Retail Sector Update 11/8/2015

“Blurred Lines in Asset Class Categorization”

The definition of retail space has been evolving rapidly. Investors who were previously able to bucket properties into rigid asset classes such as retail, residential, industrial and other major classes are now being forced to think more creatively as the boundaries between property classes become more flexible. Popovec, the author of the article, focuses on one shopping centre in Dallas to illustrate this. She notes how lifestyle retailers such as Barnes & Noble are occupying the same space as other retailers such as FedEx and Whole Foods. Thomas Park and Martha Peyton of TIAA-CREF asset management attribute this diversification to companies’ desires to reach a broader consumer base, no matter where that base may be. According to Park and Peyton, the TIAA-CREF applies a “holistic analytic framework” to all retail property categories, focusing on trade area demographics, the competitive environment, and the property’s strengths as indicated by the tenant mix and sales. With companies including space for “Airport Retailers” in their investment portfolios, it is safe to say that investors should not allow narrow definitions of retail properties to play a large part in the analysis of potential investments.

“China Sees Malls Close Despite Rising Consumption”

Despite data showing an increase in consumer activity, malls and other retail spaces in China have been subject to rising vacancy rates and plummeting rents. Possible explanations include the rising prevalence of online shopping among consumers as well as the possibility of government purchases solely to boost statistics. These failing malls, which were built with the intention to reap a solid reward on the rising levels of consumption in the country, are now adding to the country’s massive debt problem that clocks in at 160% the national GDP. While some malls are trying to refurbish in an attempt to draw a larger consumer base, others are simply closing down and turning to the online market. Major Chinese retail developers such as Dalian Wanda have already announced their closure of over 30 retail venues, with more expected to close in the coming months. Despite these failing properties, China is still the site of more than half of the world’s shopping mall construction, with over 4000 new malls projected to be completed this year. This is primarily due to local governments strongly pushing commercial development in an effort to stimulate the economy. In reality, these efforts lead to poorly managed malls and non-performing loans made by banks. Tim Condon, an economist for ING Singapore, aptly stated, “If you build it and they’re not coming, that’s a non-performing loan. That’s the bank’s problem.”

“Microsoft’s First Flagship Store”

This week, Microsoft is set to open its first flagship store on Fifth Avenue in New York City. The 5 story storefront located at 667 Fifth Ave. aims to showcase Microsoft’s products and devices in a push to become a major consumer retail force. Retail stores are a relatively new concept to Microsoft, who seeks to become a consumer brand as opposed to a brand consumers know. Since opening its first store in 2009, Microsoft has been in the works of finding the right location for a flagship store. While originally skeptical of the NYC retail market, Microsoft tested the market with a Times Square pop up store in 2012. With strong results from that store they decided NYC is the right market and this is the right time to build their largest retail store. The first floor of the 22,00 square foot space will feature a living room where customers can play Xbox on an 84-inch monitor and can test the company’s newest products, which will be untethered to enhance the experiential shopping experience. The push for experiential retail is a relatively new concept, with the idea that the longer you keep the customer engaged, the longer they stay and therefore the more they buy. On the second floor, there will be large areas for customers to play Xbox games, a community theatre where there will be 70 hours a week of workshops, and an answer desk. The third floor will be the Dell Experience at the Microsoft store where Microsoft will display their Dell products. Finally, the fourth and fifth floors will not be retail, but employee space and meetings and events rooms. In a push to compete with their competition such as Apple and Sony, Microsoft seeks to tap the retail market and consolidate their brands and products. According to Cushman & Wakefield, asking rents on Fifth Avenue between 49th and 60th streets are an astounding $3350 a square foot. The upscale location on Fifth Avenue seeks to attract both the tourists and the New York customers.

“Retail Store Expansion”

In the latest National Retailer Demand Monthly report from RBC Capital Markets, retail chains plan to increase store openings 4% over the next year and 4.2% over the next 24 months. These increases come from higher consumer confidence and retail sales growth. The increased consumer confidence could be a result of lower gasoline prices having an effect in the budget of consumers. Rents and occupancy are set for steady growth with the new store openings in the coming years as a direct result of increasing consumer sales, greater demand for retail space, and insufficient new development. Over the past year, absorption has overshadowed new construction by an almost 2 to 1 margin. In addition, retail construction is 38.5% lower over the past year than it was between 2006 and 2008. Not all chains, however, are trending towards more store openings in the coming years. Wal-Mart is set to open between 135-155 stores next year, while they opened 354 new stores last year. Although absorption is strong, retail rents are still 7% below where they were before the recession. That being said, the retail sector is in for strong growth and rent increases as new stores open in already existing spaces.