Q4 2017 reports. Click here to access those.
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 firstname.lastname@example.org.
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.