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Changing Dynamics for Retail Centers

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Retail properties are recently experiencing a few different trends – some, seemingly contradictory. The sector is doing well, but there are changing dynamics with retail centers that should be examined as part of any investment decision.

Department Stores Have Lost Importance

Big American department stores like Macy’s are being outmaneuvered by online retailers such as Amazon, discount retailers and service businesses that include food or cinema establishments.

Mall owners used to rely on four or five department stores to serve as so-called “anchor” tenants. Property owners would offer these broad-offering retailers cheap rent in exchange for reliable foot traffic. Now, however, developers or owners may simply need one or two department stores and otherwise are likely to seek anchors in off-price chains like T.J. Maxx, restaurants and movie theaters, said Green Street Advisors, which tracks the mall industry.

Retail had earlier demonstrated “barbell dynamics” – with the high and low ends performing relatively well while the middle struggled. Lately, though, the lower end, too, is changing.

The shift is perhaps most evident in apparel. Two years ago, annual sales at TJX (the parent company of T.J. Maxx) eclipsed those of Macy’s, as the company drew consumers to its relatively smaller stores with a treasure-hunt-like experience and brand-name discounts. TJX posted $29 billion in sales for the year that ended Jan. 31, 2015, while Macy’s revenue was $28 billion, a gap that has widened since then.

The old-line names seem to be hurting the most. Macy’s recently announced that it would cut 10,000 jobs and close 100 stores as part of a continuing plan to cut costs. By the time Macy’s finishes closing its stores, it will have shuttered nearly 200 locations since 2010 (it today has 730 stores). At the end of October, JCPenney had 1,014 stores, 90 fewer than five years ago, while Sears, which also owns Kmart, had 676 full-line stores with its name, a 192-location drop in the same period.

“Brick-and-mortar is not necessarily dead, but you need fewer stores to achieve the same amount of sales volume,” said Liz Dunn, the chief executive of Talmage Advisors, a retail consulting firm. “A lot of retailers need to shrink their store base, and that is tied to everything that’s happened with digital and changing shopping patterns.”

Yet Online Retailers Are Moving the Other Way – Into Malls

The debate over online vs. bricks-and-mortar distribution seems to have shifted. Earlier, physical stores seemed a bit on the defensive, making arguments about (for example) how most consumers claimed to prefer the in-store shopping experience over online, even though almost three-quarters of them intended to do some form of online research prior to making in-store purchases.

The predominant story – which remains relevant – was that retailers had to ensure that they had an appealing presence across all platforms, and not just an engaging in-store experience. For real estate operators of retail centers, this meant seeking out tenants who provided customers with a blended online and in-store experience.

But the crossover need seems to work both ways. As e-commerce grows, even previously online-only retailers like Amazon have ventured into brick-and-mortar solutions to add to and enhance their online operations. The brick-and-mortar retailer isn’t dead – it’s just evolving.

Retailers are converting empty mall space into makeshift distribution centers used for package pickup and returns of goods bought online. At the same time, online merchants are opening physical stores to reach more customers, either via short-term leases in pop-up stores or long-term tenancies like Amazon’s coming move into Manhattan’s Time Warner Center.

More retail centers, including those at town-center locations in smaller cities, are housing Amazon Lockers, which allow Amazon’s online customers to pick up and return packages at their convenience. Other online retailers without any physical stores are looking to provide options for their customers to drop off unwanted purchases in person in shopping centers where they can get immediate refunds. Such developments could provide needed relief to shopping malls across the United States as they grapple with a rise of e-commerce and some retailer bankruptcies.

Columbus, Ohio-based landlord Washington Prime Group in November started rolling out Amazon Lockers in 50 of its retail centers, and is looking to add digital screens that offer coupons and promotions to draw shoppers to restaurants and apparel stores nearby. “We have to be creative,” said Lou Conforti, Washington Prime’s CEO. “People are so hungry in Middle America for interesting products.”

‘Hands-On’ Still Counts

Online data, ironically, points to the continued relevance of physical retail stores. Searches for “locations near me” are on the upswing, indicating that consumers want “hands on” before they buy.

Brands are expected to continue to open their own locations. The physical presence concept holds real appeal for any brand that wants to effectively tell its story (not to mention control its sales, inventory,and service ethos). For online-only brands retailers, a pop-up storefront offers an opportunity to connect with customers face-to-face.

Amazon, Google and Facebook have rolled out numerous pop-up stores and roadshows around the country showcasing their gadgets, such as speakers with the latest intelligent voice functions (Amazon Echo and Google Home) or virtual reality goggles and wireless controllers (Google’s Daydream View and Facebook’s Gear VR). Amazon has been the most active, with 31 pop-up stores in shopping centers around the United States, and it plans to roll out grocery stores.

Malls are in Transition

The traditional mall is being redefined as a multi-purpose space that showcases not only traditional staples such as clothing, fashion accessories, home goods and food but also neighborhood-style shops and services. In the new mall, you’ll find everything you need to live—from doctor’s offices to schools and libraries, hair salons, grocery stores, real estate and business offices, restaurants, movie theatres, and, yes, residential apartments. (Once you’re in, you’ll never want to leave!) Hudson Yards (in Manhattan) may provide the new standard.

Grocery- and drug-store-anchored centers, too, remain productive and in high demand. “Daily needs” traffic is a powerful force. In general, though, households are spending more on services than on goods, according to Jack Kleinhenz, chief economist of the National Retail Federation.Such shopping is more “experiential,” with a focus on eating and being entertained.

About the Author

Lawrence Fassler, an attorney and real estate investor, is Corporate Counsel of RealtyShares, a leading real estate investment marketplace that places equity investments through North Capital Private Securities Corporation; a registered Securities broker-dealer, and member of FINRA/SIPC. RealtyShares as an institution does not advise on any legal issues, and this article is for general information only and does not represent professional legal advice. Contact the author at