By Garrick Brown, Vice President of Retail Research, Americas
How do you even begin to make sense of the market today? Retail closures are spiking and reaching their highest levels since the downturn. M&A activity is way up (retail related M&A activity in 2014 was at $34B, it went to $45.4B in 2015 and may top that this year)—this usually means consolidation and more space coming back to the market. Restaurant failures are starting to creep up (Restaurant Data.com recently reported that restaurant closures edged up from 4,456 in 1H 2015 to 5,124 in 2H 2015). The recent bankruptcy of Ovation Brands (Hometown Buffet) is the highest profile failure, but most of the closures have to do with weaker franchisees across a number of concepts (many of which are otherwise doing fairly well) and the occasional single player… like, for example, Los Angeles’ Roscoe’s Chicken and Waffles.
I bring up Roscoe’s for a couple of reasons. One could argue that this seven-unit chain’s issues had more to do with losing a discrimination suit than anything else. However, I cannot look at a marketplace where nearly 50% of all the unit growth over the past five years has come from restaurant chains and not wonder if we aren’t hitting saturation point. Living wage laws that are being considered in multiple states (yesterday Jerry Brown signed a bill to raise California’s minimum wage to $15 per hour by 2022) are going to increasingly be a challenge for many restaurants—this is an industry that depends on cheap labor where margins are already thin. As for the iconic Roscoe’s chain? The good news here is that Snoop Dogg says he’ll save the chain “if it comes to that…” What exactly does “if it comes to that” mean? Who knows, but I am guessing that Roscoe’s better take Snoop up on his offer before the November elections. Why? Because I am guessing that the California Control, Regulate and Tax Adult Use of Marijuana Initiative will likely pass and Mr. Dogg may just find another target for his venture capital funding. In fact, there may be as many as 15 states that legalize some sort of marijuana use this year. Whatever you may feel about it, the demographics appear to be on the side of legalization and this has emerged as one of the fastest growing industries in the United States right now and only poised to accelerate. But, take it from the landlords of Colorado… that’s the good news.
Do I see a big impact ahead on retail from legal marijuana? Not so much, though these have proven to be great tenants for gobbling up Class C retail space in Colorado, Washington and Oregon and Class C retail is in generally poor shape nationally—so this is (speaking only in terms of potential net absorption) good news for those landlords. Again, I’m not here to argue the case for legal marijuana one way or the other… but legalization has clearly driven demand for commercial real estate space in those markets where it has taken place. But the real action has not been in the retail arena. It’s been in the industrial marketplace, where aging, functionally obsolete (mostly former manufacturing) space has been reborn as state-of-the-art indoor grow facilities. There will almost certainly be a similar impact in new legal marijuana markets, the only difference being that this time around there are big money interests waiting in the wings with already successful blueprints to follow.
But back to the mixed messaging conundrum in the retail world, we are wrapping up running our Q1 2016 statistics and while we have seen a slight uptick in vacancy for mall and lifestyle center space, this year’s accelerated rate of closures has had very little impact so far on trophy malls or lifestyle centers. It has almost exclusively been focused on Class B and C product. And, to that matter, it has had little—if any—impact on prime urban high street corridors… nor has it had much of an impact on community/neighborhood, power or strip shopping centers. Mostly we are seeing flat numbers, though have been a few slight swings in vacancy (both positive and negative) depending on local markets. I will be sending our National Shopping Center Report for Q1 2016 to you as soon as it is available (should be out in about two weeks or so), but in my preliminary review of the statistics, I am not seeing any major movement despite what has seemed like a torrent of bad news.
The reason is pretty simple; closures may be up, but planned openings are up too. This is particularly the case for restaurants…but we are continuing to see action from the same categories that have been carrying growth throughout the post-recession era… discounters, dollar stores, off-price… they continue to plug away. For example, Family Dollar is planning 900 stores this year. Yep that is a new dollar store from one chain alone opening about every 10.5 hours this year in the United States.
The most recent job news is just part of the story behind this growth. In our Top Ten, this week there are a number of articles on the seeming disconnect between US economic performance and the global economic gloom that has set in. Cheap gas is here to stay (at least for the foreseeable future). We estimate last year’s gas savings put an extra $500 in the pocket of every American and all signals indicate this will be the case throughout 2016. Meanwhile, robust job growth continues and we are finally seeing pressures on wage growth across the spectrum. We are about to release a paper on the topic (if you are on this mailing list, you will get a copy), but the long and short of it is that the American consumer is already in the best place that he or she has been in in years… and all economic indicators point towards this improving further in 2016.
And so… planned unit growth is creeping up in the retail world. But expansion trends continue to be driven by two trends; concepts that don’t have to compete with e-commerce (food related, grocery and restaurant, and service retail) and the barbell of prosperity (in other words, anything except for mid-priced hard goods). These storylines have been with us for going on six years now, though they have slowly evolved. For example, the luxury and upscale retail sectors remain strong, though we anticipate slightly slower growth in 2016. But essentially, we are seeing growth from the same sectors and the same players… all of which should increasingly be a concern in the marketplace.
Let’s just start with restaurants… growth is going to increase this year, but the restaurant failure rate (already increasing) is also going to increase. The fact is that many of the pillars of retail growth over the past few years are retail categories where we are likely nearing saturation levels in major markets. That doesn’t mean we won’t see plenty of new concepts coming on the scene that will do well. We will. But we will also see some new concepts that don’t do so well. Look increasingly for volatility ahead. Though the overall stats will likely still paint a positive tale, the marketplace is likely going to be a bit more challenging in the year ahead.
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.