By: Kathryn Craig
While retail properties are at the forefront of many communities and continue to fuel employment and tax revenues, retailers and owners face significant demographic and economic challenges, as high-end retail sales decline, store closings increase and e-commerce continues to drive shoppers away from brick and mortar locations.
On the coattails of RECon 2017, ULI New York convened retail real estate industry experts for a panel discussion, delivering an exclusive look at trends in retail real estate, and insights into whether the sometimes-apocalyptic headlines appearing near-daily in the mainstream media tell the full story on the state of the industry.
Retail industry veteran David Zoba (Chairman, JLL Global Retail Leading Board) weaved together a series of questions – not all “softball” questions – aiming to address how the changing market will affect the retail industry and how innovation and the advent of new technologies can drive even greater transformation. “Is this cyclical or secular – the start of a new paradigm? Or is it one more cycle?,” asked Zoba at the beginning of the discussion.
Zoba was joined by panelists Brittany Bragg (Partner & Chief Operating Officer, Crown Acquisitions), Brian Pall (President of Real Estate, Hudson’s Bay Company), and Mary Rottler (Executive Vice President – Leasing & Operations, Seritage Growth Properties) – who together, covered emerging market trends in New York and beyond.
“I think headlines are headlines just like jokes are funny — because there’s some truth to them, but I think it’s rarely the full picture,” said Bragg, opining that when it comes to what’s happening on High Street – otherwise known as 5th Avenue in New York City, there seems to be a great deal of exaggeration. New York City welcomes more than 50 million tourists each year in addition to the City’s 8 million residents, and those numbers alone show that fundamental macro level economics are very strong here in New York.
And though the headlines speak broadly of tumbling retail real estate rents, Bragg reminded the attendees that rents levels are among the highest in the world. However, she mentioned that people bought and underwrote assets on 5th Avenue and beyond with assumptions that turned out not to be true, causing pro formas not to pencil – suggesting that what we are seeing in the market now is seemingly cyclical. “But, if anyone [here] has anything they’re looking to sell on 5th Avenue, I’d like to talk to you about it,” said Bragg.
Zoba affirmed to the crowd that retailers can only pay rent occupancy as a percentage of their sales, and asked if the fundamentals will allow retailers to pay higher rents, or if there needs to be an adjustment allowing lower rents to be accepted.
Referencing the landmark deals for Nike and Prada in SoHo, Bragg drove home the point that certain rent deals shouldn’t set the market. “Just because two retailers paid over $1000/foot on Broadway doesn’t make market rent $1000/foot on Broadway, she said. “You can’t extrapolate unless you think about exact specifics of those two corners…Maybe not every space at that number for every retailer.” And owners and operators shouldn’t expect those rents – and if they do, there will be a disconnect.
Shifting from High Street retail to department stores, Zoba posed questions to Pall and Rottler. “I’d like to say that it’s cyclical. I’d like to believe that’s it’s cyclical. But, I think that’s ignoring reality,” said Pall in response to Zoba’s overarching secular or cyclical question. Pall referenced an overabundance of malls and retail, the driver of the waning market – there has to be a market-clearing event, he said. Pall went on to discuss how important it has been for Hudson’s Bay to reinvent retail concepts to drive business –he cited that you have to create a special, memorable experience for shoppers through concepts such as food, use of technology, off-price, new locations, and overall customization stores based on the trade area. “The brick and mortar business is definitely challenged. We’re investing less in brick and mortar and more in digital,” he said. He cited that there has been a push/pull with a lot of developers that are wary of creating showrooms for digital ordering.
Rottler of Seritage – a company that solely exists due to the need for Sears to downsize or vacate completely from some locations – spoke about how her company has been focusing on finding non-traditional and off-mall reuses such as grocery stores as anchor tenants in malls for the Sears conversions, which mall owners are much more open to than ever before. “Ten years ago, they would have laughed at you,” said Rottler.
Overall, the takeaway from the panel discussion is that the retail industry is certainly changing –affecting retail real estate. Between Seritage’s inventive repositioning strategy, Pall’s emphasis on the need for brands to continually reinvent themselves to tailor to the market and digitize, and Bragg’s analysis that the economic fundamentals of retail are still strong – the panel gave tremendous insight into the health of the industry, but there’s still uncertainty about what the future of retail looks like exactly.
ULI New York would like to thank the program champions Ellen Sinreich (The Sinreich Group) and Andrew Bauman (Morgan Stanley) for putting together this informative and lively panel discussion and to Kirkland & Ellis LLP for hosting.