What will the retail market look like in 2015? With the disappearance of popular tenants such as Mervyn’s, Borders, and Blockbuster due to e-commerce, e-readers, and online movie rentals, the retail landscape looks different than just 5 years ago. Technology is only partially responsible for the decline in brick-and-mortar stores – during the first quarter of 2014, internet-based retail sales were 6.2% of total retail sales. Despite the fears of many that online shopping would put an end to physical storefronts consumers still enjoy the social aspects that lifestyle shopping centers offer.
Yet the stigma still remains and some lenders are wary about underwriting large-format traditional retailers that sell commodities such as electronics, books, movies, music and appliances. The good news is that money has returned to the market, and lenders are willing to underwrite. For those wary lenders, a few good financing tools are sales figures and health ratios – and they’re readily available. A health ratio is determined by dividing a store’s gross sales by its rent (plus common area costs). For instance, if your nail salon tenant has 30% of her sales going toward rent payments, that doesn’t leave much room for anything else.
In addition to analyzing hard numbers, lenders should look at the demographics, location, neighborhood, and even weather, of the proposed retailer’s location. Jerry Jacquet, a Principal with Meissner Jacquet Commercial Real Estate Services in San Diego, says that “it’s “imperative that you get the whole picture – whether lending or interviewing a prospective tenant – you have to take into account if it’s going to appeal to the core demographic. Making sure to take into account the desired term of the tenancy is also important.” Is it a trend that will result in a shorter tenancy or a necessity-based commodity such as a drugstore or grocer, who have long-term tenancies?
California, known for its abundance of sunshine, dense population, healthy income and housing prices, allow both retailers and lenders to feel more confident in a shopping center’s chance for success. According to Bank of the West’s California Regional Economic Outlook, California is forecasted to add 356,000 new jobs in 2015, a 2.3% increase.
It’s apparent that retail is in recovery, not only due to lender activity, but to the projected housing starts and income growth. These factors contribute to retail development – the sector is responding to an increasing population and consumer confidence.
So how do new or existing retail centers position themselves for success? Retailers and developers must get more creative. Incorporating omni-channel approaches by offering physical and online sales is a start. Deloitte and the National Retail Federation published a report in early 2014 that revealed several of the top 20 internet retailers are companies that have a significance brick-and-mortar presence, such as Apple, Best Buy, Costco, Macy’s, and Walmart.
Knowing the right ratio of online to brick-and-mortar presence is key – many retailers expanded exponentially during boom-times and thus went out of business or closed a number of stores. Smart retailers pay attention to the industry and to the discerning consumer.
Even though the economic recovery is still underway, and retail is in the process of defining a “new normal,” it is an exciting time to invest in retail real estate. Whether you are a lender, an investor, a tenant, a leasing agent, or property manager, all signs point to the increasing value of retail.
Western Real Estate Business
Meissner Jacquet Commercial Real Estate Services