2015 Retail Market Review

The retail industry has seen its share of downturn and recovery just like any other sector. It is no secret that retailers were hit pretty hard during the recession of 2007-2009 as many popular brands disappeared or companies downsized (remember Blockbuster, Filene’s Basement, Borders?) and new concepts were adopted to remain relevant in this unforgiving market. So it was welcoming to see 2015 as a year of recovery in the retail industry due to notable economic growth, cap rate compression, higher demand for stabilized Class A or high-end retail centers with national credit tenants, and lower energy prices which resulted in solid consumer spending. Layoffs or major store closings were mentioned less as the economy continues to improve. As of November 2015, the national unemployment rate held at 5% compared to 5.8% twelve months ago, according to the Bureau of Labor Statistics.

However, the early recovery was not without its challenges for retailers, especially since shopping has evolved into an experience for consumers rather than just aimlessly shopping at the nearest mall. Retail owners had to creatively strategize to find a niche or entice millennials and consumers with extra cash or credit to come shop at their bricks-and-mortar or bricks-and-clicks. Notably, malls were attracting more millennials with a mix of shopping, entertainment, and fast-casual restaurants. Nevertheless, one of the biggest concerns and buzz in the industry has been the change in consumer behavior. Retailers understood that to attract customers and thus remain profitable, they had to adjust to the “what”, “how”, “why”, and certainly “when” consumers were likely to purchase.

There has also been a shift towards specialty stores, higher e-commerce demand, and going smaller but with a targeted marketing strategy. As we look back at 2015, the following ubiquitous developments highlight the emerging new face of the retail industry in the United States:

  •  Smaller Is Trendy: Smaller store format was the norm as big-box chains continued to reduce their footprint to expand in newer markets and offer discounted merchandizes to offset the lesser crowds at the big malls. Notably, Macy’s (Backstage) and Kohl’s (Off-Aisle) are piloting this newer concept. Even Wal-Mart has been opening more neighborhood centers of approximately 38,000 square feet instead of their typical supercenters averaging nearly 200,000 square feet or discount stores of 106,000 square feet. More specialty retailers (e.g. Trader Joe’s, Sprouts Farmers Market, Aldi’s, and Whole Foods) are only occupying 13,000 to 35,000 square feet.
  •  Omni-channel Distribution (Bricks & Clicks):  Companies are aggressively responding to the great impact mobile devices have on their bottom line as more customers toggle between screen-to-store and vice versa. A big part of this strategy is Bluetooth-connected beacons, which retailers employ to specifically cater to consumers’ individual tastes through promotions and real-time message alerts.
  •  Boom in Mobile E-commerce: There is no escaping e-commerce and how it’s forcing big retailers to go back to the drawing board. U.S. retail e-commerce sales for the third quarter of 2015 alone was $87.5 billion, an increase of 4.2% (±0.9%) from the second quarter of 2015, while total retail sales were estimated at $1,185 billion, an increase of 1.2% (±0.2%) from the second quarter of 2015, according to The Census Bureau of the Department of Commerce. So consumers are definitely spending but the difference is that they shop as much online, if not more for certain products, than going to a physical store. New online retailers (e.g. Shoes of Prey, Bow and Drape, Original Stitch, and Combatant Gentlemen) are born to give consumers more options.
  •  Mixed-use Developments (residential & retail): Nearly every other major new construction development was a mixed-use project that brought residential condos/apartments, grocery stores, restaurants, movie theaters, and even hotels to the same park. This was due to the rising trendiness and popularity of walkable and urban-style living.
  • Grocery-anchored Shopping Centers: Most shopping centers under development or delivered had a grocery store.
  •  Senior Living Facilities: Construction for senior living (independent & assisted living) facilities for Baby Boomers were aplenty as investors poured in capital for this growing demanding as approximately 10,000 Americans will retire each day until 2030.
  •  Lifestyle-centers on Main Street: Malls are not completely dead but lifestyle centers are more favorable to investors and developers. We have seen a re-emerging and increased attraction to pedestrian-friendly lifestyle centers. Mall owners acknowledged this by investing in either complete redevelopment of Class C shopping centers, or renovating Class B shopping centers or malls to be more appealing with movie theaters or entertainment, high-end restaurants, specialty grocery stores, and cool shops.
  • “The 18-Hour City”: The New York-like trend of the city never sleeps or sleeps late has emerged with a bang in several urban centers in second and third tier cities. This is welcoming news for retailers as people are usually out eating or looking for some sort of entertainment after work or into the evening hours. Investors and developers are certainly paying attention to this as the “Live, Work, and Play” mindset becomes widespread.   
  •  Gulping Up the Rival: Several commercial companies, real estate firms or retailers alike, continued to look for ways to remain competitive and sustainable by either seeking a buyer or a seller. In 2015, the retail industry experienced these major news developments from retail service and commercial real estate firms.

Retail Service Firms (Buyer/Seller):

  1. Walgreens/Rite-Aid ($17.2B; pending)
  2. Stop & Shop/Hannaford-grocery (parent companies: Royal Ahold NV/Delhaize Group, respectively); Northeast ($10.4B)
  3. Dollar Tree/Family Dollar ($8.5B)
  4. Staples/Office Depot ($6.3B; pending)
  5. GameStop/ EB Games; GameStop Corp. and Electronics Boutique Holdings Corp. ($1.44B)
  6. Haggen Inc./146 Vons, Pavilions, Albertsons and Safeway stores; West Coast ($1.4B)
  7. Yelp/ Eat24 (online food ordering company); ($134M)

Commercial Real Estate Firms (Acquisitions):

  1. DTZ/Cushman & Wakefield ($2B)
  2. Colliers International/Pointe Group Advisors