June 14, 2017
To go just by the headlines, retail is in a vicious cycle of mass store closures and dwindling new construction. This week alone, Gymboree filed for Chapter 11 bankruptcy and the owner of Ascena Retail Group announced between 250 and 650 Ann Taylor, Lane Bryant and Dress Barn closures over the next two years. New Chicago shopping center construction will drop to 1.06M SF this year, and the amount of available Class-A anchor retail space is higher than it has been in eight years. But is this a sign of the failing health of retail? Or is this part of the next evolution for the sector?
Quantum Real Estate Advisors President Chad Firsel said, contrary to the reports, retail real estate is thriving, but it is bifurcated by growing numbers of online shopping volume and aging brick-and-mortar product. The U.S. has 13B SF of retail real estate footprint — an average of 32 square feet per person. That is double the European average and three times the average in Asia. Firsel believes retail landlords need to demolish 1B SF, a size equivalent to the total Chicago industrial sector footprint, to revitalize retail. Firsel said historic consumer demand is driving retail. In the U.S., personal consumption accounts for 70% of the country’s gross domestic product. But consumer demand is coming at a time of declining on-site retail sales and shoppers staying at centers for less time. Around 94% of all retail sales are from brick-and-mortar shops. Remove gas and food from that equation and that percentage drops to 75%.
Some landlords and property managers have recognized these changes and are becoming creative in revitalizing and repositioning their assets. Some are filling the dark space by adding wellness retailers and recreational activities. Some retail is being repositioned as self-storage, while some is being partially razed and rebuilt as mixed-use developments. Firsel said a prime example of retail reinvention is Charlestowne Mall in St. Charles, which is being redeveloped into a mixed-use project with apartments, townhomes and new retail tenants.
Pine Tree co-founder and principal Peter Borzak said Class-A retail landlords are getting more creative, depending on the size of a shopping center and its location. For the larger regional malls and strip centers, it is easier to allocate resources for programming. For smaller shopping centers, reprogramming can be more limited, but landlords and retailers are getting smarter about creating energy to attract shoppers. Part of creating that experience is embracing omnichannel marketing. Borzak said this is no longer a question. It is clear customers want choices in how they shop and that is dictating their relationships with retailers. National retailers have invested more money to develop these channels, and they are becoming much more innovative. Pine Tree is trying to educate small shop retailers in omnichannel as some lack the resources of the larger national retailers.
Baum Realty Managing Broker Allen Joffe said, for Class-A retail assets, location remains a primary factor in the submarkets where retail is thriving. In markets like River North, the Gold Coast and Fulton Market, there is a dovetailing of tenant demand from out-of-town fashion retailers, restaurants and consumers who want options to shop, dine and be entertained — all in one neighborhood. Joffe said some of the strongest retailers in the market these days are junior-box retailers and home improvement stores that offer low prices, experiential shopping and a continuing trend to entertain and improve the consumer’s home. These retailers are reinventing themselves with upgraded amenities meeting customer demand for value.