Innovate; cut rents; focus on food, beauty and fitness. That seems to be the prescription shopping centers have for contractions to the retail and mall sectors not seen in decades. That, and hope things will soon get better.
The only certainty in the turmoil is that the strong are likely to get stronger, while the weak will wither and disappear.
“I think you have a bifurcation in the market between dominant malls and weaker assets,” Robert Perlmutter, senior vice president and chief operating officer of Macerich, told WWD at the recent International Council of Shopping Centers’ ReCon conference in Las Vegas. “The negative headwinds and store closures will ultimately be healthy for department and specialty stores because they don’t need so much space, to sell their products” given the shopping patterns of consumers these days.
What will happen to the space department stores leave behind? “Some of it will be converted to non-department store uses such as fitness or grocery,” Perlmutter said. “Some will be divided into three or four stores, and some will be torn down for residential.”
Fashion Outlets of Philadelphia, a partnership between Macerich and PREIT — the largest cohesive retail development project in the downtown area, spanning three city blocks — is taking an everything-but-the-kitchen-sink approach with high-end off-price brands, luxury labels and full price, two dozen restaurants and a food hall. “There’s a resurgence of investment in commercial, residential and hotel, and big food scene,” Perlmutter said.
Robert Taubman, chairman, president and chief executive officer of Taubman Centers Inc., said what many were thinking but wouldn’t admit: That an omnichannel platform’s benefits have been elusive. “There’s been a race with regard to technology spending [by retailers and shopping centers]. A lot of stores wish they had spent less money on technology, and we wish we had, too.”
Yet Taubman wasn’t ready to concede anything to online retailers. “Brick-and-mortar is so much more profitable than e-commerce,” he said. “Amazon doesn’t make any money on free delivery.”
Apparel returns are extremely expensive, Taubman said, noting that the rate for brick-and-mortar is 8 percent, while online it’s 27 percent. “[Online] is not the most efficient way to do new customer acquisition, which is very important in retail.”
Nor would Taubman give anything up to other shopping center owners. “There were over 2,000 malls in 1992 when we went public,” he continued. “Today there’s a little over 1,000, and there will be less over the next decade. There was a lot of oversupply built. Now, three studies suggest that 200 to 300 assets represent 75 to 80 percent of the entire sector. I could easily see the top 300 malls 10 years from now representing 90 percent.”
Smaller independent centers took REITs’ challenges as an opportunity to stab the wounded malls. “These guys are like captains on the Titanic arranging deck chairs. Whatever they try to do won’t work,” said Rick Caruso, founder and ceo of Caruso, which owns The Grove and Americana at Brand in California. “REITS are much more driven by financial instruments. Where we’ll say no to 20 tenants, they’re filling slots to appease Wall Street.
Pointing to public mall owners and developers, he said, “We’re very much into guest experience and understand who the customer is and how she wants products delivered. We’ll have more opportunities to build more properties. There is no collaboration in the shopping center industry and mostly a lot of hatred.”
Caruso ticked off some of the projects in the company’s pipeline, including Palisades Village in Pacific Palisades, bowing next summer with more than 50 retailers and restaurants; Miramar Beach Resort in Santa Barbara; buying street retail in Brentwood, Calif., and capturing the property surrounding the Americana and The Grove for future expansion.
“We set aside $1 billion in development funds,” said Caruso, who accused the public companies of exploiting tenants with high rents. “We set a rent where a retailer can be profitable. We have to drive guests. If the retailers do well, we participate. So, we do have high rents of $5,000 per square foot at the Grove. We’d take 9 percent.”
Stephen Lebovitz, president and ceo of CBL Properties, said he had set a low bar for expectations given the industry’s state. “There’s consolidation of apparel,” he said, noting that L Brands’ La Senza, a Canadian retailer, is opening more stores in the U.S., and Francesca’s is expanding, while Altar’d State, which calls itself “a modern Christian retail store,” born in Knoxville, is also growing.
“Restaurants and theater are melding, we’re doing more entertainment, including live music,” he said. “The development of Hamilton Place in Chattanooga reduced a 150,000-square-foot Sears unit to 15,000 square feet. We’re talking to a climbing facility, family entertainment for older adults with bowling, a sports bar, hotel, restaurant and office space.”
“This year, we met with 83 tenants versus 70 last year,” said Joseph Coradino, chairman and ceo of PREIT. “Only about 15 were apparel. There will really be a shrink in apparel. We’re adding health and fitness and will be 25 to north of 30 percent in those categories. Our industry is in the early stages of understanding and absorbing this. This sounds like a blood sport, but you’ll have survival of the fittest. The stores that remain will sell things that people actually want to buy.”
Street retail is having its own day of reckoning. A Real Estate Board of New York report titled “Manhattan Retail Combats Down Current of National Market Slowdown in Spring 2017,” reported ground-floor asking rents in 14 of the 17 top Manhattan corridors declined, including Madison Avenue between 57th and 72nd Streets, where a glut of available space “was difficult to absorb and drove rents down 12 percent year-over-year to $1,446 per square foot.”
The study was the topic of debate at ReCon, with some brokers saying it was justified and others dismissing it as flawed.
According to the study, “it’s been coming and now that it’s come, there will be a more stable environment,” said Joanne Podell, vice chairman of Cushman & Wakefield, who was involved in writing the report. “There’s a challenge today in that there aren’t as many retailers who are actively opening stores. It’s a new paradigm,” she said, adding that digital brands such as Bonobos, Trunk Club and Warby Parker indicated interest in expanding since rents came down.
But e-commerce brands haven’t been expanding at nearly the pace of Eighties brands such as The Limited and Express, whose fleets exceeded 800 stores nationally. Meanwhile, L Brands’ cash cow, Victoria’s Secret, is struggling against greater competition, including from online, and women’s changing tastes in lingerie.
“Rents are off 10 to 30 percent in critical New York submarkets and anyone who thinks that’s not a reality is kidding themselves,” said Acadia Realty Trust executive vice president Christopher Conlon, adding that the REIT has hired Michael Oliverio, the most senior real estate executive at Ralph Lauren Corp. “Ralph Lauren sells high street, e-commerce and is global. They’re pruning some things. Closing the Fifth Avenue [Polo flagship] was a shock. If Ralph Lauren is closing, what does that mean for everyone else? The store never did business. It was a big writedown.
“I’m happy we didn’t buy that much,” he said, referring to overheated acquisition prices. “SoHo and Madison Avenue aren’t going away. We expect to be investing and taking advantage of the distress. It’s time for tough choices. Retailers are rationalizing their fleets. Store closings will continue this year and next.”
“Midrange retail in Beverly Hills has slowed down by 20 percent,” said Mahboubi. “Luxury is still strong. There are vacancies and a few leases being signed. Luxury brands haven’t been expanding as they normally did, but they will. In Manhattan, it’s down by about 25 percent.”
Retailers that wanted to make deals with landlords in the city nine months ago at a lower rent were sent packing. Now landlords are welcoming them with open arms and discounts in the form of hard cash or other inducements such as build-out allowances, exit clauses, etc. Nor do tenants have to sign 15- to 20-year leases any longer. Landlords are lucky if they can get them to commit to five-year terms.
“Lululemon said it wanted a 30 percent reduction in rent on all lease renewals,” one broker said. “Sheer sales are diminishing. It’s a symbiotic relationship — landlords and tenants.”
“I came to ReCon asking myself if this show is even relevant to the new world order,” said Michael Phillips, principal and president of Jamestown. “Is it part of the disruption of the system or is it people digging in their heels? Retail hasn’t worked well for the last 15 years.”
“Retail has to be nurtured and expanded gradually,” said Houman Mahboubi, senior vice president of retail at JLL in Los Angeles. “The biggest problem is private equity firms, which want to quadruple their profits. How is it that Lululemon expanding? It depends on who’s running the company or trying to make a quick buck like Wall Street and hedge funds usually do.”
New Concepts or Twists On Old Ones
“We’re all in search of these unique concepts,” said Taubman.
Conlon of Acadia Realty Trust cited as promising retailers including Untuck It, an online maker of shirts that the wearer doesn’t tuck in, and new formats for TJ Maxx, including a two-level 45,000-square-foot concept that opened in Chicago and said the brand is looking for space in San Francisco.
Forever 21’s new Riley Rose, an experiential space focused on accessories, beauty and home, is targeting Millennial consumers.
Everafter, apparel for eight- to 14-year-olds from Haro Kaledjian, a co-founder of Intermix, opened a location at 349 Greenwich Street in TriBeCa and has two more in the works, at 1121 Madison Avenue in Manhattan and Wheatley Plaza in Greenvale, N.Y. The high-end multibrand boutique features styles for little princesses to prepubescent boys, including personalized jean jackets.
Reviv, which provides IV nutrient therapies and booster shots with names such as the Royal Flush and Vitaglow, operates locations in Beverly Hills, Miami, Las Vegas, Manhattan and other places where people want to party harder and look younger. “I’ve had this obsession with them,” said Karen Bellantoni, a broker at RKF, also citing the Wellery, the new wellness concept at Saks Fifth Avenue’s flagship that will be open through October.
Phillips was keen on brands that offered Jamestown something new. “Allen Edmonds changed the whole store design and branding for us,” he said. “It’s a legacy brand and they went back to their roots. They de-commoditized the product with personalization and customization. We just signed Oliver Peoples, which created a really cool design specially for our site.”
JLL’s Mahboubi, said Nicolas Pakzad, son of the famed men’s retailer, Bijan, plans to open a store in Manhattan on Fifth Avenue and 57th Street and expand to three additional cities. The uber-luxe by-appointment business specializes in diamond-encrusted watches and jewelry, fragrance and apparel.
Millennials Confound Retailers and Malls
Shopping centers haven’t captured the imagination of the Millennial generation, which is said to value experience over products.
“Baby Boomers are underserved,” said Deborah Weinswig, managing director of Fung Global Retail and Technnology. “Plus-size consumers are underserved. You’re missing out on this consumer. The Millennial wear-to-work segment is underserved. We’ve seen a lot of ath-leisure in that space.”
“Millennials have different values. They’re still spending money, but they want to go places, not buy commodity products,” said Phillips. “Malls haven’t changed. Some department stores haven’t yet figured out how to refresh the experience.”
Taubman said his company is aiming to appeal to Millennials by opening “twice the number of restaurants at Beverly Center, which is being reset and reimagined, and opening up streets and buildings” in other cases.
Triple Threat: Beauty, Food and Fitness
“Blue Mercury is on fire,” Conlon said. “Ulta Beauty is one of the belles of the ball.”
“Beauty is the category that keeps giving,” agreed Todd Caruso, senior managing director leading CBRE’s retail owner and agency practice in the Americas. “That’s affected department stores.”
“We’ll continue to expand luxury and food,” Macerich’s Perlmutter said. “Food is definitely growing, not only in numbers, but quality. But we don’t look at our business and say, ‘Food is going to save our business.’ The names are changing. Ten years ago, Lululemon wasn’t a mainstay in malls and the concept of DryBar didn’t exist, nor did selling cars in shopping centers.”
“Apparel retailers were noticeable in their absence. And one has to ask whether the proliferation of myriad food concepts is a long-term solution or a placebo,” said Stephen Stephanou, principal of Crown Retail Services. “For the regional shopping center, one continues to observe the Darwinian principal in action with expansions or significant remodels of strong, powerful centers, which then cannibalize their weaker brethren.”
The meaning of “authenticity” was debated at the conference, with developers insisting their projects will fit in with the scale and aesthetics of existing neighborhoods. The creators of First Street Napa, a 325,000-square-foot mixed-use project in Napa Valley, Calif., were firm in their belief that the project’s 45 stores and restaurants, 183-room boutique hotel and office space will ooze charm along the roadway, which was recently converted to two-lane traffic and touted the eclectic blend of the three blocks of new, renovated and historic facades, along the stretch of roadway that’s home to the Oxbow Public Market and the Culinary Institute of America’s new downtown Napa Valley campus.
First Street Napa’s size makes it more nimble than some REITs, which are encumbered by their size. Caesars Palace, where many of the REITs hold meetings during ReCon and which is usually a scrum of activity, was more subdued this time. “At UTC in San Diego, we added a residential tower and we’re looking at doing that at other properties,” said a Westfield spokesman. “Westfield World Trade Center does really well. Obviously the space has constant challenges. It’s still under construction. We’ll activate 75,000 square feet of retail space at tower three. There’s another smaller footprint, an old Path train area near the entrance, where we’ll build retail.”
Westfield Valley Fair in San Jose, Calif., has begun a $1.1 billion renovation that will include a 150,000-square foot, three-level Bloomingdale’s and ShowPlace Icon cinema. According to Westfield, Valley Fair, which will grow to 2.2 million square feet in 2019, is one of the most productive malls in the U.S., with inline specialty store sales of $1,200 a square foot.
Westfield is venturing deeper into entertainment territory with a deal with Scott Sanders Productions that will turn the shopping center developer into a content provider. The mall giant has already shown an interest in Virtual Reality, testing it at the World Trade Center, and the spokesman asked anyone who entered its ballroom to don a headset. Meanwhile, Westfield has been giving space at its centers over to sponsors such as Ford Motor Co., PepsiCo and Chase Bank.
Triple Five announced prior to ReCon that its long-delayed American Dream project in northern New Jersey received $1.67 billion in private construction financing that could trigger the $1 billion bond issuance needed to complete phase one of the 2.9 million-square-foot center. The entertainment-packed megamall would be dwarfed by a 6 million-square-foot monster Triple Five is proposing for the Miami area.
At an ICSC luncheon at the Westgate, which connects to the Las Vegas Convention Center via a long hallway, the organization’s president Tom McGee said, “Amazon is an incredibly disruptive company” and insisted that the e-commerce giant is predominantly taking market share from other online retailers. “We’re in a p.r. challenge. Every day, there seems to be an avalanche of stories that are not consistent with your business. It’s not the facts as we’d like them to be.”
More than 8,000 stores will be shuttered this year, more than during the Great Recession, with brands including BCBG Max Azria, Yogasmoga, Macy’s Inc., J.C. Penney Co. Inc., Payless, Bebe and Sears Holdings stores closing or downsizing. Austerity was apparent at the event. Several firms skipped long-standing annual events, leaving the bacchanals of the Eighties and Nineties at venues such as Pure Bar at Caesars Palace, the grand ballroom at the Four Seasons, Tao at the Venetian and the Wynn Las Vegas pool and cabanas, a memory. Other events seemed low-key to some. “There were no retailers,” said one broker.