Americas Retail Trends Report

Q4 2014 AMERICAS RETAIL TRENDS REPORT Americas Retail Trends Report This report reflects current observations from more than 450 CBRE retail brokera...
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Q4 2014

AMERICAS RETAIL TRENDS REPORT

Americas Retail Trends Report This report reflects current observations from more than 450 CBRE retail brokerage and retail investment professionals in the Americas.

SUMMARY As we near the end of 2014, we continue to witness additional signs of an improving retail market across the Americas. The recovery we’re seeing in retail real estate fundamentals is happening amid modest growth in retail sales. Total retail sales grew in Q3 by 4.5% on a yearover-year basis, down slightly from 4.6% in Q2 and below the long-run average of 6.2%. However, total retail sales are now about 18% above its prerecession peak, set in Q4 2007. New construction projects, while taking place, are sporadic and highly dependent on the fundamentals of each given market. Some key trends include: • The dominance of urban high street activity • Grocery remains a major force in every market across the Americas • Outlet centers continue to be a significant source of new construction • The food category, everything from QSRs to chef-driven fine dining, is prominent throughout the U.S. As a result, optimism remains high as positive growth is expected in the retail occupier and agency practices through year-end.

NATIONAL TENANT/USER PERSPECTIVES The impact of e-commerce remains a hot topic for retailers. Since 2010, e-commerce’s share of total retail sales has almost doubled, from about 5% to 8%. E-commerce’s growth has largely been concentrated in just a few segments, chiefly discretionary goods like clothing, sporting goods, electronics and books. These types of retailers are mostly located in malls, which have been slow to recover in the post-recession era. Availability rates for malls in 2007 were in the 1%-3% range; today they’re hovering around 7%. The one exception to this is fortress malls. These centers, typically destination malls of at least 900,000 square feet, took a hit in the recession, but currently have an availability rate of about 3%. This is largely because they house a more dynamic mix of tenants that continue to attract a wide array of consumers, including entertainment and food and beverage options, making them less susceptible to the rise of e-commerce. If this trend holds, we could see welllocated fortress malls emerge as brick-and-mortar hubs for omni-channel retailers that want locations with healthy foot traffic. NATIONAL LANDLORD/OWNER PERSPECTIVES Recently, many nationwide retailers have announced store closures in an effort to reposition the brand, or to stay afloat. Coldwater Creek announced it would be closing 350 stores. Teen retailers Aeropostale and Abercrombie & Fitch have also recently announced closures. Aeropostale will be closing 150 stores while Abercrombie and Fitch will be overhauling its Hollister brand to a fast fashion concept and dropping its Gilly Hicks brand. In addition, Juicy Couture announced it will be shutting all 100 boutiques and outlet stores by June’s end. These announcements leave many wondering; why are there an unprecedented number of store closures in this time of economic recovery? The answer can be found in several underlying factors: §§ ONLINE SALES: For many retail chains, online sales are only 25% of their total sales. This has created price deflation among retailers competing to have lower prices than competitors; made possible through a constant stream of cheap global sourcing. Retailers must sell more to break even. One trend we’re watching closely is that 2013 was the first year online sales for bricks-andmortar retailers actually outpaced “pure-play” online retailers. Those in the physical store camp are watching this trend closely, observing many “pure-play” e-tailers announce plans for physical store openings. The announcement of Amazon’s first store in Manhattan reaffirmed this trend.

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Q4 2014

AMERICAS RETAIL TRENDS REPORT

§§ CHANGING BUSINESS MODELS: As the number of physical stores is being addressed, so is the size and layout of these stores. With fewer shoppers buying items solely in physical stores, retailers no longer require the same inventory levels, thus allowing them to shrink the footprint of their physical presence. Retailers are questioning their viability in the traditional enclosed shopping center format, particularly if the mall’s sales have languished, and in many instances favoring neighborhood communities, lifestyle, outlet and mixed-use environments. While this is going on there has been a movement afoot for more successful retailers to transform and meet the challenges of online sales growth. The focus of those who are thriving is to turn the physical stores into showrooms where consumers can try new gadgets and products, while using omni-channel retailing to combine the online and in-store experience. CAPITAL MARKETS PERSPECTIVES On the capital markets front, Q3 investment sales transaction volume for all retail property types totaled $18.4 billion, down 8% year-over-year. This dip was largely due to a drop-off in portfolio and entity-level transactions, as sales of individual assets were up 34% from year-ago levels. Pricing remains aggressive. The average national price per square foot reached $214, up 25% compared to this time last year, and cap rates continued to compress. The national retail cap rate fell to 6.8%, just 20 basis points off its all-time low reached in 2007. REGIONAL PERSPECTIVES

Northeastern United States §§ There is a trend toward Urbanization with people moving to urban areas, and retail and restaurants are following. §§ There is a shortage of quality available retail space. §§ Development is starting to occur in regional areas. §§ Restaurants are expanding at a quicker pace than ever before. §§ Retail rents are above pre-recession levels. §§ Hotels are cropping up all over the Northeast, and yet occupancy and room rates continue to rise. §§ In New York City, banks are shrinking their footprints, taking advantage of increasing tech acceptance. Fitness, Pharmacy and Food remain the other dominant trends with the recent addition of the Home Décor category; a result of the recent Restoration Hardware deal. §§ Philadelphia continues to see activity from fast-casual restaurants, discount apparel retailers, high street retail, and B- and C-mall redevelopment, including anchor re-leasing and fitness clubs. • The market has witnessed a significant slowdown in big box discount retailer deals, although there has been a strong push from junior box apparel discounters, including Ross, TJX and Fallas Paredes. Fallas has emerged as an alternate discounter apparel retailer in the market with its recent acquisition of CW Price. • Irish discounter, Primark, has recently entered the market. • Other trends are holding steady with a dearth of new suburban and ex-urban development, unless in very desirable locations. • Urban high street leasing and sales continues to flourish. • A strong emphasis on casual dining concepts in more traditional suburban sites is present, while chef-driven concepts are finally moving beyond the urban core to the suburbs, and in some cases, other markets entirely.

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Southeastern United States §§ Sporting Goods chains that are very active include: • Cabela’s entering the mid-Atlantic and Carolinas • Bass Pro expanding throughout • Gander Mountain expanding throughout • Academy Sports expanding throughout • Dunham Sports expanding in mainly small markets throughout the South • Dick’s active throughout, looking to expand its Field & Stream concept selectively • Sports Authority repositioning stores and selectively expanding §§ Walmart is most active, primarily via its Neighborhood Markets. §§ Kroger is active along with the Harris Teeter concept it acquired. §§ Gas/Convenience stores headed by Wawa are very active in Florida. §§ Banks are remaining on the sidelines. §§ New power center developments are starting to appear throughout the Southeast.

Midwestern United States §§ We are witnessing new construction driven by junior boxes vs. larger anchors. Grocery wars continue and they are leading some of the new construction. §§ Rents everywhere are highest they have been in years. Vacancy in most submarkets is lowest it has been in years. §§ The lack of available space exists in all sizes, and when something becomes available, competition is high and there are often multiple offers. §§ Rents are back to pre-recession levels in many areas. §§ The rents in the city of Chicago are above pre-recession levels and demand is very strong. §§ High-rise multifamily construction in the city of Chicago is at record pace. §§ Apartment rents in the city of Chicago have reached record levels three times this year. §§ New construction is beginning in the city and suburbs. §§ Investment sales are happening at record prices for trophy-class assets in “A” locations. §§ There is a shortage of great credit, net-leased, single tenant investment product, and where available the prices are at pre-recession level and higher.

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Southwestern United States §§ Economic growth that led to the absorption of most Class A space is now driving new construction, although at a much slower pace. §§ Most new developments are urban redevelopments of existing assets or anchor-driven suburban developments; much less shop space is being developed. §§ Grocery is the most active category, with WinCo entering Texas along with Kroger Signature. Trader Joes, Sprouts and HEB are the leading new projects, while Costco and Sam’s continue to expand and fill in gaps. §§ Vacancy in DFW is below 10% for the first time in more than 10 years, and rents for Class A space are at an all-time high. §§ There were very few store closures in 2014. Best Buy, Office Depot and Sports Authority are “right sizing” and repositioning stores, but very few retailers are on landlord’s “watch lists,” meaning existing rent rolls are very stable and fall out should be minimal in 2015. §§ The restaurant segment remains exceedingly active, with fast-casual chains, chef-driven concepts and high-end steakhouses continuing to push for new locations. Often times, restaurants are acting as the “new anchors” of development, replacing the traditional lineups of mid-boxes and shop space. §§ The overall health of centers is driving investors to record low cap rates on shopping center purchases; this trend is expected to continue.

Southern California §§ There are several major outlet malls in development. §§ Expansion minded retailers are tracking other retailers, that are consolidating or downsizing, for growth opportunities as opposed to traditional new construction. §§ Major owners are renovating existing assets and upgrading tenancies upon roll over. §§ Densification: Urban mixed-use developments are replacing traditional suburban retail footprints. §§ Shopping centers are selling to investors at record prices.

Pacific Northwest §§ There is strong demand for CBD and urban mixed-use retail locations from restaurants and retailers. §§ Second Generation mid- and big box space is virtually non-existent. §§ Very little new shopping center development is occurring in suburban markets. §§ Rents in quality retail properties have returned to pre-recession levels. §§ The explosion of new and existing restaurant concepts are driving demand.

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Canada §§ LUXURY DEPARTMENT STORE WARS: Canadians are witnessing heightened competition among high-end department stores. New arrivals Saks and Nordstrom are in the process of opening their first Canadian stores, while Canadian high-end stores Holt Renfrew and Simons continue to expand their national footprint. Bloomingdales is also said to be looking at the Toronto market. §§ MERGERS AND ACQUISITIONS: Retailer mergers and acquisitions continue to make headlines. Significant transactions include: Loblaws acquiring Shoppers Drug Mart for $12.4 billion, Hudson Bay Company acquiring Saks for $2.4 billion, and Sobeys acquiring Safeway for $5.8 billion. §§ STORE RIGHT-SIZING AND CLOSURES: Retailer right-sizing and store closures have become more prevalent as of late. Notable retailers include: Staples, XS Cargo, Le Chateau, Jacob, Big Lots, Best Buy/ Future Shop and Sobeys/Safeway. §§ VALUE RETAIL: Value retail is a well-established and growing segment of the overall Canadian retail industry. Canadian consumer demand for value-oriented merchandise has grown substantially, as evidenced by the increase in the number of general mass merchants, smaller value-priced chains, warehouse/club stores, discount food stores, close-out retailers and dollar stores. It is anticipated that value retailers will have the most significant expansion strategies during the next three to five years. §§ MIXED-USE DEVELOPMENT: Urban development, favoring high density and mixed-use designs, is witnessing an increase in preference among downtown residents and office workers who which to live, work and play within walking distance of mass transit hubs.

Mexico §§ In Mexico, new fitness brands and formats are a primary source of activity, while casual dining brands are the most successful players in the restaurant sector. §§ The country is witnessing significant expansion among the top fashion malls and shopping centers, as vacancy rates continue to decline. §§ As Mexico’s domestic brands begin to explore expansion into the U.S.; new international brands are continuing to enter Mexico. §§ Mexico will see the addition of five new luxury retail developments within the next 18 months. §§ Rents are expected to continue at the same levels.

FOLLOW CBRE

FOR MORE INFORMATION PLEASE CONTACT: Anthony Buono Executive Managing Director Retail Services Americas | CBRE

Todd Caruso Senior Managing Director Retail Agency Services Americas | CBRE

T 619 696 8302 [email protected] www.cbre.com/anthony.buono

T 847 572 1480 [email protected] www.cbre.com/todd.caruso

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