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Experiential retail will save malls

United States | Retail Outlook | Q1 2017

Retail

Contents

Retail Outlook | United States | Q1 2017

Retail performance at the tipping point 4

The closure conundrum: Who’s closing and why? 8

Experiential retail will save malls 12

Value is still king for consumers 15

Grocery-anchored centers lead shopping center absorption 17

Equilibrium

Retail performance at the tipping point as most markets peak


Reading the clock

The JLL retail property clock demonstrates where each market sits within its real estate cycle. Markets generally move clockwise around the clock, with markets on the left side of the clock generally landlord-favorable and markets on the right side generally tenant-favorable. All of the markets have now moved to landlord-favorable, as rents gradually head upward and vacancy continues to contract. Most of the major metros including Dallas, Boston, San Francisco, Miami, New York and Houston have moved to a peaking market as demand grows ahead of new supply additions. Once demand and supply reach equilibrium, the clock should strike midnight for most markets.

Total U.S.

Type Total s.f. Total Vacancy

YTD Net Absorption

Q1 2017 Avg rent

QOQ% Chg

YOY% Chg

General Retail 5,280,936,742 3.0% 7,482,681 $18.82 3.0% 7.2%Malls 894,321,316 4.3% 3,220,908 $19.81 2.4% 12.4%Power Centers 750,540,873 5.0% 510,838 $19.00 3.1% 8.6%Shopping Centers 3,517,306,976 7.9% 3,791,754 $15.20 0.6% 2.2%Specialty Centers 84,601,889 5.0% 14,368 $16.94 3.0% 0.1%

Total Retail 10,527,707,796 4.9% 15,020,549 $16.70 1.8% 4.8%

Retail subtype Definition Examples

General Retail Consists of single-tenant freestanding general-purpose commercial buildings with parking

Drugstores, some groceries, streetfront urban retail stores

Malls Includes Lifestyle Centers, Regional Malls and Super Regional Malls

Primarily anchored by mass merchants, fashion and department stores

Power Centers Consists of several freestanding anchors with minimal small tenants, 250,000–600,000 s.f.

Primarily anchored by big-box tenants and discount supercenters

Shopping Centers Includes Community Centers, Neighborhood Centers and Strip Centers

Primarily anchored by groceries and local services

Specialty Centers Consists of the combined retail center types of Airport Retail, Outlet Center and Theme/Festival Center

Primarily anchored by manufacturers’ and retailers’ outlets

Total Retail All retail building types in both single-tenant and multitenant buildings, including owner-occupied buildings All retail

Chicago

Seattle, Atlanta, Philadelphia

Los Angeles, Tampa

Hawaii, Washington, DC, Orlando, United States

San Diego

Orange County

Miami, Dallas, New York City, Houston, San Francisco, Boston

Peaking market

Falling market

Rising market

Bottoming market


Retail recovery may have reached its zenith. Gradual but steady improvement in fundamentals has led to a first-quarter vacancy of 4.9 percent—110 basis points below its level 10 years ago, at the height of market performance. That being said, retail performance will slow this year as same-store growth stagnates for many retailers and closures rise.

Net absorption slowed in the first quarter, totaling 15.0 million square feet—a 3.5 percent dip from the first quarter in 2016. Developers also remain deliberate in starting new construction projects; only 15.4 million square feet were delivered during the quarter, just edging out absorption.

Closure announcements have been accelerating in recent months, with department stores topping the headlines. Macy’s and Sears will return approximately 18 million square feet of mall space to the market over the next year. While the upcoming vacancies will pose opportunities for strong malls to upgrade to a more productive tenant or refresh the space with an entertainment destination, weaker malls could experience a ripple effect to their in-line occupancy.

Vacancies hold as demand and supply meet in the middle

Topline vacancy in the United States remained at 4.9 percent for the first quarter, thanks to deliveries just inching past absorption. In all of the United States, vacancy for shopping centers saw the greatest compression of 63 basis points, year over year, as smaller mom-and-pops

continue their recovery. General/freestanding retail vacancy also saw a marked reduction—62 basis points. Malls saw an 18-basis-point decrease as net absorption rose over the last few quarters. Conversely, power center vacancy shot up 61 basis points, thanks to over a million square feet of negative net absorption approaching the end of 2016.

YOY vacancy compression by retail subtype

Source: CoStar, JLL

$13.50

$14.00

$14.50

$15.00

$15.50

$16.00

$16.50

$17.00

$17.50

$18.00

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%

10.0%

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Q1

Quoted rent

U.S. vacancies flatten as market approaches equilibrium

-62 -18

61

-63-38 -50

Total U.S.

In b

ps

General Retail Mall Power CenterShopping Center Specialty Center Total Retail

Source: CoStar, JLL


S.f. under construction by retail subtype—as of Q1 2017

Source: CoStar, JLL

Construction still low

Developers remain cautious when adding new space. Total retail deliveries in Q1 2017 were 15.4 million square feet—20.0 percent down from the end of 2016, but inching up 3.0 percent, year-over-year. Construction levels are somewhat muted from year-ago numbers, with 72.5 million square feet currently under construction—a 6.6 percent decline.

Atlanta and New York lead the markets in construction activity, particularly in mall and freestanding/general retail. The majority of retail space being built largely consists of general/freestanding retail (59.0 percent). General

Retail59%

Malls18%

Power Centers

5%

Shopping Center

16%

Specialty Center2%

S.f. Under Construction

0.0% 0.3% 0.4% 0.6% 0.7% 0.9%1.4%

4.6%Philadelphia Net absorption as % of GLA


Philadelphia CBD absorbed nearly 5.0 percent of its total inventory in Q1 2017

Source: CoStar, JLL

A vibrant urban demographic pushes Philly to number one

Philadelphia had a strong first quarter, with net absorption the highest in years. It exceeded entire annual absorption for every year between 2011 and 2016. Delivery of new retail space was also strong, the highest in over a year, and rents jumped 10.0 percent year-over-year. Center City, Philadelphia’s urban core, is rising steadily in prominence as a key retail destination. In fact, rents have risen faster in Center City than any other peer city but Miami.

The submarket’s high proportion of millennials (40 percent) has had a major impact on the tenant mix along its corridors. There is a prevalence of boutique/independent retailers (making up 77 percent of the retail mix) along with young, hip new concepts and clicks-to-bricks stores like Bonobos and Warby Parker. Trendy food and restaurant retailers (e.g., sweetgreen and &pizza) and fitness concepts (e.g., SoulCycle, Under Armour) are also opening locations within the metro.

This strong demand is getting the cranes moving in the submarket. Developers are pouring $815 million into new construction projects, adding more than 1.1 million square feet of retail in the next few years.

Philadelphia CBD accounted for 28.0 percent of total Philly absorption in Q1 2017

Source: CoStar, JLL

8%11%

28%

17%

7%

18%

11%

Q1 2017 net absorption

Delaware

I-81 Corridor

Lehigh Valley

Philadelphia CBD

Philadelphia Non-CBD

Southern New Jersey

Suburban Philadelphia

The way consumers shop is changing

News stories about the rise of store closure announcements have been accompanied by headlines predicting the end of retail as we know it. Beyond acceleration in the number of store closures, there will also be an increase in the amount of space being closed. In other words, larger stores are closing.

• E-commerce penetration is a reality and it’s growing (although not as much as some people fear).

• Consumers’ tastes are changing, especially as millennials increase their prominence and buying power.

• Consumers want experiences, convenience and value. Stores that fulfill those functions well will stay open. Those that don’t will close.

The bottom line is retail isn’t dead. But the old way of selling and operating stores is dying.


1643796

685370

319241241

216159

70594848

3683

ApparelElectronics stores

Shoe storesOffice supplyRestaurants

Department storesBooks & music

Discount dept. storesSporting goods

Drug storesDollar stores

Home furnishingsGrocery stores

Specialty storesThrift stores

Wholesale clubs Announced closures

Apparel and electronics retailers are closing the most stores

Source: PNC, JLL

The closure conundrum: Who’s closing and why?

Commodities move online

While consumers are shifting more of their purchases online because of convenience or lower prices, many still prefer to buy in store for most product categories. The products consumers most prefer to purchase online are books, electronics and office supplies—goods that are generally very commoditized. As the category closure chart shows, electronics and office supply retailers are among those closing the most stores. Some, like Radio Shack and hhgregg, are even going bankrupt.


32.0%

33.0%

49.0%

56.0%

66.0%

67.0%

71.0%

76.0%

77.0%

92.0%

68.0%

67.0%

51.0%

44.0%

34.0%

33.0%

29.0%

24.0%

23.0%

5.0%

Books

Electronics

Office supplies

Sporting goods

Pet supplies

Tools

Household goods

Clothing and apparel

Consumer packaged goods

Food/grocery

Prefer to purchase in-person Prefer to purchase onlineNo answer

Electronics and office supplies among categories consumers like to purchase online

Source: Statista, 2016 survey

Curation will define apparel retail on- and offline

Changing demographics, shifting consumer tastes in favor of discounters and fast fashion, and some sales loss to online sellers have all helped to close some apparel stores. Several apparel retailers, like The Limited, Wet Seal, BCBG Max Azria and American Apparel, are going bankrupt and leading the store closure count.

As millennials and Gen Z consumers rise in prominence, the way in which people shop for fashion is going through a radical change. The old standard of a typical clothing store with endless racks and shelves of apparel is becoming defunct. Consumers—especially younger consumers—want something new and different. Stores that offer curated collections appeal to those who don’t have the time or patience to comb through a multiplicity of selections, like those seen in a department store. Consumers also still want value. This is why off-price chains like Ross and TJ Maxx are still doing well. The estimated online apparel spend in the United States in 2016 was $44.9 billion. Online apparel revenue is expected to climb to $70.9 billion by 2021 (Source: Statista).


Source: PNC, JLL

Apparel retailers closing stores

400

250

171

170

140

120

110

63

60

50

50

44

24

15

rue21

The Limited

Wet Seal

Bebe

Vanity Shop

BCBG Max Azria

American Apparel

Kenneth Cole

Abercrombie & Fitch

Chico's

Guess

Lucy Activewear

Kit & Ace

Perry Ellis

# of announced closures

According to Goldman Sachs, online apparel and accessories could see an additional $50 billion of sales over the next four years, a revenue base equivalent to apparel and accessories sales for Macy's, Nordstrom and Kohl's in all channels combined. Nearly 35 percent of millennials already spend most of their apparel budget online. This is especially true of older millennials (aged 25–34), who are more likely than any other age group to spend most of their clothing budget online. As a comparison, roughly 30 percent of consumers aged 35–44, and approximately 15 percent of 45- to 54-year-olds do most of their clothes shopping online.

Most growth will come from higher transaction values along with increased order frequency. The expansion of same-day delivery, coupled with ease of returns, will increase impulse purchases and rate of adoption. Online players include e-commerce platforms for brick-and-mortar retailers (like Nordstrom or Gap), brand sites (like Nike),and emerging curated fashion and styling services (like Trunk Club and Stitch Fix).

These curated shopping services appeal to consumers who don’t have the time or inclination to shop in traditional ways. Personal stylists pick out complete outfits including shoes and accessories based on a short survey of personal preferences. This channel adds a valuable service component to the e-commerce experience.

Retailers are still opening stores

While apparel, electronics and office supply stores close shop, there are several retailer categories who are seeing strong expansion. Dollar stores continue to perform very well. In fact, these stores are seeing demand from consumers across the income spectrum from low-income consumers to those making over $100,000 per year. Off-price retailers like Ross, TJ Maxx and Marshalls are also expanding, as they continue to see sales growth. And beauty & cosmetics remains a very strong retail category. The bottom line is that demand remains positive despite recent closure announcements. In fact, the amount of space opened in malls in the last year considerably outweighs space vacated.


Source: CoStar, JLL Research

Mall space absorbed outweighs space vacated

Source: CoStar, JLL

Despite headlines, retail openings still trounce closures

Mall square footage opened or closed over the last 12 months

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10.0

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14.0

2008Q1

2009Q1

2010Q1

2011Q1

2012Q1

2013Q1

2014Q1

2015Q1

2016Q1

2017Q1

Mill

ions

Mall s.f. vacated Mall s.f. absorbed

Move-ins Move-outs

15.1m.s.f.

24.1m.s.f.

Experiential retail will save malls


For malls, most of the major markets have moved beyond a peaking market toward the right side of the clock, where rents growth begins to slow.

Mall Property Clock

San Francisco, San Diego, Dallas,

Orlando, Philadelphia

Peaking market

Falling market

Rising market

Bottoming market

Washington, DC,Boston

United States

Miami, Hawaii, New York Metro, Seattle, Houston, Los Angeles, Orange County

Chicago, Tampa, Boston

Tampa, Atlanta

Mall owners will get creative in filling anchors

Mall absorption grew in Q1 2017, exceeding 3.5 million square feet. More than one-third of the space absorbed was in Philadelphia, which boasted absorption over 1.3 million square feet. While demand for mall space was strong in the first quarter, disruption is coming in the form of vacant anchor spaces.

Anchors are closing hundreds of locations in the next year—more than 230. As more anchors become vacant, landlords will need to look for creative ways of filling empty space as well as introducing stores and services that will be a huge draw for shoppers. The key is in experience. Entertainment is a powerful draw for consumers. New VR and immersive experience companies can both fill space and bring consumers to shopping centers. Some landlords will opt to fill anchor space with non-traditional uses such as medical centers, multifamily or hotels.


Source: CoStar, JLL

Q1 2017 mall absorption the highest since 2008

(6,000,000)

(4,000,000)

(2,000,000)

-

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

18,000,000

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Q1 Q2 Q3 Q4

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

2007

Q4

2008

Q2

2008

Q4

2009

Q2

2009

Q4

2010

Q2

2010

Q4

2011

Q2

2011

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2012

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2013

Q2

2013

Q4

2014

Q2

2014

Q4

2015

Q2

2015

Q4

2016

Q2

2016

Q4

4- & 5-star 1- to 3-star

Top-tier malls have vacancies significantly lower than non-prime malls

340 bps

Source: CoStar, JLL

Examples of new entertainment concepts include:

• Dreamscape Immersive, a startup backed by Steven Spielberg, which is planning to debut a virtual reality offering at Century City Mall in Los Angeles. The retail location will feature multiple pods where viewers can interact with each other as well as physical objects. The goal is to draw consumers to shopping centers as well as tie in the experience to future movie releases.

• Nomadic—a location-based VR experience company—is planning to set up its virtual environments within shopping centers and cinemas. Those environments are likely to be 40-foot by 60-foot spaces, and the experiences will last up to 15 minutes, either for individuals or multiple players.

• KidZania offers immersive role-playing activities for children within the shopping mall setting. Each KidZania "city" allows children (ages 4–14) to role-play in over 100 occupations, such as doctor or truck driver. Requiring a lot of space to operate—60,000 square feet, with 30-foot-high ceilings—the activity centers work especially well in suburban areas with families and schools and are a welcome tenant to shopping centers looking to fill large areas of vacant space. Already located worldwide, KidZania plans to open two locations in the United States: Dallas and Chicago.


Source: CoStar, JLL

Q1 2017 mall absorption the highest since 2008

(6,000,000)

(4,000,000)

(2,000,000)

-

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

18,000,000

Net

abs

orpt

ion

(s.f.

)

Q1 Q2 Q3 Q4

Value is still king for consumers


As power centers have seen strong improvement over the last two years, most metros are either in the peaking or rising market quadrants.

Power Center Property Clock

Philadelphia, Orange County, San Diego

Peaking market

Falling market

Rising market

Bottoming market

Washington, DC

United States

Atlanta

Boston

Hawaii, Los Angeles

Chicago

Tampa, Orlando, San Francisco, Dallas,

Houston, New York Metro, Miami, Seattle


Off-price retailers show strong sales and expansion plans

Despite only modest absorption in the first quarter, U.S. power center vacancies stand at 5.0 percent, 10 basis points lower than they were in 2007, and 270 basis points lower than they were at their peak in 2009. For major markets, Philadelphia showed the strongest absorption in the quarter, of nearly 400,000 square feet.

The stars of the show are off-price retailers, who are enjoying strong year-over-year sales growth. TJ Maxx, Ross, Burlington and HomeGoods all saw year-over-year revenue growth of over 6.0 percent. Building on their strong sales, these retailers plan to open more than 30 stores each in the next year.

Source: Credintell, Retail LeaseTrac, JLL

Off-price retailer sales growth strong

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HomeGoods (The TJXCompanies)

Burlington Stores Ross Stores TJ Maxx/Marshalls (TheTJX Companies)

YOY Revenue growth (L) Planned store openings (R)

Grocery-anchored centers lead shopping center absorption


For shopping centers, the markets on the clock are somewhat closely clustered in the rising and peaking segments, as significant improvement has begun to manifest in recent quarters.

Community, Neighborhood and Strip Center Property Clock

Tampa, Miami, Houston, Dallas,

San Francisco, OrlandoHawaii, Seattle

San Diego, New York Metro,Los Angeles

Boston, Washington, DC,Houston

Atlanta,United States

Orange County

Philadelphia

Chicago

Peaking market

Falling market

Rising market

Bottoming market


Grocery-anchored centers see strong demand

Shopping centers saw only moderate absorption in the first quarter of 3.8 million square feet. For the past 12 months, absorption for shopping centers totaled 40.4 million square feet. Grocery-anchored shopping centers have performed comparatively well, absorbing 6.8 million square feet over the last 12 months, or 16.8 percent of all shopping center demand. The proportion of GLA absorbed by grocery-anchored centers also tells the same story. Supermarket-anchored centers absorbed more than three times as much space proportionally as all shopping centers in the past 12 months.

Shopping center vacancy compressing

Source: CoStar, JLL

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2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Q1 2017

Shopping center rents (p.s.f.) Shopping center vacancy

Want more information?

19

Greg MaloneyPresident & CEORetail Americas+1 404 995 [email protected]

James CookAmericas Director of Research, Retail+1 317 810 [email protected]

Keisha VirtueSenior Research AnalystRetail Americas+1 954 990 [email protected]


Naveen JaggiPresident Retail Brokerage+1 713 888 [email protected]

mailto:[email protected]




About JLL

JLL (NYSE: JLL) is a leading professional services firm that specializes in real estate and investment management. AFortune 500 company, JLL helps real estate owners, occupiers and investors achieve their business ambitions. In 2016, JLL had revenue of $6.8 billion and fee revenue of $5.8 billion and, on behalf of clients, managed 4.4 billion square feet, or 409 million square meters, and completed sales acquisitions and finance transactions of approximately $136 billion. At year-end 2016, JLL had nearly 300 corporate offices, operations in over 80 countries and a global workforce of more than 77,000. As of December 31, 2016, LaSalle Investment Management has $60.1 billion of real estate under asset management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit www.jll.com.

About JLL Research

JLL’s research team delivers intelligence, analysis and insight through market-leading reports and services that illuminate today’s commercial real estate dynamics and identify tomorrow’s challenges and opportunities. Our more than 400 global research professionals track and analyze economic and property trends and forecast future conditions in over 60 countries, producing unrivalled local and global perspectives. Our research and expertise, fueled by real-time information and innovative thinking around the world, creates a competitive advantage for our clients and drives successful strategies and optimal real estate decisions.

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