Retail Sector Update 11/1/2015

Don and Eli Ghermezian of the Triple Five Group have awakened a massive commercial development project in the Meadowlands of North Jersey that has been dormant for the past six years. The $5 billion project includes plans for a 300-foot Ferris wheel, North America’s largest indoor amusement park and water park, an indoor ski hill, and over 500 stores. After two other organizations had their finances foreclosed on the development, Triple Five Group was able to acquire the land, and has a goal of raising $1 billion in financing through bonds – a risky endeavor as interest rates in the bond market have been steadily rising, increasing the degree of success the project demands. In addition, a large portion of funding for the project has been from public sources because the project is creating jobs and acts as a huge stimulant for the North Jersey area. The mall complex, entitled American Dream, plans to garner over fifty percent of its patrons from New York City’s constant inflow of tourists. This has caused real estate research firms, such as Green Street Advisors, to provide mixed feelings on the mall’s projected success. Considering only 12.4 million of last years 56.4 million visitors to New York City ventured as far as Lower Manhattan, skeptics have been asking what, if anything, would bring tourists across the Hudson and outside the allure of Manhattan. Despite this skepticism, Triple Five Group, which already owns two of the largest retail complexes in North America, has put the project into high gear with a projected date of completion sometime during Summer 2017.

The redevelopment of the World Trade Center site includes plans for a 365,000 square foot, 100-store retail complex that houses high-end retailers and luxury goods. The incorporation of the complex with the Oculus, a transportation hub and center of the World Trade buildings, is set to make this area a retail hub that has been lacking in the lower part of Manhattan. Westfield Corp., the developer of the retail portion of the World Trade Center, has been working to create an enticing environment with premium domestic and international retailers. The organization has also been working to bring restaurants such as Eataly to the complex in an effort to give the area a feel similar to that of the borough of Brooklyn. The new retail development is also bringing companies like London Jewelers to the area, opening these companies up to a new clientele as the development plans to attract patrons from all over the city and the world. A retail complex coupled with art galleries and stunning architecture is exactly what Westfield believes will pull people to the development and create a feeling similar to that of the stores along the Broadway corridor and Howard Hughes Corp.’s redevelopment of the South Street Seaport area. Above all, the development project represents a regeneration of the World Trade Center area that has been ongoing since the September 11 attacks in 2001.

In a time when more and more retailers are spinning off their real estate assets into REITs, Macy’s is left with deciding what to do with their flagship store, the prized Herald Square building. Retailers have been pressed by investors lately to sell off their real estate assets into REITs and lease them back. This allows the company to pay off debt and improve return on invested capital. REITs also protect investors from income tax on the real estate, leading to higher dividends. Macy’s, however, does not have a clear-cut path for its flagship store, largely because the value of the building is not clear. Speculation ranges from less than $3 billion to more than $4 billion on the central Manhattan building that contains 1.1 million square feet of retail space with additional room for offices and storage. As investors such as Starboard Value LP pressure the company, it will have to make a decision both on its real estate assets as a whole and its flagship Herald Square store.

As Bed Bath and Beyond finds itself in steep competition with online retailers, its decision on how to compete becomes crucial to the success of the company. The company has announced plans to invest heavily in its omnichannel strategy of selling in stores, on the web, and on mobile devices. Bed Bath and Beyond, however, only generated 8% of its revenue online last year and may need to look in other directions. Online margins are much lower than brick and mortar sales due to free shipping and fulfillment costs, and with the recent acquisition of Cost Plus and 30% expansion to a total of 1,513 stores, Bed Bath and Beyond has to be very careful about maintaining its margins on that large of a scale. As displayed by Williams-Sonoma and Pier 1 Imports, whose profit margins were destroyed due to online sales, online expansion does not always have a positive effect on the company.