Recovery in Retail: Who’s Getting There First?

Thus far, multifamily has been the belle of the recovery ball.

Is retail really dead? It depends on where you look. If you are responsible for your firm’s business development, don’t overlook retail, but be strategic in your focus. Retail, restaurants and certain store chains have increased their demand for Phase I ESAs, by adding new locations or leasing empty spaces.

Store Openings Reach 5-Year High…

Retailers remain wary of the uncertain future of consumer spending, which dampens expansion enthusiasm. This, coupled with consumers’ transition to online shopping, makes some retailers reluctant to expand their brick and mortar footprint. Major chains that consolidated their holdings—or moved into smaller storefronts—left behind regional shopping centers, while smaller retailers abandoned their space, leaving half-empty strip malls in suburban locations. Lenders likewise are skittish about lending in retail properties except for the most creditworthy borrowers in the safest locations. The landscape is dotted with retail space in suburban locations that are hungry for redevelopment into alternative uses. Retail is on the cusp of change as players grapple with how to respond to e-commerce trends and integrate technology into the traditional brick-and-mortar business model.

RetailRecovery---CombinedCharts

Despite the uncertainty and pressure from the online shopping trend, little by little, the vacant storefronts left behind by names like Borders, Blockbuster and other bankrupt retailers are getting filled as store opening plans continue to climb. Certain chains and specialty retailers are looking in choice markets for retail space. Large retailers like Best Buy are also shrinking their stores, driving demand for retail space on the smaller end of the square footage scale. According to the National Retailer Demand Monthly (NRDM) report from RBC Capital Markets, store opening plans reported during 2012 reached a five-year high. In December alone, the more than 2,000 retailers included in the RBC survey increased their opening projections by 886 stores.

…Dollar Stores Lead the Way

Demand for Phase I environmental site assessments is being driven largely by retailers and restaurants seeking good locations for expansion. The NRDM report forecasts nearly 82,000 store openings by retailers over the next 24 months. Among those retailers with the strongest expansion plans over the next 24 months are niche grocery stores, fast food and casual restaurants, fitness centers, pharmacies, dollar stores and auto parts stores (see accompanying table). In terms of unit counts, restaurants are expected to account for about 40% of all the new tenancy in retail in 2013. Another notable trend is that small shop tenancy has shifted to well-capitalized, national retailers, unlike in past downturns where mom-and-pop establishments led the recovery. The dollar store chain segment of the market is still the highest growth niche in the retail sector. The three biggest dollar store chains combined will open approximately 1,100 new stores a year (roughly 540 a year for Dollar General, 350 for Family Dollar and 230 for Dollar Tree).

E-Commerce and Industrial/Retail Real Estate

While e-commerce may well be the biggest challenge to retailers right now, it also has the potential to reshape the industrial and retail sectors of the commercial real estate market. For those who conduct environmental due diligence on industrial/warehouse properties, it is worth looking at a recent report released by CBRE, titled The Future Impact of E-Commerce on Industrial and Retail Real Estate. Among its key findings:

  • The need for multi-channel strategies will create new opportunities for retailers, such as programs that allow consumers to purchase a product online and pick it up at their convenience at a locker in a local store.
  • Popular same-day home delivery strategies may drive the need for future distribution centers near consumers, creating opportunities for urban in-fill development.
  • Markets near UPS or FedEx hubs are most likely to attract major distribution centers to service e-commerce sales.
  • The aging of the U.S. population, coupled with the implementation of health care reform, is expected to increase demand for medical uses in retail centers.

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Clearly, there are significant differences in the retail sector between those players that are expanding and those that continue to struggle. For environmental due diligence opportunities with retail clients, it is therefore important to seek out investors that are targeting retail assets or the retailers with aggressive expansion plans for 2013 and beyond. Consultants already aligned with the retailers listed above could benefit from strong demand over the next two years. Those looking to take advantage of this trend should review the more extensive lists of retailers and restaurant chains in the NRDM report, which includes lists of retailers by category that would allow consultants to focus on prospects in certain sectors (e.g., wireless, pharmacies, auto parts or banking) and in specific areas of operation.