12 retail real estate trends for the remainder of 2012
At the beginning of this year, we wrote about the 12 trends we thought the retail real estate market should be watching in 2012. Now that Q1 and Q2 are in the books, we wanted to take a fresh look at those trends, and reflect on how they’re playing out and where they’re heading as we continue to move forward in 2012. Here’s how we see the market standing now, and the biggest factors shaping the industry, economy, and our portfolio.
1. The rate of new retail development remains at historic lows. Recently published statistics from Green Street Advisors estimate that the number of new shopping center completions in 2012 will be about 0.3 percent of the total amount of shopping centers in the country. Compare that to the heady days of 2005-2008, when the addition to stock was over 1.6 percent per year. The primary reason for this remains the struggling housing market and absence of new single family residential developments. With little new retail supply, retailers continue to look at opportunities at existing shopping center space. This leads us to the second point …
2. Shopping center operating metrics are improving. This is particularly evident among REIT operating performances through the first half of 2012. The sector has reported increases in leasing spreads, and positive same property net operating income (NOI) metrics. Kimco has certainly been a beneficiary of this trend as well. Kimco’s U.S. occupancy is up to 93.4 percent, 50 basis points higher than this time last year. Our same property NOI grew at a healthy 2.2 percent through June 2012, part of a trend of nine straight positive quarters of NOI increases. New lease rates have exceeded the prior rent on individual spaces to the tune of 6.5 percent over the past year, giving further evidence that the demand and pricing for space continues to improve and the availability of quality real estate is tightening up.
3. The U.S. remains a safe haven investment. Even with the slowdown in the U.S. economy, we remain an investment safe haven for the rest of the world. We have subscribed to that view as well, as most of Kimco’s investment activity has been centered domestically. That said, we also will remain focused on expanding our North American footprint to broaden our sources of revenue for the long term. In one market that we love — Canada — we were able to acquire two grocery-anchored shopping centers in Edmonton and Ottawa. This brings our shopping center investments in Canada up to 66 properties, and in addition we have provided preferred equity capital to local Canadian operators for 47 properties. Add to that our 68 property holdings in Latin America, and it turns out that about 15 percent of our funds from operations come from non-U.S. sources — a nice balancing effect to our U.S. business.
4. E-commerce continues to change the retail landscape. Hardly any topic draws more attention in retail than e-commerce, and rightly so as e-commerce will continue to be a game changer for the retail landscape. Traditional brick-and-mortar retailers are not standing by idly while Internet retailers (read: Amazon) push aggressively into all aspects of the retail chain. The latest buzzword to describe this trend is “omnichannel,” or reaching the customer through all available channels, be it actual stores, mobile devices, traditional media, etc. Most of our tenants are recognizing the real benefit on sales and profits by integrating the various avenues to capture the customer, even in sectors where you might not think the Internet has a significant effect. For example, our largest tenant, Home Depot, noted that while e-commerce represents only about 2 percent of its total sales, about 50 percent of sales involve online research by customers at some point in the buying decision, and about one in four shoppers visited the Home Depot website before visiting the store. For retailers, the online channel offers up significantly more SKUs, and evidence is growing that online presence increases traffic to traditional stores. There is so much that will evolve in this area, as well as mobile payment systems, loyalty programs, etc. There will of course be winners and losers in the retail arena, as there has always been, and shopping center owners like Kimco have worked through many evolutions of retail and have benefitted from it.
5. Small business activity has slowly improved. We have seen slow improvement in the number of new small businesses signing leases in our portfolio. That said, the fortunes of small business growth are mixed. The July Small Business Confidence Index from the National Federation of Independent Businesses showed its largest drop since October, and hiring and investment plans continue to slow. Like most of the economic news, things continue to move forward, but at very tepid growth levels that are constantly subject to twist and turns of the market, consumer confidence, and world events. There is still a lot of “wood to chop” in this area, and healthy small business is critical to employment growth.
6. Pricing for high-quality retail assets remains sky-high. Cap rates for properties in the best locations are falling through the 6 percent level. Low interest rates (more on this in the next point) have been very influential in driving prices higher, particularly for the best-positioned properties. The gap remains wide between the best and the worst shopping center properties. When business was booming from 2004-2007, cap rates between A, B, and C quality real estate tended to converge, thanks to the flood of capital. The financial crisis changed all that, and as markets have recovered, the lesser quality assets have not benefited anywhere near the best-in-class properties. Will prices converge if the economy continues to improve? That remains to be seen, but the answer is complicated by many conflicting impacts — tight supply and little new development, shrinking footprints, growth plans of retailers, effects of e-commerce, strength of CMBS market, macro events, etc.
7. Interest rates remain low. This was an easy one to predict. And with recent comments by Federal Reserve System Chairman Bernanke to possibly launch a new bond program to lower interest rates, as well as the presidential elections approaching, expect status quo for the foreseeable future. We have tried to take advantage of the situation by entering the capital markets to access low-cost debt and preferred stock. Read Glenn Cohen’s post on capital markets trends, and you will get a great perspective of what is happening in the market and what we did to improve our balance sheet in this low-rate environment.
8. Real estate markets remain resilient against some external factors. Interestingly, while external forces — mostly the uncertainty surrounding Europe and the “slowdown” in China GDP growth — are slowing economic growth and diminishing consumer confidence, the real estate markets remain stable and are even improving. It looks like some of the real estate fundamentals that we talked about — very little supply, retailers continuing to look for space — has helped retail real estate recover over the past few years.
9. Small, service-oriented retailers are growing. Even though small business is still sluggish as I discussed in #5, we have seen quite a bit of activity for those businesses focused on providing services, food, and pretty much anything you can’t buy on the Internet. The research team from RBC issues a monthly report on national retailer store opening plans, and growth plans seem to be increasing for restaurants and fast food, spas and salons, and specialty gifts. We’re seeing a similar trend in our portfolio. During the past six months, approximately 40 percent of the 347 leases signed with users of small space (whether national or local operators) were in the categories of Food Service, Spas/Salons, and Specialty Gifts.
10. Discount retailers continue to do well. Value apparel retailers, such as Ross Stores and T.J. Maxx, have posted strong comparable sales numbers. Dollar stores continue to expand aggressively and consumers seem more focused on getting the best value for the dollar. The negative reaction to JC Penney’s shift in pricing strategy earlier this year provided some insight into the consumer condition on discounts and sales events.
11. Shopping center owners continue to focus on redevelopments. The opportunity is both for existing centers that are being expanded or remerchandised, and in some cases restarting phases of projects that were mothballed during the recession. The incremental return on expanding assets one already owns is generally higher than the returns on acquisition opportunities. That said, even when looking at acquisitions, the potential for future redevelopment is often an important determinant in pursuing the asset. At Kimco, we have identified potential redevelopment and value creation opportunities at over 30 of our existing shopping centers, which is in addition to the 20 projects currently active. Internal growth is highly valued by investors, and we are allocating more resources internally to finding value in the portfolio.
12. Many box retailers’ footprints continue to shrink. Many big-box retailers continue to see the need to reduce their footprints. This is trend we’ve been seeing for some time, and will continue to become a core part of the new retail era. As a result, opportunities to reconfigure big-box space to accommodate multiple smaller businesses will grow.
Our earlier 2012 predictions have largely held true, and we’re continuing to see some numbers and trends moving in a positive direction for retail real estate. Although other areas of the market remain slow, these 12 trends indicate that the industry is continuing to stabilize and grow as we progress toward a stronger retail environment. What are you seeing for the industry today?