Retail Real Estate 2016

Macy’s, Kmart, and Wal-Mart are all closing stores, in what is clearly becoming a more difficult retail climate for brick-and-mortar outlets. Is this the mark of a sea change for retail real estate, or simply the misfortune of a few select chains?
We’ve written before about the changing dynamics of retail centers. Most consumers prefer the in-store shopping experience over online, yet almost three-quarters of them intend to do some form of online research prior to making in-store purchases. For retailers dealing in products — not services — that dynamic should cause some worry; for what is to prevent those consumers from going ahead and consummating those transactions online, unless other attractions of the in-person shopping experience can be emphasized?
Holiday Retail Performance
Holiday sales in 2015 came in lower than expected – in fact, the weakest year since 2009. Sales at U.S. retailers declined 0.1% in December from November. Then, too, the holiday November-December season, while increasing 3% from 2014, came in well shy of the 3.7% of what was forecasted, and even more under the 4.1% increase of the 2014 holiday season.
Some observers noted that, among other explanations, unusually warm weather in many parts of the country damped demand for winter apparel, and that there was a slowdown in spending by foreign tourists because of the strong dollar. In any case, as a result of the slowdown two of America’s most iconic retailers, and another significant one, are shutting hundreds of stores. Wal-Mart Stores Inc. moved to close 269 stores worldwide, including 154 in the U.S. That followed announcements from Macy’s and Kmart that those chains would close locations in California and other states.
Tougher on Bricks-and-Mortar Retailers?
Notably, though, online retailers didn’t experience much of a slowdown. Holiday online sales rose approximately 9% year-on-year. Web merchants are gobbling up a growing share of shopping dollars, and with their vast online catalogs the sprawling superstores (like those of Walmart) may become increasingly less relevant. And in general, consumers seem to be spending less on traditional retail items like apparel.
In these traditional retail sectors, the outlook for bricks-and-mortar retailers is a bit worrying. “Physical retail, and large box in particular, is at a tipping point,” said Richard Church, a retail analyst at the data analytics firm Discern, according to the New York Times. “There are too many stores in the U.S. across all retail sectors, low end to high end and everything in between.”
Nevertheless, many physical store retailers are reaching the limits of competing on price against online merchants. Noam Paransky, a director in the retail practice at the consulting firm AlixPartners, believes that brick-and-mortar retailers needed to come up with a better proposition to lure shoppers into their stores. “ ‘Stack it high and let it fly’ doesn’t work anymore,” he said. “They have to figure out how to make shopping fun again.”
Not Every Retailer Has Been Affected
It’s been observed before how households are spending more on services than on goods, as has noted Jack Kleinhenz, chief economist of the National Retail Federation. Such shopping is more “experiential,” with a focus on eating and being entertained. And grocery and drug store anchored centers remain productive and in high demand; “daily needs” traffic is a powerful force.
Many shoppers, especially young ones, seem to still be more interested in these experiences (such as dinners and movies with friends), but less in acquiring mounds of new clothes and other physical goods. That could be seen in December, when sales at food and drinking establishments rose 0.8% even as clothing and accessories shops declined. And home improvement categories, which are linked with a desire to entertain, also saw growth. Furniture stores got a 0.9% boost. Building material and garden dealers reported a 0.7% increase.
For investors, the question is what tenant mix is the most likely to be profitable for retail center operators. Lower gas prices seem to have most benefited retailers in the middle, like Costco, Ross Stores, TJX, and The Children’s Place. And certain niche retailers still had a strong year. Lululemon raised its earnings outlook as it continued to ride a boom in athletics wear, and L Brands (which owns Victoria’s Secret) reported its “best December ever” after the lingerie brand generated holiday buzz with a star-studded fashion show.
Even with apparel and other traditional “goods,” there are still advantages to having physical shops. Those locations can serve as mini distribution centers to fulfill online orders more quickly, for example; they become convenient sites for customers to pick up orders instead of waiting for home delivery. Retailers can look at stores as “the glass half empty or half full,” Paransky said. “They have a more robust network they can leverage, but they have to figure out how to do that.”