RETAIL SECTOR IS EVOLVING

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1 RETAIL SECTOR IS EVOLVING TIPS FROM RETAIL EXPERTS Businesses must continue to adapt to meet the needs of Generation Y STORY HIGHLIGHTS Smart retailers achieve success by combining traditional stores with e-commerce. The big box chains desire to move closer to their customers in both urban and rural markets. Why would stores like Walmart try to find space directly in the heart of major cities? Why would Cabela s move into a mall? How is the Internet constantly changing the retail landscape? These questions point to the fact that the retail sector in commercial real estate is evolving, and there are several factors driving that evolution in both the sales and leasing areas. WHAT FACTORS ARE SHAPING RETAIL LEASING? Mall operators adapt by seeking to fill space with non-traditional tenants. Triple net lease investments are in high demand. Change in U.S. Retail Rental Rates In the Retail sector, the big issue is e-commerce and its impact upon retailers way of doing business. According to Fred Schmidt, President and COO of Coldwell Banker Real Estate LLC DBA Coldwell Banker Commercial Affiliates, businesses large and small must continue to adapt to meet the needs of Generation Y, the approximately age consumer group that s 76 million strong. Members of this generation are very tech-savvy and know how to make the most of technology to buy goods and services. Before they make a major purchase, they ll research it, ask friends about it on Facebook (or other social media), and seek out reviews online. With this market (and other consumer markets), the key to success for retailers lies in adaptability. Below, we examine three major questions about how big box stores, independent retailers and mall operators are responding to meet the needs of today s consumers. RATES $19.25 $19.15 $19.05 $ * Source: Reis YEAR IS THERE A NEW WAY OF MARKETING AND MERCHANDISING? For retailers these days, business is a tough balancing act. Many of them have to downsize their spaces to cut costs, but, at the same time, maintain the proper sales volume. If they downsize too drastically, they limit sales and decrease profitability. THE DIRT ON LAND SALES: Tips from Land Experts 1 1

2 Shoppers are armed with Apps that allow them to quickly find the best deal MARKETING NON-TRADITIONALLY Social media presence, including blogs and videos Text Messaging Barcode Scanning Location-based Social Networking Mobile Apps imitating Shopping Experience Separate Mobile Apps for Discounts A decline in independent retailers has been created due to the continued squeeze on their bottom lines. Because the big box stores and other large chains are taking a significant bite out of the mom and pop market, the most successful retailers are the ones combining e-commerce with an in-store presence. They ve realized that a stand-alone format is no longer viable because shoppers are now armed with Apps that allow them to discover quickly what s on sale, what coupons are available, and what new products can be bought. Savvy retailers know that customers who can touch the merchandise in a store are likely to buy more online. This means they need to seek smaller spaces while shifting a heavier emphasis to marketing and promotion. Today s customers are increasingly demanding two things from retailers - convenience and ease of use. This has caused businesses to turn to non-traditional marketing methods like: Increased social media presence, including blogs and YouTube videos Text messaging, highlighting deals and promotional codes Barcode scanning by customer smart phones Location-based social networking Mobile Apps imitating shopping experience Separate Mobile Apps for discounts (Target Cartwheel) Retailers have focused heavily on social networking sites because they can control their own destiny and retain the ability to react quickly to any issues that may occur and more readily reward loyal customers. In 2013 and beyond, these Retail categories offer potential in terms of sales and leasing because of expansion. Apparel (off-price) Automotive service Dollar stores Health and fitness (including spa concepts) Niche grocery/small grocery ranging from discount to luxury and ethnic to organic. Also, according to Dave Labush, Sales Associate with Coldwell Banker Commercial NRT, the pharmacy chains (Walgreen, CVS, etc.) are blurring traditional trade lines by expanding grocery sections, thus taking a bite out of the business of independent retailers. Restaurants (fast food/fast casual lead the way) Pet supplies Pharmacy Sporting goods 2

3 Mid-price point stores will see limited growth while luxury and discount retailers will continue to expand The trend is toward contraction in the following retail categories: 1 Bookstores Do-it-yourself home stores Large grocery stores especially unionized smaller or regional chains Office supplies (going more e-commerce) Shipping/postal stores Stationary/gift shops Some casual dining concepts Video stores Stagnant middle class growth is causing the increasing bifurcation in the retail market. Mid-price point stores will see limited growth while luxury and discount retailers will continue to expand. WHAT IS THE EFFECT OF AN EVOLVING MARKET UPON RETAIL SPACE REQUIREMENTS? One of the main trends in terms of leased retail space in 2013 is companies seeking smaller spaces so they can remain nimble and keep capital available in order to respond to a rapidly changing market. Depending on the industry, of course, it s an adapt, downsize and move response to increasingly competitive business conditions, according to Rich Robins, Vice President - Retail Specialist, Coldwell Banker Commercial NRT, Salt Lake City, Utah. There are at least three factors prompting this strategy: 1) There s a need for the big retailers to move closer to their customers with new warehouse and delivery nodes in order to meet their demand for same-day delivery and convenience; 2) There is a lack of growth and opportunity in their traditional customer base in suburban markets; 3) Big box stores want to capture business from move-back-in trends. That is, they see affluent young (and boomer) professionals moving back into urban areas due to the fundamental transformation of city economies from industry to services. This is also due to the professionals need for the diversity only an urban environment can provide. In essence, the big box firms are going where the money is. In terms of the urban environment, Walmart and Target are downsizing their stores from 100,000+ SF to 10,000 to 40,000 SF, depending on the location. More specifically, Walmart s Neighborhood Market stores have an average size of 38,000 SF while its smallest concept - Walmart Express - has store sizes averaging around 15,000 SF. 3

4 Proof of the commitment to this downsizing strategy lies in the statement from Walmart President and CEO Bill Simons. He said the giant retailer plans to open more than 500 of the smaller stores within the next 18 months. 2 That s up from the current 290. The company continues to test and refine its Neighborhood Market and Walmart Express stores. A typical Neighborhood Market offers a smaller range of items than the larger stores with a focus on groceries and pharmacies. A typical Walmart Express has a focus on giving customers convenient access for stock-up and fill-in shopping trips. A key part of Walmart s strategy is to stay flexible as much as possible and customize the Neighborhood and Express stores to local needs and competition. Further evidence of desire to exploit the move-back-in trend is shown in Target Corporation s pursuit of a similar strategy to that of Walmart s. Walgreen and CVS Caremark are also focusing more on urban environments. HOW ARE MALL OPERATORS AFFECTED BY CURRENT MARKET FORCES? Malls are seeking non-traditional tenants to fill voids in space Recently, there have been some big-name retailers (Fashion Bug, Blockbuster, Food Lion, Sears) that have closed many stores, especially in malls. In turn, the affected malls are looking to non-traditional firms to fill space previously occupied by department stores and other large clients. These non-traditionals include companies like outdoor recreation firms (BassPro and Cabela s), furniture stores, boutiques, specialty foods, wine bars and restaurants, etc. Historically, these businesses have owned their buildings. The great benefit of a mall presence is that these facilities can give them freeway exposure, thus making it easier for customers to find their stores. This creates the potential for a larger customer base and increased sales. Plus, they get great locations with low overhead. Add in the bonus of wandering mall customers, and it s a perfect fit. In short, mall operators have found it necessary to get creative and seek new tenants in order to maintain and increase profitability while fending off incursions from online selling. In summary, the need to adjust to e-commerce, downsizing and the desire to penetrate different market environments are driving the retail lease market in many U.S. areas. Successful retailers will be those who seamlessly integrate current technology (the Internet, mobile devices, etc.) with an adapted traditional bricks and mortar model. 4

5 HOW ARE SALES OF RETAIL SPACE BEING AFFECTED BY THE CURRENT ECONOMIC CLIMATE? There s a very large unfilled buyer demand for bricks and mortar, Sales of retail space depend greatly on location. According to T.C. Macker, Executive Vice President with Coldwell Banker Commercial WESTMAC in Los Angeles, the drivers behind considerable buyer demand include: Historically low interest rates and costs Low inventory of available properties Firm cap rates Investors seeking an alternative to skittish financial markets; they re looking for safer, sounder investments and see West Coast properties as a great opportunity for their money This has created a situation where sales are on fire in areas like Los Angeles. In fact, Mr. Macker said, there s a very large unfilled buyer demand for bricks and mortar, and this demand is not just limited to retail. Triple net lease investments are in high demand as well. Retail investment sales are also increasing in a big way in markets like Atlanta, Dallas, Denver, and Minneapolis. In the northeast (New Jersey), however, retail inventory is low, according to David Labush of Coldwell Banker Commercial NRT in Westfield, NJ. Mr. Labush has seen a decline in independent retailers due to the squeeze on the bottom line by larger retail firms. Nationwide, demand for space has increased at a better rate than expected after the lingering impact of the Great Recession created a glut of space. This means the market is tending toward a balance of supply and demand. However, lack of new construction means that speculative retail is the most difficult kind of property to get financing for. This, of course, is a positive for existing properties and their landlords, creating higher rents and occupancies in prime locations and centers. In summary, low inventory, inexpensive debt, firm cap rates and investor demand are driving sales of retail properties on the West Coast (in particular) and nationwide (in general). 5

6 FRED SCHMIDT Fred Schmidt is President and COO of Coldwell Banker Real Estate LLC DBA Coldwell Banker Commercial Affiliates. He is a veteran commercial real estate professional with more than 30 years of experience in the industry. He is a member of CoreNet Global, the leading professional association for the corporate real estate industry as well as IAMC and ICSC. DAVID LABUSH David Labush is a Sales Associate with Coldwell Banker Commercial NRT that is a highly successful veteran of the commercial real estate field. His belief is that real estate, first and foremost, is about service. He s a licensed real estate agent and a member of the National Association of Realtors, New Jersey Association of Realtors, and the Garden State Multiple Listing Service Greater Union County Association of Realtors. dlabush@cbcworldwide.com T.C. MACKER T.C. Macker is an Executive Vice President with Coldwell Banker Commercial WESTMAC, specializing in investment sales and leasing. During his 16-year tenure in the commercial real estate industry, Mr. Macker is recognized as one of the premiere real estate advisors to private and institutional clients. Mr. Macker was ranked #4 out of approximately 2,800 agents Worldwide for tcmacker1@cbcworldwide.com RICH ROBINS For the past 42 years, Rich Robins has been involved in the leasing, development, and management of all types of shopping centers, office buildings, and properties throughout the West. Rich acquired his Certified Shopping Center Manager (CSM) designation from the ICSC in Robins expansive background and real estate involvement has enabled him to work with many national and regional tenants. rrobins@cbcworldwide.com The Coldwell Banker Commercial organization is a worldwide leader in the commercial real estate industry, with a collaborative network of independently owned and operated affiliates. The Coldwell Banker Commercial organization comprises over 200 companies and more than 3,000 professionals throughout the United States as well as internationally. To find out more, go to or phone Source: U.S. National Retail Report 2013, ChainLinks Retail Advisors 2 Source: Coldwell Banker Real Estate LLC, dba Coldwell Banker Commercial Affiliates. All Rights Reserved. Coldwell Banker Commercial Affiliates fully supports the principles of the Equal Opportunity Act. Each Office is Independently Owned and Operated. Coldwell Banker Commercial and the Coldwell Banker Commercial Logo are registered service marks owned by Coldwell Banker Real Estate LLC. 6