Colliers Retail Forecast 2014
E-Commerce, Capitalization Rates, Loss of Community Redevelopment Funds will have Impact on Retail Markets
How e-commerce is re-shaping the look and feel of today’s modern shopping centers, what will capitalization rates do over the next 12 months, and how the elimination of redevelopment agencies throughout California has hamstrung owners of expansion-minded independent grocery chains were among the many topics of discussion between clients and brokers recently at Colliers International’s annual Retail Summit for Greater Los Angeles.
Moderated and organized by Colliers’ National Director of Retail Services Anjee Solanki, senior retail brokers from the firm’s offices throughout the Los Angeles Basin and Orange County, and representatives of many of the region’s most active retail development and ownership firms, discussed major issues influencing the retail market.
The major theme to emerge was that the long-rumored and imminent demise of the traditional shopping mall due to consumers turning en masse to online shopping outlets has been greatly exaggerated. However, its impact – both positive and negative -- cannot be ignored, those in attendance agreed.
"While we cannot deny the rapid growth of online shopping on future development or re-development of shopping centers, the biggest takeaway is that centers may look dramatically different in the future, but they are not going away completely,” said Colliers Senior Vice President Chris Maling. “In fact, retail developers are finding opportunities in sites that they may never have considered before because cities are providing incentives for them to take over sites like the random vacant car dealership site that has sat empty for years now, or the abandoned car wash that went bankrupt, so they can improve their communities and reap the sales tax lost from such failed ventures.”
While online shopping has created a new footprint for retail development sites, with developers now building smaller store fronts for firms like Best Buy, Target and others whose pre-recession buildings were so large that once the economic calamity struck these spaces became financially unsustainable, a fact that in some locations remains a blight on the community.
The group’s consensus, both developers and brokers agreed, was that the mega-stores of the past like those built by such retailing giants as Target and Home Depot, simply are no longer required nor sustainable for a variety of reasons, including the loss of foot traffic to online shopping.
In terms of the most active and favored tenants for new projects, quick service restaurants (QSR) were at the top of the list, according to Festival Companies’ Ryan Shea, Investments Director for the Los Angeles- based firm. He said that in many cases QSR restaurants, rather than full service sit-down restaurants and retail shops, are the preferred lead tenants for certain new projects due to high sales volumes they generate and their relative insulation from increased online shopping trends. In addition lifestyle uses such as fitness and entertainment were also mentioned by the group as being good long term tenants for new projects since they cannot be outsourced to the internet.
Shea and other retail owners were split about the future of cap rates and what owners should expect in terms of their investments. Developers are aiming to achieve a 7 to 7.5 percent range in terms of their return on costs for new product, whereas brokers said they recently had sold existing fully leased product with a cap rate as low as 3.5 percent, demonstrating the attractive profit potential for successful development projects of new shopping centers.
In terms of tenants, there was a wide variation of the types of tenants retailers were attracting to their centers. One thing was quite certain from the discussion – high-end retailers, no matter how much online business they’ve done -- will never abandon shopping centers for a variety of reasons. They may not take as much space, they may re-design their stores, but there will always be a need for a brick-and-mortar location where consumers can examine what they are planning to buy.
“There’s a lot more that goes into a retail transaction of any size,” said Colliers Vice President Gabe Kadosh. “There is often an emotional element to a retail transaction that you simply can’t get online. There’s also the act of shopping itself and of community one gets when the consumer is out and about, and that can never be replaced.”
Meantime, independent grocery chains that are focused on densely populated, urban and multi-cultural markets are going through a phase of consolidation and change, according to Colliers Senior Vice President James Rodriquez. He cited the elimination of redevelopment agencies throughout the state as one of the greatest challenges to expansion that independent grocery chains have had to deal with in recent years.
“By taking away the incentives, tax credits and other inducements that many developers and grocers utilize in these underserved markets, there has been limited growth due to complex land assemblages and rising land costs,” said Rodriquez. “This is driving the value of existing retail product, specifically junior anchor and anchor boxes, to new highs.”
According to Rodriquez, existing grocery store “boxes” of 20,000 to 40,000 square feet, which are usually the anchor tenants in neighborhood centers, are attractive to junior anchors and anchor tenants due to their size. Electronics retailers, apparel stores and other non-grocery related anchor and junior anchor tenants have created a rising demand for the grocery store sites.
“With the elimination of redevelopment funds and other incentives, and the difficulty grocery store owners are having assembling enough land to expand, they are reassessing their businesses and, in some cases, taking the offers,” Rodriquez said. “This, in turn, creates a dearth of options for residents to buy groceries in what are mostly dense urban areas.”
Overall, in terms of the future of retail, the group consensus was that there will always be a need to visit the local marketplace, whether that includes a regional mall, a neighborhood or community center, a power center, or a specialized mall.
“That there is always going to be a need for the shopping center goes without question,” said Executive Vice President Tom Lagos. “But what those centers will look like is what is being determined right now with smaller footprints for traditionally large retailers, upscale brick-and-mortar store fronts for new retailers trying to make a first impression, and stores that combine the online experience with the brick-and-mortar store, where customers order online and, in as little as 30 minutes, they can pick up their waiting merchandise. What we know is that the shopping center experience is going to be different, and it’s going to be there no matter what.”
Lagos’s opinion was buttressed by one of the region’s most recognized retail owners and investors, the Carruso Companies’ Chris Brandon, vice president of leasing. He noted that his mission for the firm was made easier by the fact that Carruso owns some of the area’s most recognized malls, including the Americana in Glendale and The Grove in Los Angeles, but that he doesn’t shy away from the new and cutting-edge retailer, either. If anything, he goes after the more interesting retailer who may have never before had a mall presence.
But it is in the less recognized malls that the real challenge lies, according to Colliers’ Maling. It is here that brokers and owners have to put their heads together and decide on a tenant mix that will attract consumers and how much to invest in upgrading the physical center itself.
“All of this has to be taken into consideration by investors and owners of retail properties,” said Maling. “If they do not, their success may be short-lived. The most successful centers have owners who are willing to invest for the future and those are the ones who will see their success continue.”