Working with CBRE’s vast clientele of retailers and developers, Melina Cordero, the company’s head of retail research for the Americas, is constantly delving into trends and how they convert to dollars and cents. REBusiness Online’s sister publication Shopping Center Business recently met with Cordero to find out what trends retailers, shopping center owners and developers, and CBRE’s retail brokers are asking her to look into to get a glimpse of some national trends on the horizon.
SCB: You spend a lot of time focusing your energy on trends for CBRE’s people in the field — and their clients. What are they asking you to look at today?
Cordero: Today, it’s not just retail clients, it’s also clients who are thinking about incorporating retail into projects. They all want to know about placemaking. A lot of people are saying, ‘We know that we need to create these great places.’ To them, that is about curating a special mix of retailers, restaurants, entertainment, open spaces and other uses. There are no guidelines, rules or metrics for that. A lot of it is what is placemaking; how to create a destination; and what has worked for others? They ask us a lot to research the kind of tenants who drive experience. There are a lot of questions around who the retailers are that they should be talking to — not only the existing ones, but the new, up-and-coming ones. There is a lot more openness to taking risks on some of the newer tenants, and then we’re asked for a lot of due diligence — the ‘who are these new tenants, and which ones will work for us?’
Melina Cordero
Americas Head of Retail Research
CBRE
SCB: With regard to placemaking, you are now seeing a number of companies remove tenants to create small parks and open space. To an outsider, that seems counterproductive, but at the same time you will likely have more people coming to the shopping center that will make up traffic — and hopefully sales — for that tenant. It’s hard to advise a leasing agent to do that who doesn’t own the property.
Cordero: It’s very dependent on owners. This whole placemaking idea and how progressive and experimental it can get definitely depends on the developer and the owner. If you look at the big REITs, they’re not going to take as many risks as the smaller owners. It’s the smaller, private developers that are able to and willing to take those risks and try experiments usually because they have the capital to back it, because they have that ownership in that brand and they’re selling it. They’re a lot more flexible. Those are also the kinds of players who will invest more in the new technologies. Some developers are investing in traffic management and parking management. Smaller owners are a lot more agile with those types of things; they’re willing to experiment, and they’re willing to try new things — with reasonable financial risks attached to them, of course. They can move a lot quicker than the big players can. If you think about a REIT that owns 200 shopping centers, it is a big endeavor to say they are going to give 40 percent of our shopping center space over to tenants that may or may not pay the rent next year.
SCB: Speaking of tenants, you must see your fair share of good ones, and bad ones. What helps you to judge who is performing and who is under-performing?
Cordero: From the tenant side, the really cool thing that we’re getting from them is the fact that they are using science and data to do the location analytics. That’s the big thing today. They are very much knocking out the old ways of deciding locations like drawing rings around the city or spot and saying, ‘This is my trade area.’ Today, it’s much more about combining data sources, looking statistically and analytically at what they would actually generate if they were located here and looking at the portfolio holistically. We do a lot of the statistical, predictive analytics around helping a retailer assess its existing portfolio and diagnose it like a doctor. We make recommendations, telling them, ‘you need to close these, you need to re-invest in these stores and you need to open new stores here.’ It’s a new scientific approach to location, which is fascinating.
SCB: Is that finding its way to smaller tenants? What size tenants are you talking about here?
Cordero: It can be anything because it’s like an algorithm. It depends how well you know what you’re looking for. A lot of large, national chains will know exactly what their customers are, and some of the smaller ones may not. The other thing that retailers want to know is what developer they should be partnering with. What kinds of properties and developments work for me? What we’re seeing now is it’s really important for the retailers to know what is going on at a particular property and what other projects are doing around them; and what the owners’ vision is for the space. They want to know if the owners are going to have placemaking elements or are they going to have marketing events or concerts on the property. They want to know if there are apartments nearby. Because retailers are getting so selective about where they will go — rather than have three stores in one trade area, they’ll have one — they want to make sure that one is with the right developer and owner in the right spot. There’s a lot of wanting to understand what kinds of properties are going to last into the future.
SCB: What are your clients asking you about food tenants?
Cordero: A lot of food hall questions. Developers know that they need to increase their food and beverage footprint, especially on the mall front because that category is outperforming the traditional mall categories of apparel and department stores. Everyone wants to get more food and beverage in their centers. So one of the questions is which food and beverage players should I be getting? And how do I incorporate the national chain tenants with great credit while also having some smaller, unique concepts that will do well? There have been a lot of questions about food halls lately, and I think it’s nascent. I think a lot of the food halls will be free standing, one-off structures, but now malls and strip centers are wondering if they can incorporate a food hall. Could this be a great solution for a 20,000-square-foot empty box? How could I do that? What would it take? Converting retail to restaurant uses is expensive.
SCB: What about anchor boxes at malls?
Cordero: Landlords don’t necessarily want the anchor to exit and leave it blank or they don’t want the anchor, if they own the box, to sell it to whoever the highest bidder is. If that happens, the landlord has no control over the tenant mix. I’ve seen cases where the landlords buy back the anchor before it closes so that they can re-tenant the box. A lot of the landlords see the anchor boxes as opportunities to move into mixed-use. I’ve seen some regional malls where they have one or two big boxes leaving, and rather than try to re-fill them or break them up and re-tenant them, the owner will knock them down and create an outdoor food area or build an office tower. If it’s a relatively dense location, I’ve seen hotel or entertainment added. There are options. You can re-tenant the big box or split the big box up into smaller stores. People talk about that, but I haven’t seen it that much in our practice. The other opportunity for redevelopment is one that I see a lot because it is also an opportunity for them to go back to their investors and show more income on something that wasn’t generating a whole lot. You hear a lot that the regional mall format is not as viable and robust as it once was. If a box is closing, it’s an opportunity to re-orient the structure. I hear a lot of discussions when I’m sitting with developers, the owners of these properties about creating an open-air concept.
SCB: Because the boxes aren’t coming back to the owners all at once — if at all — it seems like a lot of mall owners have to react in phases. They’re really taking the punches as they come. Are you seeing projects being redeveloped piece by piece?
Cordero: I think that managing that process is difficult, and I’ve worked with a lot of landlords who were managing a scenario where a big box has gone out or they’re adding on an extension to add a restaurant component. They really have to manage that process carefully, because it disrupts traffic flow, and you have to close down sections of the parking lot. It affects traffic flow within the center because entrances will be blocked off. Tenants are going to complain. There will be noise in one area while certain zones of the mall will become much quieter. Managing the process with the existing tenants can be tough — they really have to manage the expectations around that and mitigate the losses. You see all the time, ‘we’re improving your experience, please excuse our appearance while we make your life better.’ It’s also an investment that they know that it will help all tenants at the end, and they really need to sell that.
SCB: Do you ever see any losing battles where it’s too late — where the owner hasn’t gotten out in front of the issue?
Cordero: I have seen examples with the regional mall in particular. They were typical regional malls in suburban markets and they had big competition from another player down the road that had redeveloped and focused on being a premier, restaurant-driven property. Suddenly, the owner realized they had to up their restaurant game, so they added an extension and put in two national chains. They thought this big unveiling would save them. Sadly, they knew the weekend it opened that it didn’t add much to their sales. The damage had already been done and that segment of the market was already owned by the competitor. You can’t copy and paste in the shopping center industry anymore. If you need to add food and beverage, you need to look at the context of your market and figure out what’s viable, what’s missing and what you can add to it.
SCB: Nationally, what kind of trends do you see in terms of retail categories?
Cordero: The other category that has been growing a lot in the last couple of years is home furnishings. Sporting goods as well, but home furnishings is interesting and we see a lot of expansion if you look at concepts like Restoration Hardware. It’s a very specific segment of the market — high-end, pseudo-concierge and they have a loyal customer base. That customer base will only buy from that store, and they’ll buy everything from that store — pillows to the drapes, everything. The home furnishings category is an interesting one. It’s going to closely follow boom and bust periods in the economy. I think home furnishings were hit very hard by the recession. People didn’t go out and buy couches in the aftermath of the recession either, but now it’s been five years. It’s picking up along with the construction boom and the housing market picking back up; home furnishings is seeing a resurgence. I always have trepidation around home furnishings and furniture.
SCB: What do you see in terms of price segments in the retail sector? What is doing well?
Cordero: It’s the barbell. It’s the top and the bottom. In the middle, good luck. The middle is crowded; it’s tough competition; it’s low margins; it’s an all-out war to get that market share. That’s where the department stores are. The ones that are doing well are the ones at the top of the market and the ones at the bottom — luxury retail will always have a customer. What luxury has in its favor right now, I would say — despite economic ups and downs and the currency situations — is that it’s relatively shielded from e-commerce. People who buy luxury — whether it’s jewelry, handbags or clothing — view it as an investment. They are not buying just an item, they’re buying the whole brand experience. They want to go into Cartier and have champagne and pick out their ring. They want to go in and be catered to. The luxury shopper is a physical store shopper; they want to be doted on. At the low end, we see retailers who are also performing very well — T.J. Maxx, Ross, Marshalls, Nordstrom Rack and Dollar General. There was a fundamental shift after the recession where the consumer discovered bargains. That’s a hard thing to move away from. Many retailers did an excellent job of removing the stigma of getting a bargain. You have choices of where to get bargains; even varying levels of quality within that. To say, ‘the recession is over, now come back and spend over here,’ just hasn’t made sense to many consumers. If you’re a savvy shopper, why would you go back over there? If you’re in the middle, you’re kind of being pulled like magnets to one pole or the other. One interesting thing about today’s consumer is that you will find people who shop at Cartier also shopping at T.J. Maxx. There’s no shame or stigma there. I think the same is true with food and beverage. Fast casual and below, so that includes service and fast food, is doing really well. Fast food is still doing really well; everybody is talking about a health food trend, but fast food is still fine. They’ve got plenty of customers. The high-end — fine dining, celebrity chef concept restaurants — is also doing really well. It’s that middle ground that is again at issue. You can pay the same amount for less at a cool new concept place, and it’s much faster. You’re trading up or trading down. Everywhere we turn in every category, we see that.
SCB: We’ve seen a lot of innovative retail environments by a lot of big name owners and developers come on line. Part of their appeal are a lot of new concepts from retailers and restaurants who have little, if any, creditworthiness. That used to be a big deal not only to guarantee project financing, but also to ensure you were going to have a rent roll. I ask this a lot, and I can’t get much of an answer: Are the leases really expected to last 10 years anymore?
Cordero: There’s a fundamental shift and I think there will be fundamental changes in leasing structures whether we want them or not. Retailers want more flexible lease terms. We just did a global report that took a survey of retailers across the globe and what they look for in lease terms and things like that. The number one answer was flexible lease terms. Number two was flexible lease timing. That’s a huge thing because they have to keep up with the customer, and customers today are all over the place and constantly changing. The popularity of pop-up store concepts has happened because it gives the retailer a chance to experiment with the physical environment and follow that customer without being shackled to a 10 or 30-year lease. Retailers would love to be able to do that in traditional retail concepts as well — and to be able to experiment within the mall.
SCB: I think a lot of these creative retailers that are moving into these projects have been used to that environment because they took the remnant space in the recession.
Cordero: And our landlords are not conditioned to it. They’re sometimes like homeowners associations; they are strict about stores within the mall. Stores within the mall can’t just go and put a karaoke band in front of their store; you can’t do that. There are rules in a mall. Landlords are realizing that if they don’t provide some sort of outlet for experimentation, retailers are going to go rogue. They don’t need to be in a mall. They’ll open in a shipping container across the street, or do a pop-up at the local market. I think that landlords need to start thinking about how they’re going to incorporate this creativity. In some of the retail environments that are happening, the challenge for the landlord is that they don’t have the employees, time and money to manage two-year leases. I think that there are management companies, brokerage companies and a lot of third parties stepping in and assuming that challenge. They will specialize in curating your pop-up mix and creating your specialty leasing mix. I’ve seen a lot of those popping up.
— Interview by Randall Shearin, editor-in-chief of Shopping Center Business magazine. This article initially ran in the September 2016 issue of Shopping Center Business.