APPETIZER

SPOTLIGHT REPORTDecember 2016

Retail Services

ENTRÉE?orHow Food Continuesto Fuel Retail

Appetizer or Entrée?How Food Continues to Fuel Retail

Anjee SolankiNational Director, Retail Services | USA+1 415 288 7871anjee.solanki@colliers.com

Andrew NelsonChief Economist | USA+1 415 288 7864andrew.nelson@colliers.com

Once banished to the central food court, dining has become much more than a retail afterthought. Nearly a quarter of all trips to shopping centers today are primarily focused on eating.1 It’s official: Food is no longer the “appetizer” to a consumer’s retail experience—it’s increasingly becoming the main course.

People are dining out more often at all price points, new restaurant and food concepts are exploding and opportunities are being created for retail centers of all types—from “urban villages” to small strip centers to neighborhood centers. Many of the questions we are hearing from clients relate to the role of food in the retail center and how to create the right mix of tenants.

To answer this question, Colliers International brought together the voices of retail real estate professionals and retail center representatives to develop this playbook of food-driven trends. In a near-peak real estate cycle, staying ahead of these shifts is more important than ever, so keep an eye on our top five focus areas.

FOOD-POWERED RETAIL IN 20171. Understand the rising role of food in retail2. Recognize food evolutions (and revolutions)3. Design for cross-shopping: parking and place4. Use technology to your advantage5. Specialize, specialize, specialize

1 Conlumino, data from Intelligence Center platform

2 Retail Services Spotlight Report | Colliers International

Understand the rising role of food in retail

Even in today’s world of online convenience, where you can use an app to get groceries delivered to your doorstep in an hour, people still want to dine out. In a recent report, 80 percent of consumers said dining out with family and friends is a better use of their leisure time than cooking and cleaning up.2 And it shows: Studies suggest that the average American dines out four to five times per week.

As a culture, America has become a nation of foodies and dining out is more social in every sense of the word. Snapchatting a meal or Yelping a restaurant review is de rigueur for the dining experience. People are increasingly gathering in community-oriented “villages,” “town centers” and mixed-use districts for a bite, to pick up dinner or to purchase a specialty wine or infused olive oil. And retail centers are capitalizing on these trends to create vibrant and lively areas anchored by a growing collection of food offerings.

And there’s no end in sight. The National Restaurant Association forecasted that 2016 would be the seventh consecutive year of growth in restaurant industry sales—reaching $783 billion.3

Recognize food evolutions (and revolutions)

Food trends move quickly. Yesterday’s flatbreads and exotic mushrooms have given way to ethnic condiments and house-made soft drinks with rosemary and mango.4 While some trends are a flash-in-the-pan, we are seeing a persistent shift toward “fast casual” dining and more health-conscious menu options.

Fast casual has been the big winner in restaurant growth recently. In 2015, it was the fastest growing segment of the foodservice industry globally—reaching a $3.4 billion increase over the previous year.5

Consumers are certainly looking for dining convenience but not necessarily in the traditional drive-thru-fast-food sense. With an increasing social focus on wellness, health-oriented food concepts are thriving.

“”

Restaurants are gobbling up space in many areas. I’d estimate food-related spaces take up 25-30 percent more square footage in retail centers than 10 years ago.

– Daniel Ortega, Vice President Phoenix, AZ

2 “2016 Restaurant Industry Pocket Factbook,” National Restaurant Association3 “2016 Restaurant Industry Forecast,” National Restaurant Association4 “10 Years of What’s Hot,” National Restaurant Association5 “Fast Casual Is the Fastest Growing Foodservice Segment Globally,” QSR Magazine

3Retail Services Spotlight Report | Colliers International

We have also seen a proliferation of chef-driven restaurants in the fast-casual space, as television food channels and news media continue to turn chefs into celebrities. The demand is significant—65 percent of consumers recently said they would be more likely to go a fast-casual establishment that was gourmet or chef-driven.6 From Mario Batali to Danny Meyer, it’s clear that a notable chef can drive sales and spice up the reputation of a restaurant.

Successful food retailers are keeping an eye on the consumer shift toward convenient, health-conscious and chef-driven food offerings. For owners and developers looking to attract new food and beverage tenants, it pays to have an open mind and think about what consumers want today and tomorrow.

Design for cross-shopping: parking and place

In downtown areas or urban villages, it’s becoming more and more likely that a visitor’s trip revolves around having a meal. Whether dinner leads to additional retail spending depends largely on how easy it is to “cross-shop.” On the way to a restaurant, what do visitors walk by after parking the car? Are shops still open after dinner? How attractive and enticing are the window displays?

While many regional shopping centers are still islands in a sea of parking, more centers are moving to a mixed-use format that supports cross-shopping thanks to careful foot-traffic planning. In strip or neighborhood centers, a shared parking field encourages consumers to walk by other offerings that beckon them to enter or entice them to return at another time.

In urban villages or town centers, underground parking and garage decks are becoming more common. Local governments will sometimes pay for structured parking and other infrastructure improvements because the resulting project may increase density and create a higher tax base.

“”

Food-related cross-shopping doesn’t just happen. Strategy and good design are key, particularly when it comes to parking.

– Brian Whitfield, Vice President Greater Detroit, MI

FRESH,HEALTHY& FAST

ARTIFICIAL IS PUBLIC ENEMY NO. 1Consumer demands for natural and “less processed” food and drink are forcing

BASED ON A TRUE STORYConsumers are increasingly interested in product origin and inspiration stories.

ECO IS THE NEW REALITYDrought, worries about food waste and

worldwide food and drink supply and

ALTERNATIVES EVERYWHEREConsumer interest in novel protein sources foreshadow a profoundly changed marketplace where what was once “alternative” could take

over the mainstream.

SOYMILK

DIET BY DNA Interest in “getting back to basics” has fostered a principle that age-old staples are better than today’s manufactured options.

6 “2015 Fast-Casual Chains Survey,” Zagat

Source: Mintel

Global Food andDrink Trends

4 Retail Services Spotlight Report | Colliers International

Use technology to your advantage

New tools can make urban design more efficient and profitable for retailers. Beacon cameras, sensors and affinity tags can provide detailed information on how users engage with a space or district. Where do they park? Walk? Eat? How long do they stay inside a shop or restaurant?

Data on dwell times, store footfall and pedestrian traffic can be used to drive rents as well as reposition existing tenants. Large owners such as Simon and Kimco are using these technologies in their centers and assisting tenants with information to improve both store and center profitability.7 We expect that these technologies will increasingly be adopted by smaller owners and operators over time.

Technology also makes consumers more willing to travel to buzzed-about restaurants, bringing traffic to areas that might not typically receive this type of attention. Smart phone apps that provide reviews, maps and social sharing make off-the-beaten-path locations more discoverable and easier to find.

We continue to see thoughtful design supporting cross-shopping in mixed-use developments with restaurants joined by office space, luxury multifamily housing, shops, cinemas and entertainment venues. These newly minted urban enclaves function as suburban downtowns and are magnets for millennial workers and employers.

From the Ferry Building in San Francisco to the Imperial Market in Sugar Land, Texas, these types of projects are creating a sense of “place”—amenity-rich, heavily landscaped with well-designed outdoor areas, transit access, art and a broad array of food and drinks.

To create that sense of place, it’s essential to provide a true retail experience that draws a shopper into the store rather than onto the internet. Many retailers are finding smart ways to provide the “omnichannel experience.” And yet, the older, 10,000-12,000 square-foot mini-anchor spots can still be challenging to fill.

Here again is an area where food is driving change: These large spaces can often be broken up and occupied by multiple restaurants or food purveyors. Restaurants can make larger spaces work by providing desirable experiences: add ping pong or pool tables, TVs or other active space if the rents and zoning accommodate such uses. This type of adaptive reuse gives landlords a way to diversify risk and encourage cross-shopping with a multi-tenant strategy.

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There’s not much that the millennial generation isn’t influencing these days. As the Gen Y presence expands from urban areas into first- and second-ring suburbs, the increased density and apartment growth are making these areas much more attractive to retailers.

– Tony D’Ambrosio, Vice President Atlanta, GA

“”

Restaurant ratings are becoming even more important than location. People will go out of their way to hit a hot spot, and if they discover a unique specialty store while they’re there, chances are they’ll happily make the trip again.

– Julie Taylor, Executive Vice President San Francisco, CA

7 “Envision 2020,” ICSC

Specialize, specialize, specialize

It’s no secret that the traditional grocery store is getting squeezed on all sides—by big-box discounters, by high-end grocers and by online shopping vendors who deliver straight to your doorstep.

Previously, a large supermarket could carry 5-10 smaller in-line retailers in a neighborhood center. Today it’s more likely that a center contains a large, updated grocery store, several restaurants and multiple “grab-and-go” outlets. Retailers such as brew pubs, purveyors of locally roasted coffees and coffee accessories, and exotic tea shops are popping up and testing the depth of niche markets.

The addition of these specialty shops draws new customers and makes return visits more rewarding. Within smaller centers and strip centers, ethnic and unique offerings can get a foothold in a market and expand to other local outlets, regional markets and perhaps even nationally.

These small, distinctive shops play into the shift toward customization and specialization. Nowhere is this more visible than the explosion of small-format fitness centers: hatha yoga studios, Soul Cycle, Planet Fitness and Circuit Fitness are all examples of specialization within the broader fitness market.

These fitness centers are also increasingly aligning with the healthy food trend by locating near smoothie bars, grab-and-go salad shops or other health-oriented food purveyors. Some fitness retailers are even creating “shops within shops” by bringing branded juice bar concepts into their spaces. While this specialization trend is most prevalent in more urban, affluent and sophisticated areas, we are beginning to see the impact in second- and third-ring suburban areas as well.

“”

Look for fewer chains and more boutiques and high-quality ‘makers’ coming to the market. These types of specialty stores will be an important ingredient in the retail center tenant mix of the future.

– Tyler Peterson, Senior Associate Tampa, FL

6 Retail Services Spotlight Report | Colliers International

Fuel up for 2017

In many areas across the U.S., rents have risen significantly in recent years, and they continue to climb. These higher rents demand greater profitability from retail businesses.

While total retail spend is forecasted to grow 3.3 percent in 2017, many retailers will continue to be vigilant about pruning their franchises to the most profitable locations.8 As a result, “A” locations will continue to improve, motivated by the fact that vacancy is running at under 5 percent in the hottest locations. Many “B” locations are moving up with investment from landowners and higher tenant improvement fit up. And “C” locations may require significant reinvestment or repurposing.

This increased focus on profitability and staying one step ahead serves as a good reminder that the retail industry faces constant change: shopper fashions, dynamic consumer demographics, technology improvements, cyclical economic conditions, new ways of shopping ... the list goes on. Retailers have little choice but to change with the times or risk being eaten alive by the new market realities.

As we look to 2017, we see many exciting prospects on the menu for retailers and consumers alike. Not every player will make it—that’s the dynamic nature of retailing. But for those bold enough to look ahead and spot new opportunities, the future will be more successful than a food truck peddling artisan pickles and hyper-local ancient grains.

For more retail insights and opportunities, visit:colliers.com/us/retail

“ ”When it comes to rents,$40 is the new $30 and$50 is the new $40.

– Bob Feinberg, Senior Vice President & Principal Albuquerque, NM

“ ”The retail industry is like a great city—it never sleeps.

– David Green, Vice Chairman Brad Mendelson, Vice Chairman New York, NY

8 Conlumino, data from Intelligence Center platform

7Retail Services Spotlight Report | Colliers International

Anjee SolankiNational Director Retail Services | USA+1 415 288 7871anjee.solanki@colliers.com

Copyright © 2016 Colliers International.The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.

Andrew NelsonChief Economist | USA+1 415 288 7864andrew.nelson@colliers.com

colliers.com/us/retail