Amid market challenges, street retail thrives

Featured Author: Jimmy Balafas, Kentro Group

“Retail is dead. Long live retail!” While headlines about the retail industry are screaming, this exclamation represents a turn of phrase first used to communicate the continuity of royal power. One king, declared dead, is followed by the next in line bound to rule and transform the country. And few things have transformed more aggressively in the last decade than the retail industry and its indelible connection to commercial real estate.

Upon announcing the closure of 100 Macy’s stores last August, former CEO Terry Lundgren provided some eye-opening statistics about America’s retail conundrum: we are vastly overstored. Per capita in the U.S., developers have built 7.3 square feet of retail space (versus 1.7 sf in France and 1.3 sf in the U.K.). And, since 1995, the number of shopping centers in the U.S. has grown by more than 23 percent (and gross leasable area by almost 30 percent), while the population has grown by less than 14 percent, according to retail analyst Robin Lewis.

We are seeing the results. For the first quarter, Quantum Real Estate Advisors Inc. reported declining lease rates at malls (from $20.32 per sf in 2016 to $19.85 per sf), while rates increased in neighborhood environments (up to $15.63 per sf).

While no single retail category has been immune to the all-powerful growth of online retailing, malls are disproportionately affected because mainstays such as apparel, footwear and accessories comprise the top sellers online. Independent retail analyst Jan Rogers Kniffen projects that 50 percent of all retail not tied to bars and restaurants will go online by 2030.

So far this year, we have already seen nine major retail bankruptcies, which is as many bankruptcies as all of 2016 combined. Contributing factors are numerous and include increased consumer spending on experiences, rather than buying things. Travel and hotel occupancy is up, and in 2016, for the first time ever, Americans spent more money in restaurants and bars than at grocery stores.

• Urban center investments. Also for the first time since the 1920s, growth in U.S. cities is outpacing growth outside of them. As millennials and empty nesters increasingly move into urban centers, more retail investors are looking at street retail, and those with a portfolio of these assets are adding to them with enthusiasm. Even smaller markets such as Columbus, Ohio, and Savannah, Georgia, are at the magnified end of leading investors’ telescopes.

• Street retail convenience and magic. For millennials and others, street retail convenience frequently wins out versus destination shopping. Driving to, parking at and navigating the mall environment is not as appealing as a quick car ride or – better – walking a few blocks to meet daily needs. Some retailers are leaving malls with urgency to capture better neighborhood foot traffic. A preferred local developer for one of the nation’s largest cellular providers said that he’s been instructed to relocate 36 of 38 stores from malls to street retail regionally.

At its best, street retail evolves as community gathering points and thoroughfares with daily-use retailers like banks and coffee spots layered over with restaurants, bars and grocers. A set of favorable specifications precedes development and are highly valued in urban cores or corridors:

•One-mile population range of 20,000 to 30,000 people, or 500,000 people within 5 miles;

•Annual income of more than $50,000;

•Pedestrian friendly, broad sidewalks and detached lawns;

•Mature trees and landscaping or the ability to add these elements; and

•Proximity to public transportation.

A long view, swift calculations and gut instinct combine to create street retail magic. Transformations are impactful and profitable when the right tenants match consumer demand. The ability to recognize early site potential can be the key to affordable transactions that bank land for the future. Neighbors welcome progress on underutilized parcels.

By contrast, there may be significant costs associated with remnant parcels in near-mature or mature neighborhoods. This land generally is smaller with a higher barrier to entry and requires a creative blueprint for structures and foot traffic. Because retail follows rooftops, residents are more engaged in the development process. Still, even in these more challenging scenarios, it can be worth the investment to find a home for retail tenants in these communities.

Street retail in Denver has helped enhance neighborhoods, including North Denver (Lower Highlands, Highlands, Sunnyside and Berkley), River North, Baker, and the East Colfax/17th Avenue and Colorado Boulevard corridor. It’s not by chance that the ultra-hip bakery Voodoo Doughnuts opened its first ever location outside of Oregon in Denver at Colfax and Humboldt. Similarly, Trader Joe’s debuted at East Eighth Avenue and Colorado Boulevard, and Shake Shack’s premiere spot is planned for 30th and Larimer streets.

Along with demand, the definition of street retail is changing. Groceries can be several blocks away rather than directly adjacent to stores that still benefit from its food shopping traffic. A hospital also can serve as (nontraditional) anchor to blocks-away retailers. And restaurants and bars can be first-to-the-block magnets for enthusiastic revelers and additional retail – for example, more than 20 retailers have opened along Tennyson Street in the Berkeley neighborhood in just five years with a similar phenomenon developing on 17th Avenue in Uptown.

• Retail optimism. We won’t be saying goodbye to shopping malls anytime soon. They are busy transforming into experiential sites with retail pop-ups, museum-quality exhibit tours, upscale, chef-driven restaurants and extensive kids’ zones that far exceed soft sculpture play areas. The International Council of Shopping Centers said its members saw occupancy rates of 93.4 percent in second quarter, the highest since 2007.

At the same time, a selection of once online-only retailers has opened street retail locations. The stylish eyeglass vendor Warby Parker encourages try-ons at its growing roster of storefronts, which may number 70 by year’s end. Bonobos, a menswear newly hybrid retailer, has 34 locations categorized as “guideshops.” Like Warby Parker, your order ships from a warehouse to your home. It’s the reverse of the now popular buy-online-pick-up-in-store model that’s helping to rebuild traffic at brick-and-mortar locations.

And that category killer, Amazon? It committed firmly to street retail with five bookstores opened and another six, most literally, on the books. The company also is testing three grocery formats, including Amazon Go, in which technology supersedes checkout lines.

And despite cloudy retail headlines, consumer sentiment remains optimistic in 2017 with highs not seen in a decade, according to Kiplinger’s economic forecasts. Excluding gasoline, retail sales in 2017 are expected to rise by 4.2 percent, better than the 3.8 percent growth rate in 2016. While the Commerce Department reported a drop in year-over-year retail sales in March, sales at electronics and appliances stores recorded their biggest rise since June 2015 and activity at clothing stores increased by the most in a year.

So, as you evaluate your investment strategy for the next five years, be sure to anoint street retail within your royal family-style portfolio. After all, there’s no need to exchange a kingdom for a horse when everything looks like Clydesdales.