RECon Special Report: Retail at the Crossroads

During the first full day of RECon, topics on attendees’ radar included retailers’ efforts to adapt to rapid change and common misconceptions about the realities of retail.

Las Vegas—What are the biggest issues facing retail real estate today?

As the 2016 edition of RECon got into full swing in Las Vegas on Monday, executives sized up the major issues facing real estate’s most diverse asset category. At the International Council of Shopping Centers’ annual spring event, topics on attendees’ radar included retailers’ efforts to adapt to rapid change, the evolution of the retail center and common misconceptions about the realities of retail. Las Vegas sign in LVCC lobby2

“What’s going on in retail real estate is more structural than cyclical,” said Brad Hutensky, principal & president of Hutensky Capital Partners, at the company’s booth in the Las Vegas Convention Center. “It’s really about the fact that it’s a mature business. We’re renovating and turning around existing properties more than we’re building new.”

Executives also reported rising uncertainty among retailer clients in the face of an industry that seems to be changing practically in real time.  “To sum it up, I would say that the retailers are worried,” said JLL Retail CEO Greg Maloney in an early-morning meeting at the firm’s booth at the Las Vegas Convention Center. “They’re worried, but I think a lot of them aren’t sure what to do.” Too many retailers, Maloney explained, are counting on the same strategies that worked in the 1990s and early 2000s. Tried-and-true strategies do no longer always apply. “We need to make sure that our customers have a reason to go to a brick and mortar store,” Maloney argued. “The old-school mindset is build it, get the right tenants and people will come. Not anymore.”

Raising the Barbell
Also strongly influencing retailers’ outlook, said RECon attendees, is the strong consumer preference for value in the wake of the Great Recession.  The trend is often described as the barbell effect, characterized by strong performance at the each end of the retail market and weaker results for mid-level retailers. “Everyone’s really trying to capture the growth that’s happening at the value end.” Melina Cordero, CBRE Group’s head of retail research for the Americas.

RECon attendees streamed through the Las Vegas Convention Center on Monday.

RECon attendees streamed through the Las Vegas Convention Center on Monday.

She cited the success of the off-price concepts rolled out by such retailers as Neiman-Marcus, Bloomingdale’s, Nordstrom and Macy’s, which are often generating stronger sales growth than conventional department store formats. But the territory between those two ends of the barbell is far more challenging, and as a result, she noted, “Retailers in that middle ground are trying to figure out what to do.”

Another consumer preference that is shaping retail owners’ strategy is the dramatic shift in tenant rosters. “The rock stars are really food and beverage,” noted Mark Burlton, CBRE’s executive director for global cross-border retail occupier services. Only a few years ago, food and beverage tenants accounted for only about 5 percent of retail center clients. Today, that proportion can often reach 25 or 30 percent.

Missing the Point?

RECon attendees also suggested Monday that recent media reports are creating an oversimplified and sometimes distorted perception of the retail sector. Events like the recent bankruptcy filing by Sports Authority make good headlines but miss the larger point, Hutensky contended.

“The press has really intensified the clarion call about the death of brick-and-mortar retail. That  probably makes for a more interesting story for the reader, but frankly it’s not the case,” asserted Hutensky, “Today about 92.5 percent of retail is sold in stores. It’s not sold online.” Despite widespread perceptions to the contrary, expansion plans abound in multiple retail categories, he pointed out. “That really is the gasoline in the engine that keeps things going.”

Hutensky cited Staples as an example of how retailer strategy can be easily misinterpreted. The office supplies giant’s sales are divided roughly evenly between online and in-store locations, and as a result, Staples is reducing its brick-and-mortar footprint. “That is the sign of executing a smart and successful strategy. That’s not a sign of weakness.”