July 28, 2010—New Frontiers in Retail

By Barbara E. Champoux, Esq.

CREW NETWORK

July 28, 2010

Retail defines how we live, what we do for our health, safety and fun, and for many of us, our careers. Because it is such an integral part of our lives, and is so immediately impacted by Wall Street, Main Street and Cyberstreet, the retail industry is among the most volatile, fascinating and uniquely personal sectors of the economy. As described by Prudential Douglas Elliman’s Retail Division Chairman, Faith Hope Consolo, retail is “close to people’s hearts and constantly evolving and adapting to change.”

Based on a survey of retail industry experts, there is cautious optimism about the industry and its recovery. Described below are several of the emerging trends in retail:

1. Back to Basics

Value – The recent economic turmoil has forced most Americans to significantly reduce spending, and caused consumers to re-assess their budget priorities. Even the most upscale shoppers are hunting for bargains. Initially, this led to the expansion of deep discount stores. As consumers continued to insist on value in their bargain hunting, however, luxury retailers began taking their off-price operations out of the shadows and launching their most aggressive expansion plans in years – offering in their outlets many items currently available at their mainline stores, rather than just discontinued or outdated inventory. Both Saks and Nordstrom are expanding their outlet stores, and Saks is extensively re-branding existing mainline stores to Saks OFF 5th, its discount outlet store.

Inventory – Retailers have learned to more effectively manage their inventory to meet consumer demand, both in terms of volume and in responding to changing consumer demands and preferences. Recognizing the multi-channel nature of today’s consumers, more of their inventory is available via multiple channels (full-line stores, discount outlet, online and catalog).

2. Tech-Tail

Social Media – Seeking more effective ways to use social media to grow sales, operators and retailers have developed customized online programs to drive traffic (both online and in stores and centers), build loyalty, integrate online and in-center experiences, track trends, develop targeted events, and solicit feedback. Looking beyond Facebook and Twitter, some retailers are also turning to emerging social network alternatives such as Foursquare, a geo-location-based network already being used by Starbucks, Pepsi, Tasti D Lite, Planet Hollywood and others, while others, like Developers Diversified, have launched their own social network.

Mobile Video – By 2014, more than 500 million users will subscribe to a mobile video service. As most retailers pursue increasingly interactive campaigns to sell their products, integrating mobile video will enable them to engage potential customers wherever they are, in an environment which is not yet tainted or oversaturated.

3. Creativity

Pop-ups – Pop-up stores are no longer simply seasonal or liquidation shops, increasingly being used by landlords to fight rising vacancies and diminishing rents, and by retailers to test markets and products. Strategic use of pop-ups can increase traffic and visibility, showcase space, boost sales, test new tenants, and lend an element of surprise and creativity to the shopping experience. Both landlords and tenants like the flexibility of pop-ups, and are developing more sophisticated ways to harness the phenomenon. For example, previously done online, “crowd sprouting,” a mechanism by which progressive discounts are provided as more people tag an item for purchase, was recently tested on the “bricks and mortar” using a pop-up store.

New Specialty Categories– The emergence of targeted retail specialties is also creating opportunities for retailers and landlords. Lingerie and maternity clothes (for professional women) are among those experiencing sales growth, resulting in the expansion by Bra Smyth, Intimacy and other lingerie retailers of both stand-alone stores, and their sections within the department stores.

Non-traditional Retail – Operators are also being creative in seeking non-traditional, yet suitable, tenants, such as medical facilities, dance studios, day care, media outlets, educational and training facilities (e.g., cooking lessons, language courses, resume writing, etc.), and other professional service providers. In many instances, these kinds of tenants will agree to a 10-year lease, whereas the typical retailer signs a 5-year term, although the retailer will often accept a lower per square foot tenant improvement allowance. These alternative tenants also bring in potential new customers for the other tenants, and facilitate the landlord’s integration into the surrounding community.

Adaptive Re-use – Big-box and junior anchor vacancies remain a daunting problem, with the overall imbalance of supply and demand forcing operators to seek creative solutions for these empty spaces. Large empty buildings are being re-purposed for a broad range of uses, often more tailored to the local community. For example, movie theatres, military bases and big boxes have been converted to beauty salons, community marketplaces, life sciences centers and libraries.

4. It’s a Small World

Declining market growth in the U.S. over the past few years, together with the influx of foreign retail chains (such as Zara and H&M), have prompted U.S. retailers to seek strategic expansion globally. Due to a dearth of capacity in the major urban concentrations, Canadian retailers are also actively exploring global growth opportunities. While many retailers, developers and investors consider the BRIC (Brazil, Russia, India & China) countries an integral part of their short-term international growth plan, others are attracted to smaller global markets in the Middle East, as well as other South American countries. Developed markets like Australia and Canada, have moved quickly into recovery, with a number of major mixed-use and other retail projects planned in Melbourne, Sydney and Toronto. It remains to be seen whether the fashions of some of the U.S. brands are sufficiently fashion-forward to successfully compete with European brands to succeed, however, U.S. retailers must better understand, respect and adapt to local cultural and style idiosyncrasies of such foreign markets.

5. Welcome to the Neighborhood

Retail growth is more locally driven now than before the recession, as consumers retrench, curb spending and nest in their neighborhoods. Today’s lower rents and higher vacancies spell opportunities for knowledgeable local operators with adequate capital, solid concepts and local connections. Whether local or national, however, serving community needs has become paramount and leveraging local connections and expertise is critical. Consistent with that trend, operators are responding to increasing community emphasis on health and fitness in a variety of ways, including “going green,” providing healthy eating options and conducting fitness activities appealing to the local community, such as “mall walking,” skating rinks, bungee jumping, etc. Building on that trend, and in a further effort to differentiate their centers, many landlords are actively recruiting local restaurateurs, which have generally rebounded faster than other retailers. They both enhance community integration and add unique local flavor to a center.

5. Street Smart

Financial institutions, lenders and investors are finding the retail sector opportunistic and increasingly attractive, both in the United States and abroad. Top mall REITs and life insurance companies are aggressively pursuing new domestic and global retail opportunities. Diversified Realty, General Growth, Simon Property Group and Taubman Centers, among others, have invested heavily abroad, while Weingarten Realty Investors and Retail Opportunity Investments Corp. are among those who have acquired retail properties in the U.S. (primarily grocery-anchored shopping centers, seen as relatively recession-proof, particularly those with good operators in a stable market). Despite the challenges and continued trepidation facing CMBS financing, retail assets are emerging as one of the most attractive asset classes for CMBS originators and investors.

6. Regulation

The Financial Accounting Standards Board (FASB) and its international counterpart, The International Accounting Standards Board, are working on merging their respective accounting principles and standards. This merger is expected to result in a new set of standards enacted in 2013, which will significantly impact both landlords and tenants. Companies will be required to book their lease obligations as assets and liabilities on their balance sheets, removing the distinction between how leased and owned real property is treated for accounting purposes. As a result, among other things, more companies may buy their space, driving down the demand for leased space, and providing impetus to reduce term lengths.

Undoubtedly, the retail industry is still in recovery mode, vulnerable to periodic fluctuations in consumer confidence and government regulation. Nevertheless, the retail markets are increasingly opportunistic for savvy landlords, retailers, lenders and investors, who know their local markets (whether in the U.S. or abroad), understand underlying property fundamentals, are creative and adaptive, and are prepared to take some risk.

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