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JLL Research
Experiential retail will save malls
United States | Retail Outlook | Q1 2017
Retail
Contents
Retail Outlook | United States | Q1 2017
Retail performance at the tipping point 4
The closure conundrum: Who’s closing and why? 8
Experiential retail will save malls 12
Value is still king for consumers 15
Grocery-anchored centers lead shopping center absorption 17
Equilibrium
Retail performance at the tipping point as most markets peak
Retail Outlook | United States | Q1 20174
Reading the clock
The JLL retail property clock demonstrates where each market sits within its real estate cycle. Markets generally move clockwise around the clock, with markets on the left side of the clock generally landlord-favorable and markets on the right side generally tenant-favorable. All of the markets have now moved to landlord-favorable, as rents gradually head upward and vacancy continues to contract. Most of the major metros including Dallas, Boston, San Francisco, Miami, New York and Houston have moved to a peaking market as demand grows ahead of new supply additions. Once demand and supply reach equilibrium, the clock should strike midnight for most markets.
Total U.S.
Type Total s.f. Total Vacancy
YTD Net Absorption
Q1 2017 Avg rent
QOQ% Chg
YOY% Chg
General Retail 5,280,936,742 3.0% 7,482,681 $18.82 3.0% 7.2%Malls 894,321,316 4.3% 3,220,908 $19.81 2.4% 12.4%Power Centers 750,540,873 5.0% 510,838 $19.00 3.1% 8.6%Shopping Centers 3,517,306,976 7.9% 3,791,754 $15.20 0.6% 2.2%Specialty Centers 84,601,889 5.0% 14,368 $16.94 3.0% 0.1%
Total Retail 10,527,707,796 4.9% 15,020,549 $16.70 1.8% 4.8%
Retail subtype Definition Examples
General Retail Consists of single-tenant freestanding general-purpose commercial buildings with parking
Drugstores, some groceries, streetfront urban retail stores
Malls Includes Lifestyle Centers, Regional Malls and Super Regional Malls
Primarily anchored by mass merchants, fashion and department stores
Power Centers Consists of several freestanding anchors with minimal small tenants, 250,000–600,000 s.f.
Primarily anchored by big-box tenants and discount supercenters
Shopping Centers Includes Community Centers, Neighborhood Centers and Strip Centers
Primarily anchored by groceries and local services
Specialty Centers Consists of the combined retail center types of Airport Retail, Outlet Center and Theme/Festival Center
Primarily anchored by manufacturers’ and retailers’ outlets
Total Retail All retail building types in both single-tenant and multitenant buildings, including owner-occupied buildings All retail
Chicago
Seattle, Atlanta, Philadelphia
Los Angeles, Tampa
Hawaii, Washington, DC, Orlando, United States
San Diego
Orange County
Miami, Dallas, New York City, Houston, San Francisco, Boston
Peaking market
Falling market
Rising market
Bottoming market
Retail Outlook | United States | Q1 20175
Retail recovery may have reached its zenith. Gradual but steady improvement in fundamentals has led to a first-quarter vacancy of 4.9 percent—110 basis points below its level 10 years ago, at the height of market performance. That being said, retail performance will slow this year as same-store growth stagnates for many retailers and closures rise.
Net absorption slowed in the first quarter, totaling 15.0 million square feet—a 3.5 percent dip from the first quarter in 2016. Developers also remain deliberate in starting new construction projects; only 15.4 million square feet were delivered during the quarter, just edging out absorption.
Closure announcements have been accelerating in recent months, with department stores topping the headlines. Macy’s and Sears will return approximately 18 million square feet of mall space to the market over the next year. While the upcoming vacancies will pose opportunities for strong malls to upgrade to a more productive tenant or refresh the space with an entertainment destination, weaker malls could experience a ripple effect to their in-line occupancy.
Vacancies hold as demand and supply meet in the middle
Topline vacancy in the United States remained at 4.9 percent for the first quarter, thanks to deliveries just inching past absorption. In all of the United States, vacancy for shopping centers saw the greatest compression of 63 basis points, year over year, as smaller mom-and-pops
continue their recovery. General/freestanding retail vacancy also saw a marked reduction—62 basis points. Malls saw an 18-basis-point decrease as net absorption rose over the last few quarters. Conversely, power center vacancy shot up 61 basis points, thanks to over a million square feet of negative net absorption approaching the end of 2016.
YOY vacancy compression by retail subtype
Source: CoStar, JLL
$13.50
$14.00
$14.50
$15.00
$15.50
$16.00
$16.50
$17.00
$17.50
$18.00
0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%
10.0%
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Q1
Quoted rent
U.S. vacancies flatten as market approaches equilibrium
-62 -18
61
-63-38 -50
Total U.S.
In b
ps
General Retail Mall Power CenterShopping Center Specialty Center Total Retail
Source: CoStar, JLL
Retail Outlook | United States | Q1 20176
S.f. under construction by retail subtype—as of Q1 2017
Source: CoStar, JLL
Construction still low
Developers remain cautious when adding new space. Total retail deliveries in Q1 2017 were 15.4 million square feet—20.0 percent down from the end of 2016, but inching up 3.0 percent, year-over-year. Construction levels are somewhat muted from year-ago numbers, with 72.5 million square feet currently under construction—a 6.6 percent decline.
Atlanta and New York lead the markets in construction activity, particularly in mall and freestanding/general retail. The majority of retail space being built largely consists of general/freestanding retail (59.0 percent). General
Retail59%
Malls18%
Power Centers
5%
Shopping Center
16%
Specialty Center2%
S.f. Under Construction
0.0% 0.3% 0.4% 0.6% 0.7% 0.9%1.4%
4.6%Philadelphia Net absorption as % of GLA
Retail Outlook | United States | Q1 20177
Philadelphia CBD absorbed nearly 5.0 percent of its total inventory in Q1 2017
Source: CoStar, JLL
A vibrant urban demographic pushes Philly to number one
Philadelphia had a strong first quarter, with net absorption the highest in years. It exceeded entire annual absorption for every year between 2011 and 2016. Delivery of new retail space was also strong, the highest in over a year, and rents jumped 10.0 percent year-over-year. Center City, Philadelphia’s urban core, is rising steadily in prominence as a key retail destination. In fact, rents have risen faster in Center City than any other peer city but Miami.
The submarket’s high proportion of millennials (40 percent) has had a major impact on the tenant mix along its corridors. There is a prevalence of boutique/independent retailers (making up 77 percent of the retail mix) along with young, hip new concepts and clicks-to-bricks stores like Bonobos and Warby Parker. Trendy food and restaurant retailers (e.g., sweetgreen and &pizza) and fitness concepts (e.g., SoulCycle, Under Armour) are also opening locations within the metro.
This strong demand is getting the cranes moving in the submarket. Developers are pouring $815 million into new construction projects, adding more than 1.1 million square feet of retail in the next few years.
Philadelphia CBD accounted for 28.0 percent of total Philly absorption in Q1 2017
Source: CoStar, JLL
8%11%
28%
17%
7%
18%
11%
Q1 2017 net absorption
Delaware
I-81 Corridor
Lehigh Valley
Philadelphia CBD
Philadelphia Non-CBD
Southern New Jersey
Suburban Philadelphia
The way consumers shop is changing
News stories about the rise of store closure announcements have been accompanied by headlines predicting the end of retail as we know it. Beyond acceleration in the number of store closures, there will also be an increase in the amount of space being closed. In other words, larger stores are closing.
• E-commerce penetration is a reality and it’s growing (although not as much as some people fear).
• Consumers’ tastes are changing, especially as millennials increase their prominence and buying power.
• Consumers want experiences, convenience and value. Stores that fulfill those functions well will stay open. Those that don’t will close.
The bottom line is retail isn’t dead. But the old way of selling and operating stores is dying.
Retail Outlook | United States | Q1 20178
1643796
685370
319241241
216159
70594848
3683
ApparelElectronics stores
Shoe storesOffice supplyRestaurants
Department storesBooks & music
Discount dept. storesSporting goods
Drug storesDollar stores
Home furnishingsGrocery stores
Specialty storesThrift stores
Wholesale clubs Announced closures
Apparel and electronics retailers are closing the most stores
Source: PNC, JLL
The closure conundrum: Who’s closing and why?
Commodities move online
While consumers are shifting more of their purchases online because of convenience or lower prices, many still prefer to buy in store for most product categories. The products consumers most prefer to purchase online are books, electronics and office supplies—goods that are generally very commoditized. As the category closure chart shows, electronics and office supply retailers are among those closing the most stores. Some, like Radio Shack and hhgregg, are even going bankrupt.
Retail Outlook | United States | Q1 20179
32.0%
33.0%
49.0%
56.0%
66.0%
67.0%
71.0%
76.0%
77.0%
92.0%
68.0%
67.0%
51.0%
44.0%
34.0%
33.0%
29.0%
24.0%
23.0%
5.0%
Books
Electronics
Office supplies
Sporting goods
Pet supplies
Tools
Household goods
Clothing and apparel
Consumer packaged goods
Food/grocery
Prefer to purchase in-person Prefer to purchase onlineNo answer
Electronics and office supplies among categories consumers like to purchase online
Source: Statista, 2016 survey
Curation will define apparel retail on- and offline
Changing demographics, shifting consumer tastes in favor of discounters and fast fashion, and some sales loss to online sellers have all helped to close some apparel stores. Several apparel retailers, like The Limited, Wet Seal, BCBG Max Azria and American Apparel, are going bankrupt and leading the store closure count.
As millennials and Gen Z consumers rise in prominence, the way in which people shop for fashion is going through a radical change. The old standard of a typical clothing store with endless racks and shelves of apparel is becoming defunct. Consumers—especially younger consumers—want something new and different. Stores that offer curated collections appeal to those who don’t have the time or patience to comb through a multiplicity of selections, like those seen in a department store. Consumers also still want value. This is why off-price chains like Ross and TJ Maxx are still doing well. The estimated online apparel spend in the United States in 2016 was $44.9 billion. Online apparel revenue is expected to climb to $70.9 billion by 2021 (Source: Statista).
Retail Outlook | United States | Q1 201710
Source: PNC, JLL
Apparel retailers closing stores
400
250
171
170
140
120
110
63
60
50
50
44
24
15
rue21
The Limited
Wet Seal
Bebe
Vanity Shop
BCBG Max Azria
American Apparel
Kenneth Cole
Abercrombie & Fitch
Chico's
Guess
Lucy Activewear
Kit & Ace
Perry Ellis
# of announced closures
According to Goldman Sachs, online apparel and accessories could see an additional $50 billion of sales over the next four years, a revenue base equivalent to apparel and accessories sales for Macy's, Nordstrom and Kohl's in all channels combined. Nearly 35 percent of millennials already spend most of their apparel budget online. This is especially true of older millennials (aged 25–34), who are more likely than any other age group to spend most of their clothing budget online. As a comparison, roughly 30 percent of consumers aged 35–44, and approximately 15 percent of 45- to 54-year-olds do most of their clothes shopping online.
Most growth will come from higher transaction values along with increased order frequency. The expansion of same-day delivery, coupled with ease of returns, will increase impulse purchases and rate of adoption. Online players include e-commerce platforms for brick-and-mortar retailers (like Nordstrom or Gap), brand sites (like Nike),and emerging curated fashion and styling services (like Trunk Club and Stitch Fix).
These curated shopping services appeal to consumers who don’t have the time or inclination to shop in traditional ways. Personal stylists pick out complete outfits including shoes and accessories based on a short survey of personal preferences. This channel adds a valuable service component to the e-commerce experience.
Retailers are still opening stores
While apparel, electronics and office supply stores close shop, there are several retailer categories who are seeing strong expansion. Dollar stores continue to perform very well. In fact, these stores are seeing demand from consumers across the income spectrum from low-income consumers to those making over $100,000 per year. Off-price retailers like Ross, TJ Maxx and Marshalls are also expanding, as they continue to see sales growth. And beauty & cosmetics remains a very strong retail category. The bottom line is that demand remains positive despite recent closure announcements. In fact, the amount of space opened in malls in the last year considerably outweighs space vacated.
Retail Outlook | United States | Q1 201711
Source: CoStar, JLL Research
Mall space absorbed outweighs space vacated
Source: CoStar, JLL
Despite headlines, retail openings still trounce closures
Mall square footage opened or closed over the last 12 months
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
2008Q1
2009Q1
2010Q1
2011Q1
2012Q1
2013Q1
2014Q1
2015Q1
2016Q1
2017Q1
Mill
ions
Mall s.f. vacated Mall s.f. absorbed
Move-ins Move-outs
15.1m.s.f.
24.1m.s.f.
Experiential retail will save malls
Retail Outlook | United States | Q1 201712
For malls, most of the major markets have moved beyond a peaking market toward the right side of the clock, where rents growth begins to slow.
Mall Property Clock
San Francisco, San Diego, Dallas,
Orlando, Philadelphia
Peaking market
Falling market
Rising market
Bottoming market
Washington, DC,Boston
United States
Miami, Hawaii, New York Metro, Seattle, Houston, Los Angeles, Orange County
Chicago, Tampa, Boston
Tampa, Atlanta
Mall owners will get creative in filling anchors
Mall absorption grew in Q1 2017, exceeding 3.5 million square feet. More than one-third of the space absorbed was in Philadelphia, which boasted absorption over 1.3 million square feet. While demand for mall space was strong in the first quarter, disruption is coming in the form of vacant anchor spaces.
Anchors are closing hundreds of locations in the next year—more than 230. As more anchors become vacant, landlords will need to look for creative ways of filling empty space as well as introducing stores and services that will be a huge draw for shoppers. The key is in experience. Entertainment is a powerful draw for consumers. New VR and immersive experience companies can both fill space and bring consumers to shopping centers. Some landlords will opt to fill anchor space with non-traditional uses such as medical centers, multifamily or hotels.
Retail Outlook | United States | Q1 201713
Source: CoStar, JLL
Q1 2017 mall absorption the highest since 2008
(6,000,000)
(4,000,000)
(2,000,000)
-
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
14,000,000
16,000,000
18,000,000
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Q1 Q2 Q3 Q4
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
2007
Q4
2008
Q2
2008
Q4
2009
Q2
2009
Q4
2010
Q2
2010
Q4
2011
Q2
2011
Q4
2012
Q2
2012
Q4
2013
Q2
2013
Q4
2014
Q2
2014
Q4
2015
Q2
2015
Q4
2016
Q2
2016
Q4
4- & 5-star 1- to 3-star
Top-tier malls have vacancies significantly lower than non-prime malls
340 bps
Source: CoStar, JLL
Examples of new entertainment concepts include:
• Dreamscape Immersive, a startup backed by Steven Spielberg, which is planning to debut a virtual reality offering at Century City Mall in Los Angeles. The retail location will feature multiple pods where viewers can interact with each other as well as physical objects. The goal is to draw consumers to shopping centers as well as tie in the experience to future movie releases.
• Nomadic—a location-based VR experience company—is planning to set up its virtual environments within shopping centers and cinemas. Those environments are likely to be 40-foot by 60-foot spaces, and the experiences will last up to 15 minutes, either for individuals or multiple players.
• KidZania offers immersive role-playing activities for children within the shopping mall setting. Each KidZania "city" allows children (ages 4–14) to role-play in over 100 occupations, such as doctor or truck driver. Requiring a lot of space to operate—60,000 square feet, with 30-foot-high ceilings—the activity centers work especially well in suburban areas with families and schools and are a welcome tenant to shopping centers looking to fill large areas of vacant space. Already located worldwide, KidZania plans to open two locations in the United States: Dallas and Chicago.
Retail Outlook | United States | Q1 201714
Source: CoStar, JLL
Q1 2017 mall absorption the highest since 2008
(6,000,000)
(4,000,000)
(2,000,000)
-
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
14,000,000
16,000,000
18,000,000
Net
abs
orpt
ion
(s.f.
)
Q1 Q2 Q3 Q4
Value is still king for consumers
Retail Outlook | United States | Q1 201715
As power centers have seen strong improvement over the last two years, most metros are either in the peaking or rising market quadrants.
Power Center Property Clock
Philadelphia, Orange County, San Diego
Peaking market
Falling market
Rising market
Bottoming market
Washington, DC
United States
Atlanta
Boston
Hawaii, Los Angeles
Chicago
Tampa, Orlando, San Francisco, Dallas,
Houston, New York Metro, Miami, Seattle
Retail Outlook | United States | Q1 201716
Off-price retailers show strong sales and expansion plans
Despite only modest absorption in the first quarter, U.S. power center vacancies stand at 5.0 percent, 10 basis points lower than they were in 2007, and 270 basis points lower than they were at their peak in 2009. For major markets, Philadelphia showed the strongest absorption in the quarter, of nearly 400,000 square feet.
The stars of the show are off-price retailers, who are enjoying strong year-over-year sales growth. TJ Maxx, Ross, Burlington and HomeGoods all saw year-over-year revenue growth of over 6.0 percent. Building on their strong sales, these retailers plan to open more than 30 stores each in the next year.
Source: Credintell, Retail LeaseTrac, JLL
Off-price retailer sales growth strong
0
10
20
30
40
50
60
70
80
90
100
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
HomeGoods (The TJXCompanies)
Burlington Stores Ross Stores TJ Maxx/Marshalls (TheTJX Companies)
YOY Revenue growth (L) Planned store openings (R)
Grocery-anchored centers lead shopping center absorption
Retail Outlook | United States | Q1 201717
For shopping centers, the markets on the clock are somewhat closely clustered in the rising and peaking segments, as significant improvement has begun to manifest in recent quarters.
Community, Neighborhood and Strip Center Property Clock
Tampa, Miami, Houston, Dallas,
San Francisco, OrlandoHawaii, Seattle
San Diego, New York Metro,Los Angeles
Boston, Washington, DC,Houston
Atlanta,United States
Orange County
Philadelphia
Chicago
Peaking market
Falling market
Rising market
Bottoming market
Retail Outlook | United States | Q1 201718
Grocery-anchored centers see strong demand
Shopping centers saw only moderate absorption in the first quarter of 3.8 million square feet. For the past 12 months, absorption for shopping centers totaled 40.4 million square feet. Grocery-anchored shopping centers have performed comparatively well, absorbing 6.8 million square feet over the last 12 months, or 16.8 percent of all shopping center demand. The proportion of GLA absorbed by grocery-anchored centers also tells the same story. Supermarket-anchored centers absorbed more than three times as much space proportionally as all shopping centers in the past 12 months.
Shopping center vacancy compressing
Source: CoStar, JLL
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
$0.00
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
$14.00
$16.00
$18.00
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Q1 2017
Shopping center rents (p.s.f.) Shopping center vacancy
Want more information?
19
Greg MaloneyPresident & CEORetail Americas+1 404 995 [email protected]
James CookAmericas Director of Research, Retail+1 317 810 [email protected]
Keisha VirtueSenior Research AnalystRetail Americas+1 954 990 [email protected]
Retail Outlook | United States | Q1 2017
Naveen JaggiPresident Retail Brokerage+1 713 888 [email protected]
About JLL
JLL (NYSE: JLL) is a leading professional services firm that specializes in real estate and investment management. AFortune 500 company, JLL helps real estate owners, occupiers and investors achieve their business ambitions. In 2016, JLL had revenue of $6.8 billion and fee revenue of $5.8 billion and, on behalf of clients, managed 4.4 billion square feet, or 409 million square meters, and completed sales acquisitions and finance transactions of approximately $136 billion. At year-end 2016, JLL had nearly 300 corporate offices, operations in over 80 countries and a global workforce of more than 77,000. As of December 31, 2016, LaSalle Investment Management has $60.1 billion of real estate under asset management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit www.jll.com.
About JLL Research
JLL’s research team delivers intelligence, analysis and insight through market-leading reports and services that illuminate today’s commercial real estate dynamics and identify tomorrow’s challenges and opportunities. Our more than 400 global research professionals track and analyze economic and property trends and forecast future conditions in over 60 countries, producing unrivalled local and global perspectives. Our research and expertise, fueled by real-time information and innovative thinking around the world, creates a competitive advantage for our clients and drives successful strategies and optimal real estate decisions.
© 2017 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.