Attorney Authored
Reinventing the Retailing Model: A Tale of Two Futures
December 05, 2017
Philip Feder
Partner, Real Estate Department
The relentless growth in online shopping is forcing real change in the retail sector – for shopping malls, developers, and investors alike. But the internet shopping explosion also shows that consumer appetites remain strong. This is encouraging forward-looking stores and malls to reshape the retail experience to meet consumer expectations, offering access to a broader range of choices than ever before.
Many retail observers tend to fixate on the “big box” mall sector, if only because it figures so prominently in the retail mix. But the retail environment is now more complex than that – with trends and players who are moving successful models across borders to reflect the changing tastes and demands of today’s consumers.
An interesting example of a trend moving from the U.S. to the UK – and back again – is Westfield, which has built enormous and successful UK malls and has an extensive U.S. presence. The company recently finished a $1 billion refurbishment of its Century City property. It has brought in high-end movie theatres, a range of high-calibre restaurants at varying price points, and an outpost of trend-setting Eataly direct from New York, combined with a diminished emphasis on traditional go-to anchor stores like Bloomingdales and Macy’s. Imaginative developers like Rick Caruso have popularized the “lifestyle mall” which replicates the ambience of a small town. He has established two in California, with a third under construction in Pacific Palisades. His properties offer a “town center” mix of quality movie theatres, high-end grocers, and different categories of restaurants.
Both these cases demonstrate the innovation that is changing the face of successful retailing and that I believe represents its future. Despite headlines to the contrary, successful retailers are not standing still; they are responding with agility and creativity to the challenges of the internet and the decline of the traditional shopping experience.
At the other end of the spectrum, you have the so-called Big Box retailers such as K-Mart and Sears – the huge, all-purpose department stores. These are largely disappearing from U.S. and UK towns, and face a similar fate in major shopping malls. The cause is clear: if you are buying a commodity product, internet shopping is more convenient and often less expensive.
The new-concept malls work well in areas of high employment and good incomes. Areas where income levels are stressed are unlikely to provide enough economic traction for these newer model malls. The issue is not necessarily retail per se; the issue is the economic viability of non-urban centers and the lack of jobs. Already in small towns and smaller regional centers, Wal-Mart has largely supplanted swathes of local retailing. Now Wal-Mart is trying to reinvent itself by charging more for goods bought on its own website to increase foot traffic visits to its bricks-and-mortar stores. To me, that reflects economic growth that is flat or stagnating – a symptom seen in many parts of the U.S. today. Retail is no different from any other economic activity. And this phenomenon is by no means confined to the U.S.
The way retailing performs differentially will certainly affect REITs, which rely on cash flow to pay dividends. This could be problematic when malls are located in underperforming markets and contrasts with the very, very high prices commanded by good shopping malls. The capitalization rates on major malls are still trading at 3-4% cap rates, which remain historically low.
Looking ahead, I think the whole concept of categorizing property by use – retail, office, entertainment, hotel, and accommodation – is waning in major centers. Today owners look to get star-studded anchor tenants like Apple where tech users need to go; combine those with multimedia, restaurants, grocers, and high-end retail and you have a very successful enterprise. This “grouping” will expand as the focus shifts to properties with good communication and transit links where people don’t just work – they also play, shop, create, watch, interact, and live their lives. That is where smart developers are headed.
As to the big box retailers, they are natural candidates for repositioning – perhaps in manufacturing or logistics. The other sector of real estate that is bound for a change is, ironically, classic office development. Fewer people work in offices full-time, reducing the need for parking and business space, and forcing owners to rethink the use of buildings. Restructuring is inevitable. Aside from that, I am optimistic about the sector. The economy is good, there are jobs being created, and the built environment must reflect these new realities – generating profitable activity for growth.