Welcome to the new order.
The various constituencies attending the massive International Council of Shopping Centers’ ReCon conference in Las Vegas, May 20 to 23, appeared to be successfully coping with the changes roiling the retail industry. But there were ripples beneath the calm exteriors of malls and retail brokerage houses.
Madison Marquette kept its lips tightly sealed at the convention, announcing the following day that the privately held real estate investment and operating company is in discussions to merge with PMRG, another privately held firm that specializes in project leasing, property management and development services. The deal is expected to close in the next 30 days. The much-discussed acquisition of RKF Associates by Newmark Group, which came to fruition on Wednesday, portends further consolidation among retail real estate leasing companies, and parallels the mergers of REITs, including last year’s purchase for nearly $16 billion of Westfield Corp. by Unibail-Rodamco, which hastened Brookfield Property Partners’ acquisition of a pressured GGP following three years of retail bankruptcies and closures.
“One of the themes surrounding retail is that stores found themselves lagging in terms of technology,” said Stephen Stephanou, principal Crown Retail Services. “Those that started as web businesses are going to brick-and-mortar. There’s entrenchment by traditional retailers and there’s also been entrenchment in the mind-set of leasing departments of brokerage firms. The retail industry has streamlined to cope with the challenges.”
ReCon, which can be seen as a proxy for the health of the retail and shopping center industries, experienced a dip in attendance to 27,000, compared with 37,000 last year. The conference wasn’t without controversy. “Due to the unfortunate oversight by the ICSC and its senior management, the Triple Five Group, including West Edmonton Mall, Mall of America and American Dream, will not be present at the exhibition on Sunday or Monday in observance of the Jewish holiday of Shavuot,” read a sign in front of the developer’s empty booth. “We will have a limited number of team members at the booth on Tuesday and Wednesday.”
“I believe ICSC’s numbers were down,” said Don Ghermezian, chief executive officer of Triple Five. “The conference looked a lot less busy, but we were triple-booked. I was very bitter about it. I asked ICSC to change the dates of the convention and fought with them bitterly. They refused. There were 10,000 less people. Not all 10,000 are Orthodox Jews, but the holiday is a major Jewish holiday.”
The ranks of retailers were down, as well. Sure, there was Walmart, occupying a booth on the convention floor, as always, and Yum! Brands, Starbucks and Spirit Halloween. The roster offered an object lesson in the shifting priorities of shopping centers, which have been forced to remerchandise large swaths of gross leasable space vacated by struggling and bankrupt department stores.
Increasingly, property owners are attempting to purchase the department store boxes from the retailers themselves. “Our department store re-leasing program has taken off dramatically,” said Joseph Coradino, ceo of PREIT. “We have 10 out of 12 department stores leased and the other two are about to be signed. We got back six Macy’s units and took back five Sears and one Bon-Ton location. All things considered, business is pretty good. We just refinanced our credit line, which is a big deal for us.”
“We had about the same number of meetings during ReCon as we had last year,” Coradino said. “The barometer of a good convention now is how many meetings we have with new tenants that aren’t in our portfolio. Last year, it was 75 versus 96 this year. The business is getting harder; it’s harder today than it was.”
New to PREIT’s centers were beauty, apparel and specialty concepts such as Altar’d States, Adore, Bluemercury, Synopolis, Eyefly, Lolli & Pops and Lidl. “Bluemercury started in Philadelphia [PREIT’s home] and was bought by Macy’s. The bottom line is there’s players out there, but it’s not the usual suspects.”
“I’ve never seen so many new names that I have to Google,” said Jeffrey Roseman, executive vice president of Newmark Group. “I did the Rent the Runway deal, and the amount of traffic that goes through that store is incredible. It’s luxury fashion consignment and sneaker guys like StockX and Fight Club. Their stores are packed. Digital native e-commerce brands have been pleasantly surprised by brick-and-mortar retail.”
Fight Club will have some new competition in Solestage, a high-end collectable sneaker store, opening a 2,500-square-foot unit at the former Brooklyn Industry store at 290 Lafayette Street in Manhattan’s SoHo. The 10-year deal, signed this month for $564,000 per annum, reportedly includes four years of free rent, according to sources.
Michael Hirschfeld, vice chairman of JLL, walked the convention with client Restoque, which owns Brazilian brands Rosa Chá, women’s ready-to-wear and swimwear, and John John, a men’s and women’s collection, which is expanding. “They’re opening at Westfield Century City in Los Angeles,” Hirschfeld said. “They’re planning to open a few stores in 2019. They decided to come to ReCon to introduce the brand to mall owners and executives. You’d think we just threw raw meat into the Amazon. They [brokers and developers] were like piranhas.”
Off-pricers were continuing to pick up space. “Value retailers are expanding and have more flexibility in terms of where they’ll locate. They’re looking at former department stores,” said Stephen Lebovitz, president and ceo of CBL. “We had a great meeting with Ulta, which is still expanding and doing 100 stores a year.” Also growing are T.J. Maxx, HomeGoods, Innascense, Sierra Trading and off-pricers, and outdoor and online retailers that currently don’t operate stores. “People are thinking of creative ways to drive traffic. Some uses we’re thinking of, the retailers would never have considered five years ago.”
A dinner CBL hosted on the first night of the convention was indicative of the industry’s direction. “We had 50 restaurant prospects,” Lebovitz said. “There’s not a lot of apparel users expanding. Apparel has shrunk. About 70 percent of our new leases are with nonapparel brands. There are some retailers that are adding stores that sell apparel, but it’s just a portion of their assortments. Apparel is still driving traffic, for example, Altar’d States and Anthropologie.”
CBL’s portfolio contains about 40 Sears units that Lebovitz plans to remerchandise in the next few years. “We bought five Sears locations last year,” he said. “Department stores are all thinking of getting value out of their real estate. Macy’s and others have downsized some of their buildings.”
“Macy’s is closing its men’s store off Union Square in San Francisco,” Stephanou said. “It’s huge.” The retailer in 2016 unloaded its men’s property for $250 million and is selling the former I. Magnin building on Stockton and Geary Streets, now occupied by Louis Vuitton. Macy’s plans to rent the ground floor of the Geary Street building to three new brands.
“There’s the question of which big retailers will lease the space,” Stephanou said. “Will there be more of WeWork or a big hotel? It has shades of Lord & Taylor downsizing with WeWork above. Rents are high in San Francisco and sales performance has not been what retailers expected. You have owners who still have high expectations for rent.”
All parties have learned how to manage their expectations. “Last year, there was no open to buy,” said William Taubman. “All in all, it’s certainly a more upbeat time, but no one’s jumping up and doing high fives. There will be fewer department stores. They need to evolve. They’ll become more vertical.”
Despite apparel sales increasing 10 percent across the portfolio in the first quarter, Taubman said, “we still don’t know whether this is a real inflection point or a blip.” Especially, due to the 53rd week in the year and early Easter. “Overall, comp sales were up 12 percent,” he said. “We’re in a Gucci moment and Saint Laurent, Balenciaga, Dior, Chanel and Cartier. Luxury is strong right now. The Millennial customer is becoming interested in designer fashion. Gucci evolved by incorporating elements of street culture.”
Taubman has partnered with other developers and REITs such as the Forbes family and Macerich, but for one-off projects. He said REIT stocks “are down and obviously that makes acquisitions of REITs possible.” Unlike competitors such as Simon Property Group, GGP and Authentic Brands Group, which in 2016 acquired Aéropostale out of bankruptcy, Taubman said. “We don’t invest in brands. We invest in some start-up funds and we’re in them to gain exposure. We’ve invested in Imaginary, Natalie Massenet and Nick Brown’s fund.”
“Fewer and fewer tenants are coming to ReCon because there are fewer stores opening,” Hirschfeld said. “In the past, retailers wanted to open 50 to 80 stores over three years, and they used that to forecast revenue. Today, if a client said, ‘We’re opening 15 stores,’ you’d be just as excited.”
Michael Glimcher, ceo of Starwood Retail Partners, said the portfolio contains 35 department stores, “which will soon be two to four. This is not a bad thing. A department store doing $8 million in annual sales can be replaced by a restaurant doing sales of $30 million to $40 million. We did 50 restaurant deals last year. People can’t eat online. Less apparel is sold at the mall. We were upward of 60 percent apparel. I bet it’s been cut by 20 percent. There’s fewer players. We’re so reliant on apparel, we need more things to do and less things to buy.” That’s why Glimcher is bullish on Equinox and Planet Fitness, Burgerim from Tel Aviv and steakhouse Knife in Dallas.
Deborah Weinswig, ceo and founder of Coresight Research, had mash-ups on her mind. “There’s Amazon and Kohl’s, Amazon and Best Buy, and Macy’s and everybody,” she said. “You’re going to see a lot more of it as it does prove successful. You’ll also see uncommon pairings, maybe shopping centers tying up with drug stores, since they have a significant number of locations. Drug stores will also think of how to partner with department stores. If a consumer needs to return a product purchased online — that’s a big problem for digital retailers, since up to 40 percent of sales are returned. I could see CVS partnering with a big box to do buy online, pick up in store. There are only 250 [A-level] malls left in the U.S., and 10,000 CVS and Walgreen units. They have traffic and you’re in one 2.4 times a week.”
Cushman & Wakefield’s national retail research director Garrick Brown had another take on the strange bedfellows phenomenon. “What Amazon is doing at Kohl’s, may be Amazon testing the retailer before acquiring it,” he said. “In general, we’ll see hookups such as Walmart and Lord & Taylor, which is opening a flagship on walmart.com. Walmart has been making all the moves, acquiring Bonobos and Jet.com. The moves to upscale Walmart must be a driving strategy behind the acquisitions. I wouldn’t rule out Walmart making a bet for HBC.”
“More department stores are closing,” said Todd Caruso, senior managing director of CBRE. “The big push has hit us, especially Bon-Ton. The [closures] give the acquiring entity or landlord an opportunity to invest in a new vertical that’s complementary to their business. Kevin Mansell [outgoing ceo of Kohl’s] talked to rental car companies about locating in the department stores. Formats are out the window. There are a lot of unexpected things, bold, confident, cheeky and a little whimsical.”
Acadia is figuring out how to do business with young digitally native brands. “Outdoor Voices, Allbirds, Serena & Lily and Reformation showing up on our streets [in Washington, D.C.; Chicago; Lincoln Park, Ill., and SoHo] makes us feel good,” said Christopher Conlon, executive vice president of Acadia Realty Trust. “They tend to move in flocks. They’re the brands that are adding energy and newness to streets and projects. It’s fun, but it can be frustrating. It’s also really new.”
Conlon said Acadia is working on doing multiple deals with Outdoor Voices. “Mickey Drexler is chairman of Outdoor Voices and we want to work with them,” he said. “Sometimes the [negotiations] are long and sometimes they [brands] look for a test drive rather than signing a long-term lease. We’re seeing the SoHo market firm up a little bit, albeit at lower rents. We’re seeing a lot of vacancies on Madison Avenue. It will take longer.”
Home furnishings retailers have the wind at their backs. In addition to HomeSense, a TJX home concept is in the early stages of rollout and One King’s Lane is unveiling its second unit and first Manhattan store in SoHo.
Mixed-use was a buzzword at the conference, with Madison Marquette’s The Wharf project in Washington, D.C., which is anchored by D/Eleven, a boutique described as being similar to Forty-Seven-Ten, and Blush, a health club for the skin. Amer Hammour, chairman, has more than a passing interest in the apparel industry: his daughter designs leather jackets. “We worked with Northern Great, which opened at our District LA on La Brea Avenue. We have several brands there, mostly men’s. We’re trying to go where the apparel industry is going. I hear it’s very challenged. I don’t think sales are doing down, but margins are getting squeezed.”
In the hope springs eternal category, the unfailingly optimistic that Ghermezian said Triple Five received city council zoning approval for an American Dream project in Miami. “We’re looking to create what will ultimately be the largest retail and entertainment center in the country,” he said, noting that it will be six million square feet compared to New Jersey’s American Dream project, which is pegged at three million. “Over half of the N.J. center will be entertainment. We haven’t changed the makeup of the individual tenants, we’ve changed the percentage. We’ll have 1.5 million square feet of retail space.”
Brookfield Property’s purchase of seven storefronts on Bleecker Street, was the talk of ReCon for the incongruity of such a large entity buying up the locations for $31.5 million as something of an experiment. Bleecker Street has had some of the highest vacancies of any Manhattan submarket. Michael Goldban, Brookfield Property’s head of retail leasing, said: “Part of it is being a big developer with the wherewithal. Everybody at the show wanted to know about Bleecker Street. We’ll partner with the other landlords and existing tenants and think about it as a holistic experience. Let’s bring authentic brands that fit in with the character of the street and neighborhood. We want to incubate brands and help them succeed.”