By Garrick Brown, Vice President of Retail Research, Americas
It’s been a very long three weeks since we last connected. Retail is a huge enough sector that any single week is always going to be chock full of important news. But throw in ICSC ReCon and you are bound to have a stack of reading material in addition to the daily headlines. In this week’s edition of the Newsline I have tried to incorporate as many of the insightful pieces as I could… and there were plenty.
I believe the final attendance numbers for ReCon were somewhere in the neighborhood of 37,000 people this year. Not quite back to the peak levels of 2005/2006, but this year’s show was crowded enough.
What was the mood at the event? Well… contradictory is the best description I can think of. It really depended heavily on what your role in the business is and what retail sector. No doubt most of the bad news in recent months has fallen on the apparel and department store sectors… and that really hasn’t changed. In fact, today’s announcement from Ralph Lauren that they will be closing 50 underperforming locations is just one of many more headlines we expect to see in the weeks ahead.
Yet most retail categories are actually still in growth mode, with a few in robust growth mode. This year’s ICSC was a weird hodge-podge of all of them… the upbeat, the downbeat, chains on upward and downward trajectories and landlords dealing with all of those situations and everything in between.
The fact was this was probably the most important ICSC ReCon of the past decade very simply because so many concurrent trends were playing out on the convention floor. Next issue I am going to get into some of the hottest growth categories and what transpired in Las Vegas with them… but for now let’s circle back to the apparel sector and why this year’s ICSC may prove to be so pivotal for them.
In the last couple of issues of the Newsline I have been talking about the immense pressure that publicly traded mid-price apparel retailers have found themselves under from Wall Street to speed the rate at which they are closing underperforming stores, or the process of “e-commerce rightsizing.”
Most chains were already actively shrinking their store base; closing underperformers (primarily at secondary locations—mostly in Class B or C malls) as those leases expired. Some retailers were working on five-year plans, some longer… but over the last few months those timetables have fallen out of favor with Wall Street. Five-year plans suddenly need to become two-year plans. Two-year plans suddenly need to be one-year plans… and so on. The only problem, of course, is that you generally can’t just walk away from a lease.
And so here is one potential dilemma for retailers in this predicament. Let’s say you are the CEO of a chain that is under pressure to shutter 50 underperforming locations quickly. Obviously it isn’t hard to figure out what to do if you have a disappointing storefront in a fading Class B mall that has a lease expiring next month. That is clearly a location you are going to want to wash your hands of. But what happens when that location still has three years on a lease and the landlord isn’t going to let you walk away from this one without paying dearly? Likewise, what do you do with the decently performing Class A- location with a lease expiring soon where the numbers aren’t great, but they are positive? You can walk away from this one and help get those unit counts down with little hassle and no cost… but in a perfect world this is not the location you would be closing.
I posed a few theoreticals along those lines in the last issue. I was surprised when, in the days before ICSC, my phone began ringing off the hook. I heard from a number of chief real estate executives with apparel retailers that are in this very situation and it became quickly apparent to me that there is an entirely new wrinkle to this story…
As one executive put it, “your theoretical dilemma is turning out to not be so much of a dilemma for us because you may not realize it, but the landlords of those Class A locations you mentioned… most of them are pressing us extremely hard on renewals.” How hard? One site selection specialist advised me of the women’s apparel concept he represents facing a couple of renewals at Class A malls where the landlord was seeking to double the rent and one in a trophy Class A mall where the landlord was trying to triple it.I ended up speaking with at least ten different parties during the days leading up to ICSC and at least that many at the event (all of them primarily apparel players who typically lease mall space). They all shared similar anecdotes of Class A landlords pressing aggressive rates on renewals. Among the best quotes I heard:
“At first I thought they might just be trying to force our concept out, but I’m hearing the same from everyone in our boat. I believe they think we don’t have any options but to keep our Class A spots and close everything else. Here is the problem… a lot of those Class A spots won’t actually be profitable if we’re paying twice the rent.”
“The landlords of the quality malls smell blood in the water and they think they can press us right now. I keep hearing that they have a waiting list of potential tenants eight deep for my spot. I find it very hard to believe in this environment. It’s hard to tell if this is just posturing or if some of these guys have drunk so much of their own Kool-Aid that they won’t have a problem killing the Golden Goose.”
“We are probably going to be closing a few Class A stores because of situations like these, but we almost feel compelled to at this point to send a message. I think you will see a bunch of us in the same boat doing the same thing.”
The storylines I heard from multiple people really told me the same tale… that of the landlords of premier space looking to aggressively grow rents despite the fact that most of the top performing centers in the U.S. have already been doing so over the past few years. Now this certainly could have been pre-ReCon deal posturing—most of the execs I spoke to were going to be meeting with different major mall landlords in Las Vegas to review their portfolios. It is a time honored tactic of starting negotiations off with a ludicrous number… so that the very aggressive rental rate bump suddenly seems like a deal by comparison. Likewise, I cannot say that for one or two of the chains I spoke with that this could merely be a situation where a major landlord no longer has much faith in their concept and is purposely pricing them out on those grounds.
But the reality is that I have heard too many anecdotes like this and come across too many others seeing the same thing for there not to be a trend here.
And here is where things get a little interesting… every single real estate exec I spoke to said virtually the same thing… “We are going to have to look at some alternative real estate strategies going forward no matter what we do.” In my discussions with roughly 20 different players I was asked repeatedly about the “good Class B malls” or the “survivable Class B malls.” I was asked about new urban hot spots, the Cool Street neighborhoods I call them. I was asked about alternative urban retail, I was asked about outlet centers, I was asked about power centers.
Now a lot of those details were worked through at ICSC, but I have only heard bits and pieces from my contacts since. So far, what happened in Vegas has stayed in Vegas… but it won’t stay there for long. But here are some things I think it safe to expect in the months ahead…
Pressure will remain on department store and apparel concepts to speed the rate of their store closures.
The lion’s share of these closures will still hit Class B and C properties. However, Class A malls will feel an impact. Most of these do have waiting lists of potential tenants, though it is hard to believe that these lists are currently very deep for most of these centers and they are likely to be pretty shallow if rents continue to be aggressively pushed.
Mid-priced apparel players are going to have to come up with additional real estate strategies or capitulate to major mall landlords who, as the Director of Real Estate for one women’s apparel brand told me, “think that they are our only option.”
Indeed, the question of whether or not Class A malls will be the only game in town for the entire mid-priced apparel sector is still hanging out there. One of my contacts put it this way, “the vision of this one particular institutional landlord I deal with is that they are going to rule the luxury and the outlet world and that there won’t be retail in the middle anymore.”
Another put it this way: “I get it. If this were a game of poker, (landlord) is holding a three of a kind against my pair. But here is the thing… I don’t think they are just playing poker with me. I think they are playing poker with the whole market. And the whole market, I am guessing, probably has a full house over their three of a kind.”
We’ll see what happens in the weeks ahead… In the meantime, here are a few bones for you…
Though the number of retailers reporting monthly same-store sales continues to dwindle, new figures came out late last week for May. You can check out detailed retailer-by-retailer data by clicking here. By the way, these come to us by way of our good friend Mike Palenchar of the MR Group. In addition to putting together this free monthly report that he shares with the industry (you can get on his mailing list by dropping him a line at email@example.com) , Mike is also one of the top retail talent recruiters in the business. He’s been active in the industry since 1999 and he specializes in identifying top talent for mid to upper level positions in the retail and building industries nationally. He’s helped a lot of people I know land some great positions and he is a good friend to the Newsline.
At ICSC ReCon we released our inaugural version of the 2016 Cushman & Wakefield North American Retail and Restaurant Expansion Guide. This report represents the growth plans (as we interpret them) for roughly 2,000 major chains throughout the U.S. and Canada.
Also, while we have begun work on our Q2 2016 reports… in the meantime, in case you missed it, here is a link to the latest Cushman & Wakefield US Shopping Center Marketbeat.
In the next few weeks we will have a number of new reports covering the retail marketplace coming out… most notable will be our Cool Streets of North America Report, as well as new analyses covering the retail investment and net lease investment marketplace.
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.