Top trends in retail real estate for 2014
The only consistent thing in retail real estate is change. Unlike other real estate sectors, the vibrant world of retail changes dramatically as new concepts pop up, existing concepts reinvent themselves, and outdated concepts fade away. And while change can sometimes be disruptive, we think it creates a great opportunity. Kimco has a long history of creating opportunities out of headwinds. We have worked through countless retailer bankruptcies and restructurings, resulting in real estate value creation. Disruption in the retail landscape will no doubt continue, especially with online shopping establishing itself as a fixture in our daily lives.
Here are a few trends we anticipate in the retail real estate industry in the year ahead.
- Redevelopment and “phase two” projects are key initiatives, bolstered by some level of new development. Redevelopment remains a cornerstone in the growth of many retail real estate companies, especially Kimco. At the same time, retailers of all sizes are looking to grow their store counts, typically in the country’s core markets. We’ve seen this from strong small shops, such as Starbucks, Dunkin’ Donuts, Subway, Jersey Mike’s, and Which Wich; midsize retailers, such as Dollar Tree, Family Dollar, Petco, Petsmart, and Trader Joe’s; and junior anchors, including Nordstrom Rack, TJX, Marshalls, Home Goods, Ross Dress for Less, Bed Bath & Beyond, buybuy BABY, Whole Foods, and Sprouts Farmers Market. We’re also starting to see development opportunities emerge in the country’s core areas, but the lead time is long and many new sites won’t come online for another 12 to 18 months. In the interim, retail supply remains historically low. The 2009-2013 period is the first five-year period since 1974 that retail square feet per capita declined, according to a Cowen and Company report. (Square footage per capita was 52.5 in 2009 and 51.6 in 2013.) The lack of supply will continue to bode well for rent spreads and help drive further redevelopment activities. Retailers are anxious to hit their store count goals, and they can get into redeveloped space much faster than ground-up developments.
- Demand for well-located space will continue to drive occupancy rates. U.S. retail availability dropped 30 bps to 12 percent in the fourth quarter, and was down 70 bps for 2013, according to CBRE. Given low new retail supply, most public REITs are expecting to achieve near-record or record occupancy rates this year. We’ve already started to see this trend in Kimco’s U.S. portfolio. We reached the highest occupancy levels since the third quarter 2008, achieving an occupancy rate of 94.9 percent in the fourth quarter, an increase of 100 basis points year over year. We’re optimistic we can squeeze more out of this momentum in 2014. High occupancy has allowed us to increase rents, which rose from $12.58 at the end of 2012 to $12.99 at year-end 2013. High occupancy has also given us more flexibility to improve our tenant mix, which has translated into increased traffic flow and further positive impact on rents.
- Sustainability will become a large initiative for most commercial real estate owners. We’re on pace to see sustainability efforts coalesce into major corporate initiatives for most CRE owners this year. For instance, 2013 saw a 31 percent increase in the number of institutional investors joining the Global Real Estate Sustainability Benchmark (GRESB), a leading sustainability disclosure and benchmarking forum for the CRE industry. That’s just one important indicator, and we’ve been following other sustainability developments on our blog that underscore the growing importance of sustainability to modern business models. Kimco is proud to be an industry leader in sustainability — we were recently awarded NAREIT’s 2013 Leader in the Light Award for our efforts — and we’re committed to building upon the value we’re bringing to our tenants and industry. We’re also partnering with Energy Star® to build on our efforts. We believe that creating a more efficient and sustainable environment is crucial to the success of generations to come, and our industry has an important role to play in seeing this through.
- Omni-channel retailing will become mainstream by the end of 2014. The line between online and brick-and-mortar retailers continues to blur, especially in terms of operations, sales, and footprint. Retailers that haven’t adopted omni-channel retailing are racing to catch up to businesses such as Nordstrom, Apple, and Best Buy. RIS News’ Omnichannel Readiness report, released in October 2013, found that retailers’ top priority for the next 12 months is shifting to a single transaction platform that unifies point of sale, e-commerce, and m-commerce. Some of the bigger boxes, such as Macy’s, are turning their stores into distribution centers, which has enabled them to more tightly integrate their online and physical presences. Some restaurants are increasingly offering online ordering. Showrooming is less of a threat as retailers have innovated ways to increase engagement in-store. We also expect more online businesses to open physical stores this year, the genesis behind the Clicks to Bricks Program Kimco launched in 2013. The growth of omni-channel retailing demonstrates the relevancy of both community shopping centers and online retail to the industry overall.
- Shopping centers will become 24-hour hubs. Landlords are working harder to create complementary tenant mixes that keep shoppers coming to a shopping center all day long, weaving it more tightly into day-to-day living. As a result, new amenities, entertainment, Wi-Fi, wellness concepts, food purveyors, medical centers, and educational uses will become part of the fabric of retail lineups in 2014. Health-conscious consumers are driving the growth of health-oriented retailers, including fitness centers, organic food stores, and healthy restaurants. As demand for medical services grows, it will be commonplace to see a doctor or urgent care facility in nearly every retail shopping center — no different than a drug store or supermarket.
- National franchises will attract more entrepreneurs. Franchising is on the rise amid the advent of new, proven concepts which appeal to entrepreneurs given the lower risk profile. While franchise establishments grew modestly last year (1.4 percent), that pace exceeded non-franchise businesses in the same industries. The International Franchise Association predicts the franchise segment will generate 193,000 new jobs, 13,000 new business establishments, and $38 billion more in economic output in 2014. Given our large, national platform, we identified the franchise trend early on and sought to foster the entrepreneurial spirit and growth potential through our FastTrack Franchise Program. Anytime Fitness, Subway, Supercuts, Jimmy John’s, Great Clips, and Kumon Math are some of the strongest franchises in 2014, many of which are also part of our program.
- Transaction activity will heat up. We saw a number of major mergers and acquisitions in 2013 that will set the stage for heightened activity in 2014 as REITs work to drive earnings growth. Most recently, Kite Realty Group acquired Inland Diversified Real Estate Trust. We’re also seeing activity in the Triple Net REIT space, with American Realty acquiring Cole Real Estate Investments in October. The retail sector has also had its fair share of M&A and IPO activity as businesses seek ways to become more competitive. Office Max and Office Depot are prime examples of large, dominant retailers — also known as category killers — that had overlapping business models and merged to improve their financial strength and increase their competitiveness. This activity is percolating across the retail sector. Consider the $3.3 billion Supervalu deal and the $2.4 billion Saks deal. In other cases, we’re seeing some retailers taken private by PE firms, such as Leonard Green’s purchase of Lucky Brand for $225 million. Still others are going public, notably, fast casual restaurant Noodles and Co. (raising $96.4 million on its first day of trading), Potbelly (raising $105 million), and the blockbuster Sprouts Farmers Market (raising $333 million).
- The gap between power center and grocery-anchored cap rates will continue to narrow. The specialty grocer category is expanding rapidly with consumers increasingly focused on healthy eating and living. But there is limited opportunity for these retailers to enter shopping centers anchored by large grocers due to the competitive conflicts. Instead, specialty grocers are finding homes in power centers, which lets landlords add an everyday draw along with strong national retailers. We’ve also found that power centers are often ripe for redevelopment. In Kimco’s case, for example, we have the opportunity to reconfigure big-box space at some of our power centers to accommodate a smaller specialty grocer and one or more complementary tenants. Grocers tend to decrease cap rates at shopping centers, and not surprisingly, the stronger grocers push cap rates down more than weaker ones.
- Junior anchors will quickly fill big-box spaces vacated by struggling retailers. We’re seeing many junior anchors — including TJX, Ross Dress for Less, and Bed Bath & Beyond — looking to fill spaces once occupied by large, struggling retailers. Bed Bath & Beyond in particular has strong expansion plans, and we’ve seen this retailer show interest in opening several of its flags in one box, such as Cost Plus and buybuy BABY. This trend circles back to what we discussed at the opening of this post — redevelopment. It’s the nucleus for growth for many retail landlords. Within our portfolio, we are actively repositioning vacated big boxes into spaces of approximately 25,000 square feet, which are in high demand and are in our sweet spot today.
Looking out at 2014, Kimco is well-positioned to take advantage of these themes. We firmly understand the fundamentals driving our business and the importance of remaining innovative from a strategic, operational, and technological perspective.
As a landlord, we continue to research new technology and amenities that will enhance and draw more traffic to our centers by helping connect shoppers to retailers. The Kimco portfolio of the future is shaped by creating the right tenant mix and redeveloping our real estate to the highest and best use. With a strong team and vision for our future, we continue to create value for all Kimco stakeholders.