Western Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Western United States.
Issue link: https://westernrealestatebusiness.epubxp.com/i/818922
68 • May 2017 • Western Real Estate Business www.REBusinessOnline.com Coat Factory. Fitness users like Life- time Fitness, LA Fitness and 24-Hour Fitness are also being pursued to backfill these spaces. However, the list of retailers expanding is growing narrower each day. Landlords who are not fortunate enough to secure one of the best-in-class retailers may be forced to consider the alternatives. When faced with such a reality, we have seen departments stores con- verted to a litany of non-traditional uses, such as mini-storage facilities, healthcare facilities, assisted living facilities, car dealerships, call centers, community event centers and more. Some landlords have succeeded in successfully deconstructing these boxes and creating an entirely new retail experience that has driven far greater traffic to once-tired retail proj- ects. These developers and owners are creating mixed-use environments with residential components comple- mented by uses like food halls, beer gardens and co-working spaces. Yet, we are only at the beginning of this chapter. As retail continues to evolve, the store closures and retail bankruptcies will continue as well. We are now at the forefront of the next evolution of living, shopping and dining, and new sustainable, innovative and creative places will emerge. AS THE RETAIL SECTOR STRUGGLES NATIONALLY, THE WEST SHOWCASES THE EFFECTS OF A STRONG ECONOMY By Peter Muoio, Chief Economist, Ten-X There's no way around it: these are trying and uncer- tain times for brick- and-mortar retailers. Encroachment from e-commerce has cast a shadow of doubt over the prospects for traditional strip malls in markets across the country and, with little exception, retail fa- cilities of all types are performing at a weaker level than they were 10 or 20 years ago. There's no question that people are shopping online more than ever before. The question is: to what extent can a strong economy buoy what has become one of the commer- cial real estate industry's most chal- lenged sectors? The headwinds facing the retail sec- tor in recent years have been more ap- parent than ever before. More than 13 percent of total retail sales are currently conducted online — a figure strikingly higher than the 10 percent range just a few years ago. Retail vacancies nation- wide are about 9.9 percent and have hovered within 20 basis points of 10 percent since the end of 2014. The near-term prospects for im- provement appear limited. Ten-X Re- search estimates vacancies will fall slightly to just above 9 percent in 2018 — a marginal improvement owed in part to the general lack of new supply coming to market — before climbing back to near 10 percent in 2020. This dreary outlook stands in stark con- trast to a steadily improving national economy where labor markets contin- ue to strengthen and wages remain on an upward trajectory. While it's true that lagging retail fundamentals correlate with the e- commerce boom, it's not necessarily a zero-sum game. A closer look at the regional disparities in the retail sec- tor reveals that the regions with the strongest housing markets and local economies are seeing gains in retail fundamentals. This is happening even as these populations are increasingly turning toward online shopping. This is the case out West. This area has experienced stronger improvements than other regions in vacancies and rents. The West's economy buttresses its retail sector in two ways. First, higher home sales levels typically translate to an increase in home remodeling and refurnishing. These supplies tend to be purchased at retail establishments with physical storefronts. This trend benefits certain large retailers like Home Depot and Lowe's, as well as furniture stores. Second, higher home prices drive a small "wealth effect." This leads to higher spending in gen- eral which, on a regional scale, can prop up traditional retail centers. While the retail markets in the Northeast and Midwest tend to be on downward trajectories over the next four years, the vast majority of West- ern and Southwestern markets project to either improve or maintain their strength over the same period. Spe- cific markets on the upswing include Los Angeles, San Diego, San Francisco and Denver. Only one major market in the West — Oakland, California — stood out in Ten-X's latest report as a "sell" market, indicating that retail owners in the region might consider selling their properties due to unfavorable projected returns. In Oakland's case, retail jobs have declined in four of the past five months, failing to keep pace with the city's population growth, while absorption has stalled. As new retail buildings come to market, Ten- X projects vacancies will rise above 9 percent in 2020, a marked increase from the current 6.6 percent vacancy rate. Still, the West seems to offer a glim- mer of hope, however faint, for the struggling retail industry. While the sector as a whole faces an uphill battle to overcome the proliferation of e- commerce, regions with strong hous- ing markets and robust economies are best equipped to weather the storm. RETAILERS ARE LEADING LA WITH LIFESTYLE By Jordan Rubinstein, Vice President, Brokerage, Kennedy Wilson The first things that likely come to mind when you think of Los Angeles are sun, sand and celebrities. While the entertainment capital of the world still boasts these at- tributes that draw visitors and new residents alike, in recent years, LA has solidified its po- sition as the unofficial Western capital of the U.S. through its transformation into a burgeoning urban environment. It's no secret the city is experiencing a development boom. With dozens of mixed-use projects popping up, op- portunities for retailers continue to grow. Gone are the days of developing traditional strip malls throughout the city's sprawl. Now, those looking for retail space must be more creative in their approach as urban infill becomes the name of the game. The evolution of LA's landscape is ultimately impacting the vitality of its retail scene. Rents are sky-rocket- ing in light of low cap rates and the expensive tenant improvement al- lowances required to attract the right mix of retailers. The expenses borne by landlords to create inviting and desirable retail destinations are then passed down to tenants who must make sense of resulting higher rents in relation to their operating costs. Many landlords are still in search of the coveted "right mix" of ten- ants and are seeking those that will elevate the shopping experience by offering lifestyle and amenity-based environments. It's clear today's retailers cannot merely copy and paste their strate- gies from suburban markets into ur- ban environments. The confluence of tech, art and cinema distinguishes LA as the cultural hub of the Pacific Rim. LA's shoppers want to experi- ence the vibrant culture that mirrors its glamorous lifestyle. As such, land- lords seek to activate their corners with curated amenities and retailers that resonate with the city's distinct way of life. QSR and fast-casual restaurant ten- ants are the perfect example of this, and are finding success in producing foot traffic through the unique experi- ences they offer to customers. This ul- timately results in sales numbers that more than make up for high rents. On the flip side, big box retailers of the past are no longer able to support a center as an anchor. With the rise of e- commerce, shoppers are meeting their daily needs in new ways, eliminat- ing the need for a surplus of big box tenants. Luckily, LA landlords have found new retail anchors that have fi- nally cracked the secret of this market: create retail spaces that embody the ultimate LA lifestyle. There are a few tenant types leading in LA's retail landscape. Interestingly enough, these are re- tailers whose experiences cannot be replicated online, such as: • Specialty Coffee: Establishments like Blue Bottle Coffee Company, In- telligentsia and Go Get Em Tiger offer the cultural experience many desire in Los Angeles — they're hip and their products are eye-catching and sus- tainable. • Fast-Casual Dining: From new concepts like poke bowls to stan- dards like lemonade, innovative and "Instagram-able" food concepts are the ultimate anchor. Fast casual estab- lishments offer high-quality items in a time-efficient manner and at an af- fordable price, drawing foot traffic at a greater rate than a table service res- taurant would. • Fitness: LA's lifestyle reveres fit- ness, and SoulCycle, Orangetheory Fitness and Pure Barre are just a few examples of tenants who are changing the game. Often, such establishments create a "health hub," as they typical- ly draw complementary neighboring tenants like juice bars. Given that so much is easily acces- sible online, and considering LA's traffic and parking issues, landlords realize they must entice consumers to leave the house and shop. With this in mind, retail developments must create an outing that is both experi- ential and enjoyable. While this costs the landlord dollars, it can work in dense markets where targeted retail- ers are able to produce the volume required to foot the bill. In LA, this means embodying all that Angelenos want out of their true Los Angeles ex- perience. n Muoio Rubinstein Establishments like Philz Coffee offer the cultural experience many desire in Los Angeles. They're hip and their products are eye-catching and sustainable. Photo credit: Brigham Yen