eCommerce & Retail Mash-up: Ramifications for Real Estate
GREATER RICHMOND ASSOCIATION OF COMMERCIAL REAL ESTATE JANUARY 21, 2020
BENJAMIN D. CONWELL Senior Managing Director newCommerce Advisory Lead, Americas Over-Retailed Marketplace U.S. Market can no longer support this much bricks and mortar retail
Sales per Square Foot per Capita Overbuilt 30 $4,000 As the largest consumer $3,500 based economy in the world, 25 the US has traditionally been $3,000 able to support two to four 20 times the amount of retail of $2,500 any other nation.
15 $2,000 As eCommerce has gained $1,500 market share, this is no longer 10 true, despite continued strong $1,000 consumer spending. 5 $500 We believe equilibrium will 24 17 8 7 6 5 4 occur when the US moves 0 $0 USA Canada Australia UK France China Germany from the current level of 24 SF Square Footage per Capita Sales per Square Foot per Capita of retail space per person, to roughly 20 SF per person. Source: Cushman & Wakefield Research Cushman & Wakefield | GRACRE January 2020 | #newCommerce 2 2019 Announced Closures Nearly 10,000 stores in the U.S., excluding restaurants
Payless (USA ONLY) 2,100 A'gaci 54 Closures Due to: Gymboree 800 Victoria’s Secret 53 Ascena Retail (Dressbarn) 650 Office Depot 50 Fred’s 557 Pandora 50 Charlotte Russe 530 Kmart 48 Fleet Rightsizing Family Dollar 390 CVS 46 Shopko 363 The Children’s Place 45 GNC 332 Caleres (all banners) 43 Things Remembered 274 Stage Stores 40 Debt-Addled Concepts Charming Charlie 261 Christopher & Banks 40 Chico’s FAS 250 Abercrombie & Fitch 40 Gap 230 Burberry 38 Avenue 222 Pat Catan 36 Weakest Category Players Destination Maternity 210 Williams-Sonoma 30 Walgreen’s 200 JC Penney 27 Forever 21 178 Vitamin Shoppe 25 LifeWay Christian Stores 170 Southeastern Grocers (Including Bi-Lo) 22 Announced Bankruptcies & GameStop 160 ELF Beauty 22 Liquidations Kitchen Collection 160 Lowe’s 20 Signet Jewelers (Jareds, Signet, Zales) 150 Saks OFF Fifth 20 Foot Locker 145 J.Crew 20 Pier 1 145 Francesca’s 20 A.C. Moore 145 Z Gallerie 17 Tesla 130 Bentley’s Pet Stuff 17 Samuels Jewelers 122 Build-A-Bear 15 Performance Bicycle 102 Barney’s 15 Hibbett Sports/City Gear 95 Tuesday Morning 12 Sears 93 TopShop/TopMan 11 Bed, Bath & Beyond 60 Walmart Neighborhood 11 Party City 55
Source: Cushman & Wakefield Research
Cushman & Wakefield | GRACRE January 2020 | #newCommerce 3 Major Retailer Bankruptcies Major chain bankruptcies 2017 onward nearing Great Recession totals…
Hits Keep Coming… Major Retailer Bankruptcies 40 While eCommerce penetration may finally begin to slow and 35 signs of reaching a “new normal” in the next few 30 years—particularly within those categories already 25 impacted—the disruption is far from over for bricks-and- 20 mortar retailers.
15 Particularly for those addled 10 with debt thanks to leveraged buyouts or Wall Street-driven 5 aggressive development which continued for many 0 chains until the Great 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Recession.
Source: Cushman & Wakefield Research Cushman & Wakefield | GRACRE January 2020 | #newCommerce 4 Bankruptcies…the Hits Keep on Coming… Wall Street, Private Equity and the challenge of outdated growth models
2017 2018 2019 2020 Watchlist Aerosoles Agaci A’Gaci Alfred Angelo Bertucci’s Avenue BCBG Max Azria Bon Ton Babalu Tacos & Tapas 99 Cents Only Bob’s/Eastern Mountain Brookstone Barney’s Academy Sports Central Grocers Charlotte Olympia Beauty Brands Ascena Retail Group Charming Charlie Claire’s Charlotte Russe Bed Bath & Beyond Gander Mountain David’s Bridal Charming Charlie Container Store Gordman’s Fika Destination Maternity Dean and DeLuca Gymboree Gump’s Diesel USA Eddie Bauer (Everest) HHGregg Kiko USA Forever 21 Fairway Markets Limited Mattress Firm Fred’s Francesca’s Marbles: The Brain Store National Stores FTD Fresh Market, The MC Sports Nine West FullBeauty Brands (Online) GameStop Papaya Clothing Real Mex Gymboree Guitar Center Payless Rockport Hollander Sleep Products (Online) Hot Topic Perfumania Samuels Jewelers Innovative Mattress Solutions Hudson’s Bay (All Banners) RadioShack/General Wireless Sears iPic Theaters J. Crew Romano’s Macaroni Grill Southeastern Grocers Kona Grill Jack in the Box Rue 21 Taco Bueno Lolli & Pops JC Penney Sheikh Shoes Walking Company Marie Calender’s/Perkin’s Sports Zone Payless Lands’ End Styles for Less Roberto Cavalli Le Chateau Toys R Us Shopko Modell’s Traffic Shoes Sonia Rykiel Neiman Marcus True Religion Sugarfina Noodles & Company Vanity Things Remembered PetSmart Vitamin World TopShop (Arcadia Group) Pier 1 Imports Wet Seal Z Gallerie Rite Aid Savers & Value Village (Evergreen) Spencer Gifts & Spirit Holdings (SSH) Source: Cushman & Wakefield Research Steak ‘n’ Shake (Biglari) Cushman & Wakefield | GRACRE January 2020 | #newCommerce Vince 5 More Leveraged Buyout Fallout Ahead All of these major retailers have high debt loads due to LBOs
Recent LBO Bankruptcies
Bi-Lo Rue21 Albertson’s Belk Guitar Center Brookstone Sports Authority Claire’s The Limited JoAnn Fabrics Staples 99 Cents Only Deb Shops Toys R Us Edwin Watts Golf True Religion Chuck E. Cheese PetSmart Calceus (Cole Haan) Gymboree Vitamin World HH Gregg Wet Seal Pep Boys Petco Lands’ End Linens N Things Wickes Mattress Firm MC Sports Hudson’s Bay Talbots Neiman Marcus Musicland Company Nine West Academy Sports The Fresh Market Payless Hot Topic Rockport
Source: Moody’s Analytics/Cushman & Wakefield Research
Cushman & Wakefield | GRACRE January 2020 | #newCommerce 6 2019 Announced Net Growth Plans Not everyone is shrinking!
Dollar General 975 Target 30 Dollar Tree 350 Sprouts Farmers Market 30 Top Expansion Categories Starbucks (USA) +/-350 At Home 30 Dunkin 250 Texas Roadhouse 30 O’Reilly Automotive 210 PJ’s Coffee of New Orleans 30 Family Dollar 200 Untuckit +/- 30 Beauty/Cosmetics Green Growth Brands 200 ZIPS Dry Cleaners +/- 30 Five Below 150 Lidl +/- 25 Clicks to Bricks Aldi 150 Dd’s Discounts (Ross) 25 Green Growth Brands 108 Boot Barn 25 Coffee Levi Strauss 100 Trader Joe’s +/- 25 Peloton 100 Habit Burger 23 Discount Grocery TJX (TJ Maxx, Marshall’s, HomeGoods) +/-100 Michael’s 20 Chipotle Mexican Grill +/-100 Carter’s 20 Dollar Stores ULTA 80 Indochino 20 Tractor Supply 80 Potbelly 18 Fitness/Health Clubs Crunch Fitness 80 Wegman’s 17 Ross 75 Noodles & Company 16 Off-Price Apparel Burlington 75 Walgreen’s 16 Hobby Lobby 65 PetSense (Tractor Supply) 15 Super Stores (smaller sizes) Lululemon 50 Duluth Trading 15 Pet Supplies Plus 50 Bed, Bath & Beyond 15 Food Concepts Bath & Body Works 46 Hibbett Sports/City Gear 15 Services Darden (all concepts) 45 Lands’ End 15 Ollie’s Bargain Market 44 DSW 15 Grocery Outlet 40 Shoe Sensation 15 Shake Shack 40 Dave & Buster’s +/-15 Paris Baguette 40 Floyd’s Barbershop +/-15 Adore Me +/- 40 Ocean State Job Lots 14 Aerie 35 Costco 12 Sephora 35 Michael’s 12 Jack in the Box 35 Boardroom Salon for Men 12 Warby Parker +/- 35 American Eagle 10
Source: Cushman & Wakefield Research Cushman & Wakefield | GRACRE January 2020 | #newCommerce 7 Green Shoots: Clicks to Bricks Brand embassies, returns savings driving more pure play growth in physical space
Seamless Integration of Physical and Online Channels in Retail is When eCommerce retailers open 45% now a GIVEN for physical stores, they experience a 37% 36% success for most significant increase in web traffic. categories. Average Established New Retailers Retailers (Digital Increasingly, new retail Natives) will begin online and then spread to bricks Home Apparel Department and mortar—not the When eCommerce retailers close other way around. physical stores, they experience a 10% 8% 16% significant decrease in web traffic.
Source: Cushman & Wakefield Research, ICSC
Cushman & Wakefield | GRACRE January 2020 | #newCommerce 8 Green Shoots: Clicks to Bricks These digitally native brands have opened everything from permanent to pop-up to store-within-stores
ADAY Draper James Kuiu Rockets of Awesome Adore Me Drunk Elephant Leesa Rothy’s Allbirds Duluth Trading LIVELY Snowe Amazon E.L.F. Cosmetics LumberUnion Stance American Giant Eloquii LXR & Co StockX Athleta Essentia M. Gemi Sugarfina Away Everlane Mackage SuitStudio BaubleBar Fabletics Mack Weldon SuitSuply BHLDN Fashion Nova Madison Reed TechStyle Birchbox Floyd MeUndies The Arrivals Black Tux Framebridge Milk Makeup ThirdLove Blue Nile Frank & Oak Ministry of Supply ThredUp Boll & Branch Function of Beauty MM. Lafleur Tie Bar Bombas Gilt Moda Operandi True Botanicals Bombfell Glossier Nadaam Trunk Club Bonobos GOAT Nisolo Tuft & Needle Brilliant Earth Goop Outdoor Voices Universal Standard Brooklinen Greats Parachute Home Untuckit Burrow Hanna Andersson Peloton VSP Carbon38 Happy Returns PIRCH Warby Parker Casper Harry’s Primary Wardrobe NYC Chubbies Heyday Qalo Wayfair Cotopaxi Huckberry Quay Australia Wolf & Badger Curology Indochino RealReal Yogibo Cuyana Interior Define Rebag Zenni Optical Combatant Gentlemen Knot Standard Reformation Dia&Co Kopari Beauty Rent the Runway
Source: Cushman & Wakefield Research Cushman & Wakefield | GRACRE January 2020 | #newCommerce 9 Green Shoots: Clicks to Bricks Brand embassies, returns savings driving more pure play growth in physical space
120
100
80
60
40
20
0
Store Count New Stores 2019
Source: Cushman & Wakefield Research
Cushman & Wakefield | GRACRE January 2020 | #newCommerce 10 One of the Next Big Things We have some catching up to do
Online Grocery Market Share of Total Grocery Spend 2019 9%
8%
7%
6%
5%
4%
3%
2%
1%
0% China UK US France South Korea Austria Japan Germany
Planet Retail, EuroMonitor
Cushman & Wakefield | GRACRE January 2020 | #newCommerce 11 Feeling Good in the Neighborhood Neighborhood/Community/Strip vacancy continues to slowly fall
Neighborhood/Community 70.0 12.0% Center Outlook
60.0 10.0% 50.0 Stable vacancy despite retail challenges. 40.0 8.0%
30.0 Most newCommerce resistant 6.0% tenant base. 20.0 Million Million SF Grocery growth favors product 10.0 4.0% type and will continue to.
0.0 Drug store disruption could 2.0% (10.0) eventually challenge weaker centers, but remains a (20.0) 0.0% question. 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Net Apsorption (MSF) New Construction (MSF) Overall Vacancy BIFURCATION!
Source: Costar Group, Cushman & Wakefield Research Cushman & Wakefield | GRACRE January 2020 | #newCommerce 12 eCommerce Gets the Blame… But it was merely a catalyst…
It’s Not All This Guy! Convergence of Five Factors: It’s Not All This Guy! 1. Acceleration of newCommerce
2. Over Retailed Marketplace
3. Outdated Financial Models (Wall Street, Private Equity, etc.)
4. Race to the Bottom Discounting (Rise of Off-Price)
5. Shifting Consumer Patterns (Millennials Spending Differently than Past Generations)
Source: Cushman & Wakefield Research
Cushman & Wakefield | GRACRE January 2020 | #newCommerce 13 A New Paradigm – Boom of eCommerce Consumer Purchasing Patterns Have Elevated Value of Logistics CRE
eCommerce Growing 5X Overall Retail U.S. Retail Sales vs. Ecommerce Growth*
Total retail sales growth* Ecommerce sales growth
19.0% 17.1% 17.5% 17.4% 16.0% 16.0% 15.9% Recession Resilient 14.9% 14.6% 14.7% 15.0% 15.0% 14.8% 14.0% online sales and 13.0% related logistics leasing remained Online sales will continue to growth at a rate positive during 5X overall retail sale, generating continued recession demand for logistics space
4.1% 2.8% 5.2% 4.9% 3.9% 4.2% 3.8% 3.9% 3.1% 3.6% 3.3% 3.1% 3.0% 3.0% 2.8% 2.8% 1.7% 0.3%
-3.3%
Source: U.S. Department of Commerce, Internet Retailer, eMarketer, Cushman & Wakefield Research | Growth forecasts by eMarketer Research | *To more accurately reflect market penetration and logistics impact, In-store Retail Sales factors out the sale of items not normally purchased online, such as fuel, automobiles, and sales in bars and restauran ts
Cushman & Wakefield | GRACRE January 2020 | #newCommerce 14 The eCommerce Lift eCommerce Represents a Structural Change to Market, Lifting Logistics
Ecommerce Lift 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015Industrial2016 2017Leasing2018 Consistently2019 2020F 5% Outperforming Economic Growth 350,000,000
4% 300,000,000 250,000,000 3% 200,000,000 2% 150,000,000
1% 100,000,000
0% 50,000,000
0
2002 2009 2016 2001 2003 2004 2005 2006 2007 2008 2010 2011 2012 2013 2014 2015 2017 2018 2019
-1% 2000 2020F -50,000,000 -2% -100,000,000
-3% -150,000,000
-4% -200,000,000 Recession Real GDP, AR% U.S. Industrial Net Absorption (msf)
Source: Oxford Economics, Cushman & Wakefield Research
Cushman & Wakefield | GRACRE January 2020 | #newCommerce 15 Faster Delivery Means More Logistics CRE Retailers Must Have More Inventory in More Locations, Reflected in Leasing
Retailer’s Inventory-to-Sales Ratio eCommerce Impact on Net Absorption
Traditional eCommerce 350 1.75 eCommerce Means More Inventory in More Locations: 1.70 300 More Warehousing 1.65 250 1.60 200 1.55 1.50 150 1.45 100 1.40 50 1.35 1.30 0
Source: Federal Reserve, Cushman & Wakefield Research
Cushman & Wakefield | GRACRE January 2020 | #newCommerce 16 In Era Of eCommerce, Logistics Is King Logistics Real Estate Will Be Priced on Delivered Value
Amazon U.S. Fulfillment Expansion
30 120 166msf with eyes Delivery Station on 200msf in US 25 100 Regional Sortation
20 80 Inbound Cross Dock
15 60 Prime Now Hub
10 40 Pantry and Fresh Distribution Center
5 20 Fulfillment/Distribution
0 0
Amazon Prime Members
2005 2018 1997 1998 1999 2000 2001 2002 2003 2004 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2019
Source: Consumer Intelligence Research Partners, LLC, Amazon company reports, MWVPVL International, Cushman & Wakefield Research
Cushman & Wakefield | GRACRE January 2020 | #newCommerce 17 Key Drivers in Fullfillment Center Planning & Development
• Proximity to customers
• Facilitating expansion of fulfilment capacity to bring optimal inventory as close to customer base as feasible
• Material handling solutions that work today and scales
• Optimize leverage of distribution network
• Proximity to parcel carriers, transportation infrastructure
• Build to suit vs. existing product
• Lease vs. own …and labor, labor, labor
• 3PL vs. self-perform
• Clear height vs. building depth
Cushman & Wakefield | GRACRE January 2020 | #newCommerce 18 Multiple Building Types Benefit Faster Delivery Expectations by Consumers Requires Multiple Assets
SERVICE LEVEL MIGRATION
LTL BOX/ROUTE/ CAR/UBER (ETC) DEPOTS TL ROUTE/BOX • Service level depot • Urban core, 10-40K SF • Some stocking & picking, but less CROSS DOCKS automated • Receiving TL • Limited inventory, A+ only • Full of labeled orders • Possibly a 3PL or multi-tenancy • Some A level inventory • Higher cost location (5 mi radius) • Less staffing, limited automation • Possibly a 3PL or multi-tenancy TL RDCs TIERED MODEL: RDCs • Larger replenishment DC – less remote PARCEL/ROUTE • Highly automated; significant receiving, Increased Consumer Expectations of Service and stocking, picking and shipping activities Urbanization Supports Broad-Based Demand BIG BOX E-COMM • Big Box shipping to multiple RDCs • Larger eCommerce DC • Highly automated, land and labor leveraged • Shipping in a cost-viable location - remote URBANIZATION IMPACT
Source: Cushman & Wakefield Research Cushman & Wakefield | GRACRE January 2020 | #newCommerce 19 Small Warehouses Pack A Big Punch Multi-Tenant Distribution Warehouse Performance
#1 39% 59% 1-5-10
BOASTS THE HIGHEST COMPRISES 39% OF THE ACCOUNTS FOR 59% OF THE RETURNS HAVE YOY UNLEVERED 14.3 BILLION SQUARE INVESTMENT-GRADE PERFORMED WELL ON A RETURNS OF ALL CRE FOOT U.S. INDUSTRIAL UNIVERSE OF U.S. ONE, FIVE, AND 10-YEAR TYPES AT 14.7% IN 2018 MARKET INDUSTRIAL PRODUCT BASIS
Source: NCREIF, Real Capital Analytics, Cushman & Wakefield Research
Cushman & Wakefield | GRACRE January 2020 | #newCommerce 20 A Look Ahead: AMZN G+4.5 Latest FC designs going to new heights
Cushman & Wakefield | GRACRE January 2020 | #newCommerce 21 AMZN G+4.5 Complexity and height drive new set of challenges for all stakeholders
86’1” top of parapet
77’9” clear height
Cushman & Wakefield | GRACRE January 2020 | #newCommerce 22 Shifting Paradigms on the Ground as Well Parking, Circulation and FAR
Cushman & Wakefield | GRACRE January 2020 | #newCommerce 23 Not Just FCs – Final Touch Facility Designs Changing
Cushman & Wakefield | GRACRE January 2020 | #newCommerce 24 Final Touch Facilities – Outside and Inside in Constant Flux AMZN as Pioneer Here Too?
Cushman & Wakefield | GRACRE January 2020 | #newCommerce 25 Urban Infill – One Constant is Change New development and adaptive re-use
• Urban logistics centers not just crucial for quick and cost effective delivery, but also for replenishing stores: smaller stores, allowing for returns and avoiding stock outs
• Urban logistics center reduces delivery time and costs
• Deep penetration key given the rising demand for same-day delivery
• Strained urban infrastructure and increased congestion of densely populated cities will drive the need for a more efficient supply chain
• Micro fulfillment getting bigger
Cushman & Wakefield | GRACRE January 2020 | #newCommerce 26 Urban Infill – Single- Or Multi- Story It’s not for every market, but here we go with 1st generation in select U.S. markets
Triangle Equities Terminal Logistics Center – JFK airport (pre-leasing)
Innovo’s 2025 Bruckner – Bronx (pre-leasing)
Prologis Georgetown Crossing – Seattle (complete, 100% leased)
Cushman & Wakefield | GRACRE January 2020 | #newCommerce 27 Lack Of Modern Space Will Push Rents Up Composition of Vacant Logistics Space (Q3 2019)
Key Takeaways
The amount of available 5 years old 36' clear + logistics space and its characteristics will remain a 6 to 19 32' to 36' key storyline in 2019/2020 years old 28' to 32' 60% of available logistics Occupied Vacant space is more than 20' years old. Over half has clear Below 28' heights below 28' 20+ years old clear height
That limits options for tenants seeking modern fulfillment space and will continue to provide landlords leverage
Source: Cushman & Wakefield Research
Cushman & Wakefield | GRACRE January 2020 | #newCommerce 28 Retail Conversions Are Not Supply Side Risk Former Retail Buildings & Land Site Converted to Logistics (2016-H1 2019)
10,000 800 Key Takeaways 700 Former retail conversions 8,000 600 account for a fraction of recent supply and comprise 500 less than one hundredth of 6,000 one percent of logistic stock 400 Existing logistics assets of 4,000 300 bankrupts retailers and 200 building or land sites of former retail establishment 2,000 100 do not represent “shadow inventory” or pose a supply- 0 side risk to asset values 0 New U.S. Logistics Supply Total Logistics (2016 to H1 2019, MSF) Inventory (MSF)
Source: Cushman & Wakefield Research
Cushman & Wakefield | GRACRE January 2020 | #newCommerce 29 Robotic Innovation Booming Inside the Box And it’s far from just an Amazon phenomenon
Cushman & Wakefield | GRACRE January 2020 | #newCommerce 30 Cushman & Wakefield | GRACRE January 2020 | #newCommerce 31 Grab Bag
1. Temperature Controlled Getting Hotter
2. eCom-driven Air Freight to Take Off
3. eCommerce Luxury
4. Power of Returns
Cushman & Wakefield | GRACRE January 2020 | #newCommerce 32 newCommerce Wrap
1. Retail disruption – Not apocalypse.
2. Engagement, experience and value.
3. Proximity, Proximity, Proximity. Labor, Labor, Labor.
4. Speed of delivery vs. cost vs. customer experience; not your father’s delivery network: customer demands radically changed; AMZN has trained us to demand fast and free
5. Complexity of supply chains will continue to drive further investment in technology and physical assets – ever closer to the customer.
6. Rethinking each function of real estate from the supply chain to the “store” and back again. Leveraging the physical store network.
Cushman & Wakefield | GRACRE January 2020 | #newCommerce 33 Thank You
BENJAMIN D. CONWELL Senior Managing Director newCommerce Advisory Lead, Americas
425 785 6325 [email protected]
LINKEDIN: benconwell TWITTER: eComConwell