The retail market in the United States is rapidly changing, with strong demand, little new supply and characteristics that seem to change by the hour. If your post-holiday routine included an overstuffed recycling bin filled with cardboard shipping boxes, you’re not alone—there was a surge in online shopping in 2016, with respectable retail revenue growth overall. According to the National Retail Federation, retail sales during November and December increased 4% over 2015 to $658.3 billion (exceeding forecasts), and $122.9 billion (19%) of this was in non-store sales (a robust 12.6% increase over the year before). The holiday season and beginning of the New Year brought some bright spots, but also some cause for concern in the retail sector, which in turn impacts commercial real estate. For example, some household names announced store closures in recent months, while other sectors of the retail world have survived, thrived and even expanded.
So what does this all mean for commercial real estate, and how can you effectively plan for future retail development? Our Senior Manager Shaun McCutcheon specializes in the commercial space and helps clarify the many moving parts in that sector with this two-part blog. Consider the following themes being revealed in most metro areas around the country:
New Construction Lagging: Deliveries of new construction retail space have been at historical lows during the 2010s, and while there has been an increase in deliveries in 2015 and 2016, the new inventory is far below historical (30 year) annual averages of growth in many metro areas.
Demand is Stronger Than Supply: Positive absorption is now outpacing deliveries in most markets, reversing a trend in which new deliveries far exceeded lease-up activity during the Great Recession.
No Space, Stable/Rising Rents: Vacancy rates are decreasing, though lease rates are stable in most markets (except more expensive coastal metro areas, which are also experiencing rent growth).
Food/Health Driving Growth: Expanding sectors include dining (particularly fast food with drive thru and informal counter service), food stores (health food markets, specialty/ethnic markets and supermarkets) and gyms/specialty fitness facilities in particular.
Department Stores Declining: Contracting sectors include select department stores and big box retailers: Sports Chalet and Sports Authority both filed bankruptcy, closing a combined 490 stores in 2016; Macy’s plans to close 68 of its 750 department stores in 2017 and Kmart/Sears plans to close 150 stores in the near term as select storefronts undergo a real estate liquidation process. Some of these closures will result in increased vacancy, while others will disappear from the retail inventory altogether as the space is re-adapted or redeveloped to other uses.
Big Box Diversifying: Successful big box retailers are differentiating themselves from online competition. For example, Best Buy is trying to combat the trend of consumers “showrooming” their stores—trying out products but then purchasing them online for a lower price, by 1) price matching their products, and 2) focusing on large, big-ticket items such as household appliances that are often more a need rather than a want and cannot be shipped from an online retailer quickly or inexpensively. In fact, Best Buy increased their share of showroom space to accommodate large appliances, and during the 2016 holiday season had sales growth in health & wearables, home theater and major appliances (along with “significant declines” in mobile phones, tablets and digital imaging) according to their latest financial report. Further, Dick’s Sporting Goods, Cabela’s and Bass Pro Shops have succeeded in the sporting goods sector by offering product demonstrations and interactive/virtual reality experiences that are fun for the consumer, and a big value add versus online shopping. Finally, Amazon has entered the brick-and-mortar world with Amazon Books stores in select markets (Seattle, Portland, San Diego), which not only sells their books and showcases their latest media gadgets, but also serves as a pick-up spot for those who have purchased online. Amazon has plans for eight more of these stores.
Collectively, these trends highlight the rapidly changing landscape faced by today’s retailers and commercial developers. Stay tuned for our next blog, which is designed to help you plan your next commercial or mixed-use development, in light of these changes.
Contact us to discuss how we can help with your next development.
Shaun McCutcheon, Senior Manager – Advisory Charlotte
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