The retail industry’s evolution has accelerated over the last decade, as brick and mortar retailers face competition from online retailers and consumers continue to demand new ways of interacting with brands. Nowhere are these changes more apparent than in retailers’ real estate strategies. Smaller footprints, new store formats, store closures and relocations to areas attracting population growth are all influencing the future of real estate.
What’s ahead for the retail real estate market in 2014? We recently talked with some industry experts to find out.
State of the Market
The retail real estate market has steadily improved since the recession. The IBIS World 2013 Commercial Real Estate in the US report notes that vacancy rates in the retail sector are declining, and increases in consumer spending are driving demand for retail space. However, 2013 gains were anticipated to be slight, and only in the most attractive primary markets.
Private equity has been fueling growth in some industries, particularly the restaurant and food industries. There have been a number of acquisitions and IPOs following Chipotle’s success, and with easier access to financing and low interest rates, private equity firms have been investing heavily in businesses with growth potential.
Private equity’s investment in restaurants, particularly those with an emphasis on healthy living, is likely to continue. Why? “It’s Amazon-proof,” notes Paul Schlesinger, Buxton vice president of business intelligence. “You can’t easily buy ready-to-eat food over the internet.”
Continued emphasis on growth has led to fierce competition for prime retail space, and the competition is expected to increase in 2014.
“2014 will continue to be competitive from a retail growth stand point,” observes Stephen Polanski, Buxton senior vice president of sales. “Prime real estate is still in demand, and with interest rates projected to increase the saying ‘first in, wins’ will be the slogan going forward for retailers and restaurants.”
In industries facing a rapid shift in consumer preferences, the competition is becoming even more intense. The casual restaurant segment has faced tremendous pressure from fast casual restaurants. As Jason Siegler, vice president of real estate for BRAVO | BRIO Restaurant Group (BBRG), notes: “The retail opportunities are certainly less available than they were three, four, even five years ago, and the competition is getting tougher and tougher.”
Real Estate Trends
Of all the trends in the retail real estate industry, one of the most prominent is the trend toward smaller-footprint stores. There are several key reasons for this shift, most notably efficiency.
“I think the industry is definitely going to smaller, more efficient locations,” says Siegler. He points to BBRG’s strategy of slightly shrinking restaurant square footage in order to reduce overhead and occupancy costs and more effectively compete against the fast casual market.
Another key reason for the trend is a population shift back to urban centers, particularly among Gen Y. Convenience is a priority for these young professionals, and smaller footprint stores give businesses the ability to reach shoppers in previously unrealistic locations, such as downtown areas.
Another notable shift in the real estate market is the resurgence of outlet malls. While development of other retail centers is expected to remain steady through 2014, outlet mall development will continue to grow. Last year, Women’s Wear Daily reported that as many as 50 new U.S. outlet centers were in the planning stages, anchored by luxury tenets who once avoided such spaces. Outlet malls are becoming both increasingly upscale and urban, with the most notable example being the new Fashion Outlets of Chicago, located right next to Chicago’s O’Hare International Airport.
As noted previously, retail development follows population migration. 2010 U.S. Census data shows that the ten fastest growing Metropolitan Statistical Areas over the last ten years were primarily in the South and West – in states such as Florida, Utah, North Carolina, and Texas. IBIS World expects the majority of real estate activity going forward to take place in the Mid-Atlantic, West, and Southeast.
We examined 2013 site scores run by a sample of approximately 100 current Buxton clients, primarily in the retail and restaurant industries. By examining patterns in the site scores, it is possible to identify markets that are drawing interest from retailers and predict hot markets for new investment in 2014.
The patterns show that big markets will continue to get bigger. Dallas/Fort Worth, Houston, Austin, Los Angeles, the San Francisco Bay Area, Phoenix, Seattle, Chicago, Atlanta, and the northeast corridor (New York City, Boston, etc.) all generated a lot of interest.
But other large markets also generated interest. Minneapolis and Milwaukee showed strong demand, as well as Portland, Denver, Salt Lake City, St. Louis, Kansas City, and Nashville. North Carolina continues to grow, as the heavy concentration of site scores in Charlotte, Raleigh, and other surrounding cities indicates. And in a much-needed good report for the bankrupt Motor City, retailers examined a large number of sites in the Detroit area.
In general, “2014’s top markets will look similar to 2013,” says Polanski. “Texas is really strong, with Houston and DFW leading the way. San Francisco, South Florida, and Washington D.C. will also be very strong markets. Internationally, Canada and Asia seem to be the focus for retailers in 2014.”
How will you stratgize for success in 2014?
As the retail real estate market rebounds, the stakes are higher than ever before. How will you position your brand for long-term success? To learn more about how Buxton’s customer analytics and retail expertise can help you grow with confidence, contact us.