Industry leaders share their predictions for 2012.
by Joel Groover
Gazing into the crystal ball is never a comfortable task, but it has always been part of doing business in the shopping center industry. Decisions made today — whether to build a new store, buy a fixer-upper of a mall, or sign a multimillion-dollar insurance policy — often hinge upon what might happen in the future. And so it is that the likes of developers, retailers and architects must indeed play swami from time to time as they imagine future scenarios and survey the landscape for clues that could give them an edge in the inexact science of making predictions. As the calendar turned to 2012, SCT asked executives across a variety of disciplines to share their musings on the opportunities and challenges that lie ahead. Charting trends in this way is much easier when the industry is clearly at the start of either a boom or a bust. Given today’s bifurcated economy and up-and-down market swings — not to mention the unpredictable impact of such wild cards as the presidential election and the continued growth of e-commerce — these experts are to be commended for their willingness to go on the record and call it as they see it.
DEVELOPMENT
David B. Henry Vice Chairman, President and CEO, Kimco Realty Corp.
The good news is that we’re seeing solid signs of life in the shopping center business. After three years of running scared, many consumers appear to be in the mood to spend. Even with lingering uncertainty about the strength of the economy, after all, about 90 percent of Americans are still working. Consumers showed their willingness to open their pocketbooks and wallets in the strong back-to-school season this fall.
As a result, many retailers, especially discounters and big-box chains, expect holiday sales to be up 2 to 3 percent over last year. But sales growth is just one piece of an improving picture. National retailers like Bed Bath & Beyond, Petco, Marshalls and T.J. Maxx have fixed their balance sheets, cut expenses and inventories and are playing offense again. High-end tenants like Saks Fifth Avenue and Nordstrom are also optimistic about the future. However, in some regions midlevel retailers are still struggling, showing that a large swath of shoppers continue to be price-sensitive.
Economic uncertainty is part of the reason why, on the investor side, we continue to see such a wide divergence in property valuations. Generally speaking, if a center is not in a prime market, the interest is not there, even for top-tier, class-A properties.
Furthermore, in a normal real estate recovery, ‘B’s and ‘C’s typically grow more popular as investors become increasingly willing to take on more risk in a bid to earn higher yields.
Today the divide between the ‘A’s and the ‘C’s is as wide as it has ever been, but investors are not saying, “There’s a great arbitrage between the ‘A’s and the ‘C’s. Let’s buy ‘C’s.” At Kimco we have bolstered our balance sheet and are channeling our resources and capital into our strongest properties, many of which are located in the 25 markets that form the core of our portfolio. We continue to buy assets, but “selectivity” is the operative word. We also continue to seek opportunities in fast-growing international markets, particularly Canada and Mexico.
Should economic growth pick up nicely both at home and abroad, these strategies put us in a great position to seize new opportunities as they arise. But, of course, focusing on your best assets and strongest markets also happens to be protective: Our exposure will be minimal if — and let’s hope this doesn’t happen — retail ends up limping along in 2012.
SUPERMARKETS
Don Wright Senior Vice President, Real Estate and Engineering, Safeway Inc., and CEO, Property Development Centers LLC
As is our nature as merchants, most executives in the conventional grocery industry look forward to 2012 with cautious optimism. The challenge for all grocers will be to continue to find innovative ways to grow sales and increase market share while producing favorable returns for their shareholders.
Given that the residential real estate market is not likely to return to full health for some years, there will be little in the way of new grocery store opportunities coming to market that would traditionally aid this top-line sales growth.
Those opportunities that do exist will largely be in-fill or redevelopment locations, or locations made available by further consolidation within the sector. Clearly, those grocers who will continue to gain traction in 2012 are those that are well capitalized and nimble enough to take advantage of the site opportunities that come available, as well as those that are able to strengthen their brands, deepen their ties to consumers and set themselves apart from the competition.
CAREERS
Roberta Rea President, Roberta Rea + Co., Inc.
The employment picture has definitely brightened over the last couple of quarters, particularly if you consider where the industry was for the last two years, when most companies were either in a holding pattern or downsizing.
And while it is true that construction of new centers is still minimal, there is a noticeable increase in redevelopment of existing projects as of late, which is a welcome bit of good news — as is national retailers’ healthier appetite for new stores in solid markets. In today’s highly global, start-and-stop economy, however, the impact of debt crises in places like Greece or Italy can undermine the confidence of employers half a world away. This macroeconomic uncertainty — sunny headlines one day, gloomy the next — is part of the reason company growth and salaries have been relatively flat and may very likely stay that way in 2012, barring some dramatic improvement in the global economy.
That being said, we can count on employers to continue to ask specialists like property managers and leasing agents to wear multiple hats and, in effect, do more than one job. The mantra in 2012 will continue to be: “Do more with less.”
CAPITAL MARKETS
Spencer G. Levy Executive Managing Director, Capital Markets, National Retail Investment Group, CBRE Inc.
Today’s retail markets include pockets of strength that can be easy to miss amid all those headlines about macroeconomic uncertainty. And we are not just talking about grocery-anchored shopping centers; from luxurious, High Street boutiques, to far-flung outlet malls, to hot suburban submarkets, there are plenty of good stories today in retail. For the purpose of discussing transaction activity in broad strokes, however, it makes sense to focus on two major categories: core, stabilized assets at one end, and distressed real estate at the other.
When it comes to prime properties, the market has been good to excellent — and in the best markets, like Washington, D.C., even better — with a tremendous amount of buyer demand and, believe it or not, adequate available financing — so much so, in fact, that this has helped keep cap rates strong in this category. At the distressed end of the spectrum, meanwhile, the buyer pool has been fairly deep as well, at least for truly challenged properties.
The biggest problems lie with what might be called the weak middle: ’tweener deals where the buyer pool is thin, thanks to a general lack of institutional interest in these price points. Unfortunately, this weak middle may be where the majority of seller demand lies, so it may negatively affect the view of the retail sales market overall.
Even here, however, deals are being traded in note form. After all, much capital has been raised specifically for buying either large individual notes or pools of the same. The special servicers and, to a lesser degree, the banks are still very biased toward extending loans rather than taking properties back real-estate-owned [REO]. And in addition to the demand for straight note transactions, we have seen strong demand for short sales. With interest rates at historically low levels, the cost of holding distressed assets is manageable for the banks.
The owners of distressed assets, meanwhile, have limited incentive to sell these properties, at least until the rates go up. The bottom line? Do not count on a flood of distressed assets hitting the market in 2012. Instead, we are far more likely to see a continuation of the gradual weeding-out process that occurred in 2011.
MARKETING
Rebecca Maccardini, SCMD President, RMResources LLC
The lack of new shopping center development in the U.S. has translated into reasonably strong demand for existing space in prime properties. Additionally, many owners are strategically upgrading their center portfolios through reinvestment in key properties, disposition of nonprime assets and acquisition of new ones that better fit their financial and geographic goals.
Simultaneously, in 2012 national retailers will continue streamlining their U.S. businesses, selectively choosing locations for in-fill or bolstering their advantages in key markets, always with an intense focus on the quality of product they seek. But today’s widespread emphasis on well-located assets in prime markets does carry a certain concern for all of the key players: owners, retailers and, perhaps the most important people at the party, the customers. Will the effort to reduce risk to the lowest common denominator create “vanilla” properties with less choice and reduced excitement for the customer? Will this eliminate the opportunity for the next generation of great retail ideas, which are so essential to a healthy retail base?
Given today’s lack of access to capital, at least for small stores and new shopping center ventures, my biggest concern for both the industry and the customer is the difficulty of incubating new concepts and new small-shop space. Even though small shops have higher failure rates and require more time and energy, they bring uniqueness, color and choice. And this is exactly what owners will need as they try to make their prime assets stand apart from each other. Traditionally, many in our industry have always believed that what works in one place is bound to work in another. In fact, we need individual-market understanding.
This, coupled with imagination, insight and perseverance, is the key to finding, assisting and keeping smaller tenants. Simply put, owners that couple a solid small-shop strategy with upgraded portfolios will differentiate their properties, securing more visits more often. Did someone just say, “win-win”?
RETAILING
Deborah Weinswig Retailing/Broadlines and Food and Drug Chains, Citi Investment Research
Over time, we have seen a decline in mall development and a lack of new and exciting retail concepts. In the 1980s we estimate that department stores were responsible for driving 70 percent of a mall’s traffic. Today they account for 25 percent to 30 percent of traffic. In addition, department store closings have created vacant space in the mall with no clear alternate use and have led to redevelopment challenges for mall owners.
We estimate that over half of the regional malls in the U.S. have declining occupancy rates and a low-quality-tenant component. This is partly due to small or declining populations and low-income consumers in those regions. Drilling down a bit further, we estimate that 25 percent of regional malls have occupancy rates below 75 percent. This is definitely a concerning figure.
To add to these woes, new and exciting retail concepts are few and far between. We believe consumers are enticed to stay at home, as the significant growth of the Internet, high prices at the pump and weak balance sheets make it increasingly difficult for retailers to drive traffic to bricks-and-mortar locations. This is fundamentally changing the way that consumers shop, as consumers are basing their decisions more often on price, since they cannot see, touch or smell the merchandise in person.
Additionally, a number of retailers are offering free-shipping deals online. It is not only easy but also cost-effective to order merchandise online, and we believe the consumer is feeling more and more comfortable in this channel, given its attractive dynamics.
ARCHITECTURE
David Kepron, AIA Principal, Callison
When the holiday shopping season begins, Black Friday is synonymous with Cyber Monday, digital deals going hand in hand with brick-and-mortar offerings. The popularity of the digital shopping option may cause you to wonder where the future of retail stores is headed. The simple answer is that shopping as a social paradigm is more than just a business transaction. It is our desire to express ourselves, establish a context that grounds us and support our need for personal relationships that drives us to engage beyond the technology boundaries.
The social-networked world and technocentric way of communicating will drive the most profound change in store design. Having everything available through your cell phone, anywhere anytime, and crowd sourcing will empower customers as they play an integral role in design of both products and environments. Technology will engage customers in the shopping experience, providing customized incentives such as coupons and special offers while they walk by displays. Shopping experiences crafted “just for me” will support “mass-clusivity,” where it will be completely natural for things to be of a here-today-gone-today ephemeral nature.
Retailers will also continue to curate assortments to target more subsets within a particular customer demographic. Store footprints will become smaller as retailers continue to be more focused. Connecting to customers on a more personal level is pushing “glocalization” — being everywhere but equally adapting to the local sensibilities of a specific area. The key will be authentically adapting a store concept to a local culture and connecting to the customer in a more meaningful and relevant way.
DEPARTMENT STORES
Carl L. Goertemoeller Senior Vice President of Real Estate, Macy’s
From a department store perspective, 2012 will remain active on a number of fronts. The coming year will continue to present department stores with expansion opportunities via repurposing of underutilized or vacant boxes. At Macy’s, we have had tremendous success with this strategy, allowing us to grow our share of business in established markets such as Chicago, as well as enter new markets such as Victorville, Calif.
Not surprisingly, new-project development will continue at a much more conservative pace. But we are seeing some activity on the new-project front, including the reincarnation of a number of projects that were in various stages of development a few years ago. Generally speaking, these projects will need to demonstrate real incremental opportunity to department stores, both in terms of market share and profitability.
Finally, 2012 will generate continued activity on the mall redevelopment front, with owners undertaking more-significant reinventions of their properties. The introduction of somewhat nontraditional tenants such as grocery stores and nonretail uses such as residential will continue to expand the reach of existing centers — or in some cases, create a more localized flavor.
De-malling will also continue as owners determine that in certain trade areas, traditional enclosed venues have outlived their usefulness. In other cases center owners will continue to recast their mall portfolios by looking to dispose of certain classes of assets. As always, it will be important for mall ownership to be aligned with the department stores as they advance their various redevelopment strategies.
CONSUMER TRENDS
Peter Muoio, Ph.D. Founder and Senior Principal, Maximus Advisors
Measures of consumer confidence tend to tell us very little about how people actually behave. Consumer spending, for example, rose fairly dramatically late last year even after a summer marked by economic turmoil both at home and abroad. While this rise in spending seemed like a hopeful sign to some, it happened to coincide with a deterioration of the national savings rate.
This, in my view, highlighted consumer stress rather than strength. It also called to mind one of the fundamental truths about the American retail ecosystem in 2012, namely that amid double-digit unemployment, stagnant incomes and sharply limited credit, it is unlikely that consumers will be able to maintain strong levels of spending. Without healthy and sustained job growth, in other words, retail might survive, but it will not thrive. Thus the number-one challenge in 2012, by a mile, is jobs.
But there are others. The interplay of energy prices and online sales, for example, clearly will continue to have a big impact on retailing. The past few run-ups in gas prices have illustrated that higher energy costs do not just reduce retail spending, they reroute that spending toward the Internet. Rather than drive to a destination retail center, shoppers save gas by buying merchandise online. And thanks to the rise of iPhones, iPads, mobile-optimized Web sites and more, it is easier than ever for them to do so.
Landlords, in particular, need to be concerned about the terms of trade shifting in favor of online retail. As downsizing chains transition to what might be termed “the showroom model,” the demand for space could nose-dive even further. E-readers were the final bullet for Borders. How many other chains face similar fates? Of course, if the housing sector were to stop bouncing around at the bottom of the barrel, the rise in sales of new and existing homes would boost the bottom lines of a wide variety of retailers and, in turn, landlords. It would also translate into a stronger job market.
Will this happen in 2012? In the words of the immortal Yogi Berra: “It’s tough to make predictions — especially about the future.”
OPERATIONS
John R. Morrison President and CEO, Primaris REIT
Notwithstanding historically low interest rates, consumer confidence in North America continues to trend at low levels. This is due in no small measure to a constant barrage of negative news: global financial uncertainty as a result of the European credit crisis, forecasted slower growth in Asia, high unemployment, sluggish economic growth and a disconcerting level of political uncertainty at home, not to mention daily volatility in the global equity markets. Equally troubling for brick-and-mortar retail is the continued growth of its biggest competitor: online spending.
Consumers are more reluctant to spend, and so visits to shopping centers need to be more compelling than ever. The challenge is to remain relevant in consumers’ minds. Today shopping centers need to focus on the core fundamentals that enhance the consumer experience.
Once the decision is made to visit a shopping center, control of the experience is in the hands of shopping center management. Once the consumer enters a store, it is in the hands of the retailer. This highlights the acute need for retailers and shopping center managers to communicate and collaborate in their efforts to create a repeatable, positive experience for the consumer.
When it comes to operations fundamentals, details are all-important. For example, research reveals that the majority of shopping center consumers are females. But while they all have their individual merchant preferences, their attitudes about the shopping experience are generally aligned: Their fundamental expectations include the likes of well-lit, safe, and easy-to-navigate parking areas; clean and pleasant restrooms; friendly customer-service personnel and simple way-finding systems. And when it comes to all of these amenities, the difference between creating a positive or a negative experience boils down to one thing: attention to detail.
With the advent of social media, moreover, shopping center managers and retailers can garner feedback like never before. Immediate feedback from consumers is without a doubt the most relevant piece of information a provider could use. Owners and managers need to remind consumers why shopping centers exist: not only to provide a collection of stores in a highly convenient setting, but also to meet the basic human need of a social and community environment. And that is something the online shopping experience can never do.
The focus on operations is not about “back to basics.” The fundamentals, after all, should always be top of mind. Today, the primary challenge is to enhance the customer experience by taking maximum advantage of all relevant feedback and information. We want customers to come back time and time again, and to share their positive experiences with others. The customer is always right.
RISK MANAGEMENT
Mary Pipino DeMaiolo CEO, Donald P. Pipino Co., Ltd.
The biggest perceived challenge for any insurance buyer is obtaining the necessary coverage at the lowest price. However, the true challenge is defining a company’s risk profile and then structuring the corresponding insurance purchases to maximize the company’s cost-coverage ratio.
The best strategy for meeting that challenge is using insurance professionals who have specific expertise in handling shopping center risks as well as a thorough understanding of the current insurance market conditions.
These professionals understand that shopping center developers, so long as they employ sound risk-management strategies, need not be at the mercy of the insurance companies. The design and implementation of company-specific loss-control programs and claims-management services, combined with the appropriate use of deductible, self-insured, retained corridors and risk-transfer opportunities, can significantly reduce your company’s overall insurance expenses for the long term.
For example, 2012 property insurance rates are increasing as a result of three major factors: unique, unexpected weather patterns which caused more-frequent damaging windstorms, floods and earthquakes in 2011; weak investment income along with a reduction in underwriting profitability for the insurance companies; and reduced market capacity.
To obtain a cost-competitive program, analyze your company’s financial situation and risk tolerance to determine the amount of loss you can bear, then structure your insurance coverage above that amount. Remember, the most expensive layer of insurance coverage is the lowest tier exposed to loss from noncatastrophic events. Insurance companies charge the most for this layer because the probability of paying claims is higher. Your insurance and risk-management professional should be able to calculate the appropriate portion of risk that your company would be able to reasonably assume and manage, ultimately assisting you in meeting the challenge of maximizing your cost-coverage ratio and controlling your total cost of risk.
SUSTAINABILITY
Marcus Wild CEO, SES Spar European Shopping Centers
Central and Eastern Europe, aside from economic problems, still face a complex set of environmental challenges such as low energy efficiency, urban air pollution, deteriorating water and sewage systems and hazardous waste sites. In those CEE countries that have adopted or are striving for adoption of European Union environmental regulations, the situation has clearly improved, and the role of strong sustainable-devoted shopping center developers also contributes to this change. Nevertheless, the financial sector can play a critical role in the transformation to a more sustainable environment. Financial institutions, as financial intermediaries in an economy, can contribute to mitigating environmental problems, while at the same time taking advantage of the opportunities that sustainability offers to the finance sector. Environmental credit risk appears to be the most important sustainability issue in CEE. After that are issues like renewable-energy markets, carbon finance, water resource management and biodiversity.
The shopping center industry is beginning to understand with objectivity the importance of introducing sustainable practices into mainstream operations. Companies are aware of a wide range of potential financial and nonfinancial sustainability risks and opportunities that may affect their businesses. It should be emphasized that almost all companies that implemented sustainability practices experienced clear benefits. However, at this stage, measuring financial benefits of sustainable practices seems to be a challenge, due to the lack of sustainability management and report systems.
Therefore, one important step is to develop a consistent set of materials that intelligibly outline the business opportunities and potential competitive advantages resulting from sustainable practices. Another is to identify a series of case studies highlighting positive examples and to create a set of guidelines for facilitating all these processes. Finally, it is a must that we more efficiently promote training courses about the benefits of sustainability to all shopping center executive and senior management positions.
MARKETING
Barb J. Faucette Vice President, Corporate Mall Marketing, CBL & Associates Properties, Inc.
The concept of shopping has and will always continue to change. What’s important to the shopper today may have no relevance tomorrow. To maintain top-of-mind awareness for the current consumer as well as capture the attention of next-generation shoppers, we must have a strategic marketing plan, but also be prepared to adjust that plan quickly. Are there challenges? Absolutely. CBL marketing professionals have developed a three-part formula to address them.
First, staying ahead of the game is a primary marketing goal, one in which technology plays a tremendous role. Web sites, smartphones, iPads and social networks — from Facebook to Foursquare to Google Plus — all provide instant information. I-marketing initiatives have the power to capture an infinite audience, and this same audience also has the ability to change opinions overnight. Site management and message content are critical in utilizing these communication tools. Providing up-to-the-minute information is clearly a necessity consumers seek in making their buying decisions. Online shopping will continue to be a threat, with easy search, comparable pricing, convenient ordering and nearly half the purchases delivered free. The research firm Forrester estimates that e-commerce is now approaching $200 billion in revenue in the U.S. alone and accounts for 9 percent of retail sales. Traditional retailers need to find a way to integrate these technologies in their stores.
Second, competition is tough, so building the right retail mix and understanding what drives consumers to the shopping place are key elements in making a retail complex successful. We all want to enjoy a trip to our favorite shopping place, one that offers close-up parking, trendy retailers in one convenient place, perceived value, entertainment and unbelievable service. Top that off with a caramel brulée latte, and the experience is indeed rewarding. We cannot reinvent the parking design, or guarantee lattes, but we can work with leasing to secure key retailers as well as help promote seasonal merchandise, value offerings and just plain fun!
And third, there are fewer dollars for programs and fewer people for implementation, so it’s important to do more with less. With intentional marketing synergy, the possibilities can be endless. Developing partnerships or joint initiatives with retailers as well as other business partners and community organizations can help maximize the consumer experience even as it reaps rewards for retailers and the shopping place.
For example, CBL recently partnered with Chick-fil-A to host a nationwide Santa breakfast serving 10,000 children simultaneously, possibly one of the largest such events in the country. It was a plus for both our shopping centers and Chick-fil-A.
RETAILING
Elise Jaffe Senior Vice President, Real Estate, Dress Barn
At the Ascena Retail Group, operator of Maurices, Justice and Dress Barn stores, we are excited about 2012, thanks to our strong performance over the past couple of years as well as the emergence of new growth opportunities for our thriving brands.
Indeed, our expansion plans provide a window into what is possible today for brands that strike the right approach to fashion, value and service. Consider that Maurices will open more than 50 U.S. stores this year and will expand or relocate another 30, even as it breaks into the Canadian retail market with plans to eventually open more than 75 stores. Tenant mixes in Canada tend to be split between retailers targeting either mature shoppers or the very young. With its focus on 20-somethings, plus-size concepts and multilifestyle assortments, Maurices will occupy this largely unmet niche.
In 2012 Justice will remodel over 40 locations and open 55 domestic stores, along with 10 new stores in Canada. Justice believes the Canadian market will ultimately support 100 stores. Overall, Justice is working toward increasing its total North American store count from 900 stores to 1,100. With its focus on tween girls aged 7 to 14, Justice faces very little competition in its segment. And while Justice offers value, it also benefits from the reality that even when the economy gets tough, mom and dad will continue to spend for the kids.
For its part, Dress Barn will open as many as 30 stores in various U.S. markets. Over the past couple of years, thousands of 35-to-50-year-old shoppers have discovered that Dress Barn offers an attractive alternative to full-price department and specialty stores. The challenge is not just to woo these shoppers, but to keep them, which is why we redesigned our prototype to be more contemporary and have taken our marketing efforts to the next level. Although Dress Barn launched its e-commerce venture just 15 months ago, it has already caught on with shoppers who visit our site for promotions, special values and featured merchandise but also shop our brick-and-mortar stores in person.
Given the rising impact of Ascena’s brands, one might wonder how this growth has been possible amid the lack of new shopping center construction. For starters, the continued downsizing of midsized boxes like Old Navy and Best Buy has finally prompted once-reluctant landlords to start dividing these spaces in ways that create growth opportunities for our brands. Indeed, this trend has already allowed Maurices, Justice and Dress Barn to get into markets and centers that were previously unavailable to them.
Similarly, increased vacancy from the continued purging of specialty retailers continues to open up formerly inaccessible real estate. Bear in mind, also, that it is still a buyer’s market. A couple of years ago, our brands started to take advantage of favorable rents by pursuing smaller markets in which reasonable top-line growth could translate into solid profits. That did indeed happen. But because good real estate positions only get better as spending increases, these leases promise to pay even greater dividends once the economy fully recovers. Likewise, our brands have honed their approaches to fashion, value and service, thereby building even stronger relationships with their customers. This clearly will bolster Ascena’s brand positioning not only in 2012, but also for years to come.
From the January 2012 issue of Shopping Centers Today
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