Reviving Big Box- How the Shopping Center Space Is Transforming

Over the past few years, we have seen news As numerous big-box locations that were once the headlines declaring retail is dead, the impeding main traffic-generators to shopping centers remain recession is affecting consumer spending, the empty, well-funded investors with a sharp eye for e-commerce boom will make retail obsolete, and opportunity are taking advantage to reinvent the most recently, impending tariffs are obliterating space. Several big-name businesses and investors retail sales and profits. It comes as no surprise are changing the retail game, for the better. that the retail industry is changing, especially with big-name brands, such as Sears, Macy’s and J.C. Penney, declaring bankruptcy, shuttering locations, and announcing closures. Despite this shift, The following article will dive into what consumer confidence and spending are elevated, big-box tenants are transforming the and the overall retail property fundamentals shopping center space and how they are remain healthy with continued improvement. taking advantage of the opportunities currently available in the market. RETAIL OUTLOOK WHAT’S IN THE CARDS FOR SHOPPING CENTERS?

THE FUTURE OF THE SHOPPING CENTER INDUSTRY Source: ICSC, Envision 2020

UNIFICATION of brick-and-mortar & online retail CONVERSION of shopping centers into communities UNPRECEDENTED INTIMACY with the consumer Mall environments that ENGAGE millennials

Rising wages, low unemployment, and increased 2019 holds many positive dynamics for the consumer spending are all positively affecting retail industry, particularly for those who are the retail industry. The total disposable personal willing to adapt. For retailers and shopping malls income of retail consumers in today’s market that aren’t changing, it is assured that they will reached an all-time high revenue of $16.5 billion face headwinds. However, many investors are in June 2019. The National Retail Federation standing in the curtains, ready to sweep up the (NRF) also reported that U.S. retail sales are surrendered retail space for unique opportunities. expected to rise between 3.8 percent and 4.4 percent to more than $3.8 trillion in 2019. Based on those numbers, investors see an AS OF AUGUST 2019, THE NATIONAL increase in retail investment opportunity. Investors SHOPPING CENTER RETAIL are continuously finding ways to keep the sector MARKET’S VACANCY RATE alive, with new concepts and tenants filling stands at 7.2 percent with over 171 million out vacant space to include co-working space, square feet absorbed year-to-date boutique fitness studios, and even food halls. Price trends, strong fundamentals, and lower interest rates all point to a brighter future, for rental rates are $21.11 per square foot, some regions more than others. For example, according to CoStar data Southern California is an especially prime market, where supply is constrained, and there is a lack of large-scale, new retail property development taking place due to heightened construction The increased rental rate reflects the growth in costs and prolonged entitlement processes. demand for retail space, with heightened demand Along with the limited construction, space demand for grocery-anchored neighborhood community remains robust, and rents have reclaimed their and strip centers. These tight market conditions pre-recession levels, thus inspiring investors to increase the likelihood that fundamentals show increased interest in the opportunities these for existing shopping center inventory will assets offer for current yield and appreciation. continue to improve over the long-term.

MATTHEWS™ BIG-BOX IN THE NEWS

As consumers start looking for experience, Target and Walmart are two tenants that are firing convenience, and a sense of community, there is on all cylinders and continue to defy conventional a transformation in the retail sector well underway retail thinking to capitalize on the whole consumer to include a blend of entertainment and one-of- experience. Target just cited a surge in same- a-kind services. Big-box tenants are utilizing new day fulfillment as the main driving force behind strategies to differentiate themselves in the retail sales growth, and Walmart has made numerous transformation. technical improvements to focus on the omni- channel shopper. These improvements include OMNI-CHANNEL RETAIL HAS introducing cashier-less checkouts, automated COME TO FRUITION store systems, and have recently equipped employees with an in-store app that allows In August 2019, Target’s stock spiked to a customers to order and pay for items online in record 19%, with same-store sales rising the physical store. Walmart is also seeing more 3.4% and online sales jumping 34%. customers place their grocery orders online during the day and then utilize the drive-thru pick-up The Home Depot sales increase by for their items on the way home from work. 5.7% in Q1 2019, due to faster online delivery. The retailer also a B2B TOP RETAILERS RANKED BY platform where professionals can OMNICHANNEL EXPERIENCE manage their inventory online. Source: Internet Retailer Research, 2019 Omnichannel Report

Walmart has contributed $1.2 billion to its e-commerce program and has rolled out Walmart 159 grocery pick-up services to 140 stores.

Target 158.5 Retailers no longer only have physical locations or online stores; they have a strategized The Home Depot 155 physical retail location and a refined online presence that delivers a seamless shopping Best Buy 143 experience. These services include ordering online and pick-up in-store the same day and buying online with same-day shipping. Macy’s 140.5

Dick’s Sporting Goods 137

Once just a buzzword, omni-channel retail has become the number one Kohl’s 129.5 way for retailers to stay relevant in the consumer marketplace. Nordstrom 123.5

Lowe’s 120

JC Penney 118

* Based on a 200 point ranking

MATTHEWS™ A NEW RETAIL MIX

The retailer is also building its online strategy Although Nordstrom revenue slipped 5% around a plan to locate available inventory that is in Q2 2019 to $3.87 billion, the profit for the quarter represented a positive year- closest to the customer and ships the item from over-year change of 13% to $141 million. that location. Department discount store, Kohl’s is also cutting Kohl’s is underperforming on comparable back its in-store merchandising, and real estate store sales expectations, which is down footprint to team up with grocers, gyms, and 2.9% in Q2 2019. Net income for the quarter Amazon. Discount grocer, Aldi will be Kohl’s first totaled more than 17% to $241 million. partner to sublease space in its downsized stores. This partnership will not only allow customers It is a tough time for department stores, with to buy milk and eggs and a pair of jeans, but will age-old retailers like Macy’s and JCPenney also allow the retailer to effectively use space closing locations, and upscale retailers trying to and penetrate specific markets that they aren’t compete with discounters. Although Nordstrom currently located in. sales have slowed, especially in their renowned Announced earlier this year, Kohl’s will be shoe department and men’s suits, they have leasing space next to its department stores to added to their retail mix. After closing some Planet Fitness in order to generate more traffic. full-line stores in recent years, the retailer now Additionally, Kohl’s has partnered with Amazon to operates more stores than in 2018, including 118 sell Amazon products and accept Amazon returns full-line stores, 250 Nordstrom Rack locations, six to its stores. Kohl’s is making themselves more Trunk Club clubhouses, three Jeffrey boutiques, relevant by partnering with companies to provide and three Nordstrom Local concepts. The new a more suitable way for people to shop. These additions have been small, but they have provided partnerships are pivotal indicators for Kohl’s stock. a unique shopping and service experience.

KOHL’S NET SALES DOLLARS AND NORDSTROM LOCAL STORES SERVICES COMPARABLE SALES ($MILLIONS) Source: Kohl’s Corporation

$19,167

$19,036 Personalized Dry-Cleaning 1.7% Shopping Experience Services 1.5%

$18,636

Pick-Up Items Personal Ordered Online Stylist

2018 2017 2016

Barber Custom (2.4%)

Shop Alternations 53rd Week Net Sales Change in ($170 Million) ($Millions) Comparable Sales

MATTHEWS™ RETAILERS RIGHTSIZING & DOWNSIZING LOCATIONS

Retailers are looking to right-size their In the second quarter of 2019, CVS Pharmacy’s operations to deal with the changing consumer earnings beat Wall Street’s expectations, and shopping patterns. Walgreens, CVS, Target, the company raised its earnings forecast for the and Walmart are prime examples of tenants rest of the year. This growth was primarily fueled who are building and introducing smaller by its acquisition of health insurer Aetna. In the stores or decreasing their portfolio size. coming years, CVS Pharmacy is slowing their store expansions to remodel well-performing stores and focus on its HealthHUB Concept, With more than 9,000 stores around the country, Walgreens announced that it was a concierge service that offers expanded shuttering a couple hundred of them. MinuteClinic services, pharmacy support, and more health and wellness products.

CVS Health has about 9,900 stores but will be curtailing plans to open OTHER BIG-BOX new stores. The drugstore is also evaluating over 500 lease renewals. TENANTS INCLUDE

Both CVS and Walgreens are closing less than three percent of their stores in an effort to seek new ways to drive shoppers to their stores. These include offering more health services, improved products, and even experiences. Walgreens recently stated that they anticipate minimal Ikea, Barnes & ...while Walmart disruption to customers and patients and hope Noble, and Nike are and Target are to save $1.5 billion in annual expenses in 2022. DOWNSIZING... RIGHTSIZING.

Walmart is testing a small-format store concept by building a 3,000 square feet convenience Walgreens’ goal is to invest in partnerships store with fuel pumps in parking lots with and services for the future, focusing on 180,000 square feet or more. Target is building more profitable stores that will provide smaller and more streamlined urban-format long-term growth. stores to service those who do not live near their larger traditional Target stores.

REASONS TO DOWNSIZE

Increased Suitable, sizable land being cost of land more challenging to find

MATTHEWS™ RETHINKING EXISTING PROPERTIES

There is a “battle royale” occurring between big- Unibail-Rodamco recently became the box retailers who are coming up with new concepts largest owner of shopping centers in the world, purchasing Westfield for $16 billion. to stay relevant and grow in a changing landscape. This is the largest property acquisition With the increased growth in personalization and since 2013, bringing up the sale of localization, each new strategic goal is to compete investment malls by 155% year-over-year. in a market that is primarily dominated by Amazon. The bar is continuously raised around delivery The breakup strategy is on the rise. windows, options, and customer experience. Investors are breaking up their $40 million to $200 million properties into Many investors have been raising concerns smaller NNN boxes, pads, or anchor retail about investing in retail centers due to the ever- strips to receive high property prices. changing world with retail continually being surrounded by “bad news,” especially in the mall The retail landscape is being rearranged as space. However, we are seeing Class A malls, thousands of locations remain empty from stores high-quality open-air centers, and outlet centers downsizing, and bankruptcies from Toys “R” Us and increasing in productivity. There is profitable Sears. Despite these closings, malls are welcoming retail in every market, and active tenants will these spaces as opportunities to replace anchor always be attracted to the best centers in the stores that weren’t attracting customers with market, particularly properties with continued more profitable tenants. By investing in higher fundamental improvements. Well located grocery- growth retail as well as mixed-use projects, malls anchored and shadow-anchored centers are that already have high favorable demographics also performing well and are highly desirable by and high-quality locations are reactivating the investors. So long as investors continue to focus on underutilized space and parking lots. There is a shopping centers situated in dense and attractive new future for these malls and shopping centers, locations, these will continue to be assets with but achieving it requires investment and patience. the ability to scale and adapt if the center should lose existing tenants. Brick-and-mortar is here For those investors who are willing to wait to to stay; if it weren’t, Amazon wouldn’t have secure new tenants, we have seen a rise in demand purchased the big-box retailer, Whole Foods. for retail investment due to the limited supply.

For more information regarding the big-box AS INVESTORS RETHINK THE RETAIL trends in the market or if you are interested SPACE, WE HAVE SEEN THE RISE OF in finding out more about shopping center TWO DIFFERENT SELLING STRATEGIES: buying and selling strategies, please reach out to a Matthews™ specialist. Breaking up of larger assets that have 1 strong anchors or vacant boxes with tenants in tow into smaller individual properties.

By selling off parts of large centers into either NNN boxes or two to three tenant properties, cap rates are lower and will often yield a higher overall sale price.

Increase in retail sale leasebacks, for example, Sansome Pacific recently 2 purchased 11 of Bass Pro Shops and Cabela’s stores.

MATTHEWS™