More retailers embrace omnichannel
Commentary By Anjee Solanki
It has been quite a year for tenants and landlords as the retail industry resets after a stifling 18 months of uncertainty. Retailers have finally embraced omnichannel as the strategy of record, investing in online and mobile solutions. As more progressive brands keep a watchful eye on Alibaba, we predict new and existing technologies like artificial intelligence (AI) and machine learning to play a more prominent role in 2020.
BUILDING A CULTURE OF CONNECTIVITY
According to Eggplant Automation, more than one-third of retailers (34%) are looking to incorporate AI to improve the digital experience and 70% have already deployed AI to test their software and applications. The continuous aggregation of data by retailers will provide clarity on consumer behavior, informing marketing and merchandising decisions.
Advertising to get customers’ attention and then having in-store experiences will help solidify sales. One major influence will be how companies connect with customers through social media to bring them into stores for purchases. Consumers live on their phones and retailers who market through this medium will drive sales both online and in-store.
Currently, 90% of retail shoppers use their smartphones in stores, creating a direct connection between retailers and consumers. Beacon technology is expected to surge by 45.5% over the next five years. The small inexpensive, wireless transmitters use low energy Bluetooth technology to transmit signals to nearby compatible smart devices. The emergence of Beacon technology will implement even more connectivity between consumers and locations, allowing companies to learn what products consumers are drawn to, what direction they’re coming from, where in-store they spend the most time, and how long they shop.
THE SURVIVAL OF THE FITTEST
High-end luxury retail brands continue to perform thanks to the personalized, hands-on experience they provide consumers. Successful high-end retailers will continue to do well as they cater to a specific limited demographic who are less apt to buy their luxury items online and prefer to see and touch before purchasing.
Upon establishing a physical presence, direct-to-consumer brands create valuable and impactful experiences for consumers. And it enhances their online sales, too: Direct-to-consumer brands have seen online traffic jump nearly 37% after opening a physical store. Direct-to-consumer brands continue to open brick-and-mortar stores with great success, as seen by strong sales and increased brand awareness.
Landlords have also experienced a hard reset, broadening the scope of their tenant mix to include brands and retailers that generate foot traffic, engagement and are more adaptable to change. The stress in the mall sector appears to be moving up the food chain. As the dust settles, we’ll see non-traditional anchors — apartments, hotels, senior housing, medical, entertainment, ball fields, etc. — increase in velocity. We are seeing additional redevelopment across the sector, increasing the social and community components of the property with food truck events, live music, open seasonal markets, among others. Food and beverage, as well as fitness and entertainment uses, have continued to be active, increasing the category’s footprints.
THE CONVENIENCE OF DELIVERY
The existing infrastructure that supports delivery options is changing at a rapid pace. How retailers respond to customer demand for the immediate distribution of goods will continue to be a major influence on the e-commerce experience. We will see brands expanding their online catalog by adding SKUs to create additional options for consumers to stay loyal. Capital allocation by brands to strengthen e-commerce focusing on same-day delivery and the convenience of in-store pick-up or home delivery by the consumer will be critical to their survival.
The U.S. economic growth relies heavily on consumer attitudes and buying intentions. As the U.S. GDP slowly regains momentum, we have seen a slight increase in consumer spending (2.9%), including a 5.5% increase in spending on goods. There is much speculation on how the state of the elections may influence consumer decisionmaking, impacting CRE and retail in the new year. It’s unclear how the 2020 presidential election may affect CRE. When you consider the sales year over year, things are as good as they can be, and hopefully, will be no worse after the election. As for the rest of it, we’ll have to wait and see.
As for Houston, while overall job growth is expected to be positive, the energy sector, especially up and mid-stream companies are expected to continue to shed jobs. The loss of jobs in the energy sector will have a negative impact on the higher-end retailers and restaurants as the average income for those positions is roughly double the average income for all other industries in Houston. We still expect the economy and consumer spending in Houston to have modest growth in the next two years and population growth will continue to drive the demand for retail and retail services.
Vacancy & Availability
Houston’s average retail vacancy rate dropped 10 basis points from 5.4% in Q3 2019 to 5.3% in Q4 2019. At the end of the fourth quarter, Houston had 15.6M SF of vacant retail space on the market. Among the major property types, theme/entertainment and single-tenant retail had the lowest vacancy rate of 1.6% and 1.7%, respectively, followed by malls at 2.3% and Lifestyle Centers at 2.7%. Neighborhood centers have the highest vacancy rate of 8.7%, followed by strip centers with a vacancy rate of 8.5%.
Approximately 865,000 SF of new inventory delivered during the fourth quarter. There is currently 2.3M SF of retail space under construction, of which 68% is pre-leased. The majority of the projects under construction are located in the outlying suburban submarkets adjacent to rapidly growing residential developments, including Cross Creek Ranch, located in Fulshear, TX in the Far Katy South submarket and Phase III of Sienna Crossing in Missouri City in the Far New Territory submarket.
According to CoStar, our data provider, Houston’s citywide average quoted retail rental rate for all property types increased from $16.75 per SF NNN in Q3 2019 to $17.91 per SF NNN in Q4 2019. These average rental rates are typically much lower than actual deal rates since they include all retail property types and classes, the majority of those properties are not well leased and are listed with discounted asking rates. According to Colliers’ internal data, Class A in-line retail rental rates can vary widely from $20.00 to $85.00 per SF, depending on location and property type.
Absorption & Demand
Houston’s retail market posted 1,035,391 SF of positive net absorption in the fourth quarter, making the year-end total positive net absorption to 3.5M SF. Some of the positive absorption can be attributed to tenants that expanded into new locations. Among those tenants are HEB, Northern Tool & Equipment, Life Time Fitness, Dick’s Sporting Goods, Floor & Decor, HomeGoods and Total Wine and More.
Houston’s retail leasing activity, which includes renewals, remained steady over the quarter at 1.3M SF in Q4 2019. Year-end 2019 total leasing activity is 3.5M SF. Some of the tenants that signed leases during the fourth quarter are listed in the table below.