2017’S TOP FIVE RETAIL TRENDS
Another successful year has come to an end, which means it’s time that we share with all of you the biggest retail trends that the Kimco team foresees in the coming year. As North America’s largest publicly traded owner and operator of open-air shopping centers, Kimco is uniquely positioned, both in our geographic reach and dealings with retailers large and small, to identify key factors that will have an impact in the retail real estate landscape. From our vantage point, here are the top five trends that people should keep their eye on in 2017:
1) The line blurs between different retail "product"
Retailers today are looking at their best leasing opportunities, with little preference as to opportunities located in open-air centers, malls, street retail, or lifestyle centers. Tenants are testing new flex format prototypes to adjust to the supply and demand dynamic that exists in high-barrier-to-entry markets. They are disregarding the old norms of being a “mall-only” retailer, an open-air retailer, an outlet-only retailer, or even a pure online retailer. Retailers today are focused on locating where they can produce the most sales with favorable occupancy costs, regardless of the type of retail product. This bodes well for Kimco’s high-quality portfolio that is nearing all-time highs in occupancy. Demand will continue for these irreplaceable locations where retailers want to be, especially for the preferred open-air concept.
2) Bet on the heavy favorite: Retailers in the Sweet Spot
Retailers that are in the sweet spot of retail succeed in two major ways: First, by perfecting the art of the treasure hunt, or second, continuing to master the art of omni-channel retail. The winners in these categories will continue to gain market share. The off-price category continues to thrive and maximize customer loyalty by encouraging the treasure hunt of bargain shopping. TJX, Ross Dress for Less, and Burlington are clearly the front runners in this category and have captured market share from department stores, and don't intend to let up aggressive new store expansion plans. Omni-channel retailers are also finding their footing, as Best Buy and others have now figured out how to maximize their store network advantage over Amazon by offering Geek Squad services, Amazon price matching, and using “ship from store” or in-store pick up to maximize shopper convenience.
3) Amazon will NOT be opening thousands of stores
Clearly the rumors have been running wild on what to expect from Amazon as they look to test different brick-and-mortar prototypes for their bookstore, grocery store, and convenience GO store. The evolution of retail continues, and Amazon has tapped the imagination of what the future of retail might look like, but the actual expansion into the physical world will be measured. We anticipate the company’s approach to their grocery concept will be similar to their bookstore prototype. They will likely kick off a beta test in their home market of Seattle, test different formats in other gateway cities, and then look to perfect the model before considering a major rollout of grocery stores, Amazon Go convenience stores, or flying warehouses.
4) Retail cap rates in the gateway markets remain sticky
With the Fed raising rates in December 2016 and what looks to be a steady schedule of increases scheduled in 2017 and 2018, the anticipation of higher cap rates might be considered a foregone conclusion. However, the spread between cap rates and interest rates is still comfortably wide, despite the recent run-up in the 10-year Treasury. We are in a global economy and when you look around the world, the US Treasury is still the most attractive investment versus other developed nations. This relative valuation should push fund flows towards the US and keep our interest rates from spiking up, and the demand for high-quality assets in top markets will continue to keep cap rates near all-time lows.
Source: Mizuho Global Research-Global REIT Research
5) Major shake ups in department stores
Major M&A, privatization, and/or significant store closures will occur in the department store world, as depressed sales and valuations make them attractive candidates for consolidation, or for private equity to take private and work on a turnaround strategy. The recent news of Macy's closing 100 stores is just the beginning, and further erosion in sales will impact the ability for department stores to be nimble and evolve in the new world of retail. Store closures will be limited in high-quality locations, as those leases will either be purchased or redeveloped to a higher and better use.
Some of these trends, like gateway city stickiness and the rise of omni-channel retailing, are holdovers from last year that will continue to affect the retail landscape tomorrow. Others are just starting their momentum. We can’t wait to see what this year holds.