The Shifting Demands of Retail Real Estate
There is a shifting real estate demand in the retail industry based on socioeconomic trends. The market is limited by pre-leasing requirements and the economy still has a ways to recover before a significant change is reflected in retail real estate. The following are trends seen recently within the industry:
The Rise of Discount Stores
Previously, outlet malls that largely exist just outside of major cities carried unwanted stock from the store’s previous season. Today, merchandise is being created specifically for stores’ outlet counterparts. Post-recession retail demand has proven to differ from pre-recession demand, as the stigma of shopping at discount stores has gone away and consumers are openly more price-conscious.
Discount apparel and fast fashion are overtaking brand apparel. TJX is ranked #103 and climbing in recent years in the Fortune 500, and H&M is slated to open 400 stores and seen a 36 percent jump in net profit. Kohl’s and Macy’s are throwing their hats in the ring as well for outlet stores. Macy’s, already the mid-range chain for its upscale counterpart, Bloomingdale’s, decided to open six small-format discount chains called “Backstage” this year because, “the data said there is a customer who is going in this direction and not coming to our stores,” said Macy’s CEO, Terry Lundgren.
Gap is optimizing their portfolio by closing 175 traditional stores within the U.S., but have no plans to close any within their outlet portfolio. Global president for Gap, Jeff Kirwan, states that the company will be focusing more on providing, “on-brand product collections and enhancing the customer experience” via a smaller store count.
In the UK, discount food stores Aldi and Lidl are set to double their sales in the next five years1. They are also expanding into the U.S.—Aldi has plans to open its first stores in Southern California by next March, and Lidl confirmed a $2.2 million investment for its U.S. arrival. Their growth would make them responsible for 11 percent of the grocery market.
Shifting Expansion Plans
Most retailer construction plans have been cut back in recent years. Instead, companies are opting to re-size and expand upon their existing stores. McDonald’s, for example, is planning to open 1,000 stores globally, as well as close 700 existing stores. This means the global net for the largest fast food chain in the world is only 300 stores.
This trend, however, excludes superstores Walmart and Target, whose store numbers continue to grow. However, the growth is very specific to smaller footprint expansion. Walmart Neighborhood Markets will pose a threat to traditional supermarkets, offering a compact supercenter in accessible locations. Target will introduce Target Express and CityTarget, a compacted version of the suburban staple that will cater to a more urban demographic.
Demand has also shifted to accommodate the rise of e-commerce. Omni-channel customers may opt to purchase books and electronics online, shrinking that sector of real estate demand. However, items like toiletries and food are still mostly purchased in-person, and research suggests that retail centers still top as a shopping destination.
Growth of the Third Space
The “third space” refers to entertainment and socializing in living centers, or what is commonly referred to as a lifestyle center. These are growing in popularity but have not completely replaced the traditional mall. Rather, B and C malls are dying as A malls and these mixed-use spaces gain popularity.
Lifestyle centers are growing with a focus on quality customer experience. The new shopping center supply grew at its slowest pace in 40 years in 2013, and the industry is wisening up to customer demands by creating destinations that are complete with merchandise, food and entertainment options.
As the socioeconomic landscape evolves, many retailers have improvised in strategy to continue their growth while others have faltered. Those currently struggling may wait to see how other retailers’ adjustments play out before echoing their actions.
1“Discount retailers to get stronger, says IGD” by Rod Addy, 30-Jun-2014