By Nellie Day
LAS VEGAS — The changing nature of retail and what it means to the future of the shopping center industry was a hot topic of discussion throughout RECon 2015, held May 17-20 at the Las Vegas Convention Center.
The topic took center stage during the “Envision 2020 Town Hall: Redefining Our Industry” panel where six experts outlined the trends they believed would be critical to remaining relevant in the ever-evolving retail world.
“There is so much change going on in our business right now that it makes your head spin,” said moderator Stephen Lebovitz, chairman of the International Council of Shopping Centers (ICSC) and president and CEO of Chattanooga, Tenn.-based CBL & Associates Properties.
“The holy grail, as far as property owners and retailers are concerned, will be the ability to communicate better with customers — to translate their interests into specific transactions. There will be unprecedented intimacy with the customer going forward,” added Lebovitz.
Communication is Key
Panelists conceded that rather than work against the online retail vessel, many brick-and-mortar retailers and shopping center owners need to embrace the omni-channel way of communication if they plan to successfully forge that bond with consumers.
“The common thinking now is that the integration of online and physical stores is the most powerful formula for retail success,” Lebovitz continued. “Shopping centers will feature a more customized, personalized appeal to attract and engage the younger consumer, creating a heightened level of coordination between developers and retailers.”
Lebovitz noted that customers at many Westfield shopping centers could now order food from the property’s restaurants, or even the food court, through the shopping center owner’s mobile app.
“That type of cooperation and collaboration between a shopping center owner and a tenant didn’t happen in the past,” he said.
Lebovitz also cited digital storefronts as another popular trend in consumer engagement. He pointed to their ability to enhance a brand within a property, but also noted that their level of inventory will continue to shrink.
Macy’s is also exhibiting a new trend panelists believed would catch on industry-wide. The big-box store recently converted some of its shop spaces into fulfillment centers to accommodate online orders.
“We have entered an anytime, anywhere, anyway world,” said panelist Steve Kirn, executive director of the Miller Retail Center at the University of Florida in Gainesville. “The necessary reality for most retailers is they’re going to compete in that environment.
“It’s going to be an integrated system. People will literally sit in the parking lot during the holidays at Macy’s,” continued Kirn. “They’ll do their online shopping and then walk into the store and pick it up just so they don’t have to wait in those long lines.”
Creating a Sense of Community
Ironically, all this technology and instant shopping gratification can breed isolating experiences. This is why panelists argued that it is important for today’s shopping centers to be in places that unify people, enabling them to reconnect with one another.
“Retail, more than any other segment, is representative of the fact that it’s a social science,” said panelist Mark Stapp, executive director of the Master of Real Estate Development program at Arizona State University in Tempe.
As we’re evolving, and as technology and our values change as the generations change, we really need to see those changes reflected in our spaces. The difficulty is if you don’t understand these nuances and as changes occur more rapidly, it becomes difficult for you to make a good decision about your asset,” added Stapp.
Shopping center owners must be able to see past the transaction, noted Stapp, which can be difficult to do considering the main purpose of a shopping center.
“The industry has to begin to understand that some of the old models we’ve had for looking at a property have to be [rethought] to see if they’re still applicable,” continued Stapp.
“The things that drive value and allow merchants to pay rent are changing. How do you value an asset when all it’s doing is facilitating a transaction that you can’t actually see in that space? We’ve gone from a transactional economy to a transformative economy. Many projects are designed for a transactional economy, making this conversion tough,” emphasized Stapp.
Lebovitz pointed to Downtown Summerlin, a 400-acre, mixed-use project in the Las Vegas submarket of Summerlin as one retail project that has successfully transformed itself into a community.
“There is no better example of how a shopping center is becoming a community than Downtown Summerlin,” said Lebovitz. “Even the name is a statement of what that property is aspiring to be. Spaces are not just used for shopping. They’re used for workouts, community events, all ranges and purposes. We have to continue to offer activities at our properties that you can’t do online.”
Cary Lefton
Cary Lefton, CEO of Agora Realty & Management in the Los Angeles submarket of Sherman Oaks and a RECon attendee, also believes the community mentality and developer-retailer relationship are paramount to creating a successful retail project in today’s market.
“Creating an experience that attracts consumers to the center remains critical to retail success,” he said. “Developers must work with their retailers to provide programming that generates traffic and creates a stronger tie to the local community.”
Out With the Old
Panelist Richard Green, director and chair of the USC Lusk Center for Real Estate at the University of Southern California in Los Angeles, noted income inequality also plays a major role in a center’s fate. With women outpacing men on the education front, the marriage rate sinking and the middle class slowly disappearing, Green believes the industry may see the demise of some centers.
“Shopping centers will absolutely still be here,” he said. “But it’s hard for me to see the future of the middle class shopping center. Class A malls are doing well. B, C and D spaces? Not so much. Saks Fifth Avenue is doing fine. Nordstrom is doing fine. Some of these spaces and centers may need to be repurposed for services that require face-to-face contact.”
Green said healthcare facilities would be ideal in some of these spaces, and even in entire centers that are not viable for retail redevelopment. He noted this trend would be especially popular in cities with larger senior populations because “as Boomers get older, they spend more money on services and less on goods.”
Shari Tucker-Gasser
Shari Tucker-Gasser, a RECon attendee and the council chair of retail investments at Sperry Van Ness in Phoenix, said cities could also capitalize on the multifamily boom, particularly in urban cores, when it came to the conversion of outdated shopping centers.
“Cities need to acknowledge that their 120,000-square-foot neighborhood centers built in the ‘70s and ‘80s are now obsolete,” she said. “Converting these centers into housing communities is smart on so many levels. Many of these centers are located within the city’s urban core, where Millennials want to live. New housing development removes dilapidated buildings, provides jobs and tends to have a rippling effect that spurs additional redevelopment. [It’s] urban renewal at its best.”
Investing in the Future
Shiny digital storefronts, 400-acre community-oriented projects and apps for ordering food sound great, but someone has to cough up the capital for all this “engagement.” Fortunately, panelists said that wouldn’t be a problem for viable assets.
“There is an amazing amount of capital chasing real estate, and specifically chasing retail, these days,” pointed out panelist David Funk, director of the Baker Program in Real Estate at Cornell University in New York. “The evolution of capital and where institutional investors are putting their cash is amazing.”
Funk noted that institutional investors had gone from allocating 2 percent of their cash into real estate in 1990 to 9.62 percent in 2015.
“The amount of capital going into real estate is not at a level people are prepared for,” he continued. “It’s coming from Asia Pacific, they’re the most bullish on real estate and this capital is chasing U.S. real estate. Eighty percent of all global investors are putting money into real estate targeting the U.S. It’s their preferred destination. It’s a tsunami of capital.”
Funk further asserted that institutional investors have $70 trillion worth of assets under management, with $700 billion of new money coming into real estate.
“That’s not total money — that $700 billion is new money entering real estate,” clarified Funk. “It’s new capital targeting the [gateway cities and core markets]. It first chases core product, then value-add in secondary markets and then more risky investments. The tsunami of capital chasing real estate will be in retail because, if anything, it will present a soft landing, if not sustained growth.”
Unfortunately, this evolution of change may present itself as a speed bump to many projects. Panelists noted it has become almost impossible to churn out generic retail projects because communities are now so localized and tastes are so specific that the design, experiences and tenants offered at one center will not necessarily translate to another.
“We’re very localized now,” said Stapp. “Centers are all very unique. They’re not alike. Retail is becoming hospitality. There are lots of metrics involved now to underwrite these things. You can no longer say, ‘I saw this project over there, we’re going to do it here and because you did it there, you can underwrite it.’ That’s not working anymore. These projects have to have a great story.”
That great story, Stapp asserted, begins with a developer doing his homework and putting that information to good use.
“Our transformational economy asserts that we create an experience,” he said. “Experience implies an environment that is engaging. Design becomes critically important. You have to start with a space that is quite honestly benign.
“How do you move from a benign space that’s there simply to move goods and convert it into an experience that’s engaging that people really want to be in? Information by itself has zero value,” emphasized Stapp. “It’s whether you can use that information to make a decision that affects your business that counts.”