Middle-Tier Suburban Retail: A Southern Anomaly?

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Sam Berry

Sam Berry is a first-year master's candidate in the Baker Program in Real Estate at Cornell University's SC Johnson College of Business, and hails from Chattanooga, TN. At Cornell, Sam is an Editor for the Cornell Real Estate Review and is a member of the Associate Real Estate Council. Prior to Cornell, Sam's education and work experience includes a B.S. in Building Construction from Auburn University in 2016, and three years in the construction management field. Sam is still deciding whether to concentrate in development or finance during his time in the Baker Program.

The mass population exodus to the suburbs in the 1950’s and 1960’s resulted in the creation of hundreds of thousands of new suburban homes across the country, and thus, the birth of the suburban shopping center. While suburban growth rates naturally varied by region, the Southeastern United States benefited from multiple factors which encouraged the suburban shopping environment in its earliest decades. The eight state coverage of the Tennessee Valley Authority made cheap power available to homeowners in an otherwise hot and humid region, and the insurance industry in Atlanta and Charleston provided the backing for banking and institutional growth–which attracted many to the early suburban colonial and split level homes in the South. (Cornell University, Michael A. Tomlan). Fast-forward to today, and retail is still following suburban residential rooftops, though many industry professionals reserve a pessimistic outlook due to the growth of e-commerce and the desirability of new generations wanting to live within the Central Business District (CBD). When discussing how to attract shoppers to physical retail stores, urban or suburban, the latest twist in conversations cite experiential retail as the solution.

Some of the fastest growing cities in the Southeastern United States, such as Atlanta, Charlotte, Nashville, Tampa, and Miami, are continuing to sprawl with rapid outward expansion. Doug Yearley, Toll Brother’s CEO, recently remarked at Cornell University’s Real Estate Conference that many people are still leaving cities for the suburbs once their kids reach school-age, and that the “American Dream” is alive and well. He cited data specifying that premiums for new homes, which are predominantly being built outside of urban areas, are higher than they have ever been as compared with existing homes, meaning that homebuilders are still building, and consumers are still buying in the suburbs at a high rate. As a result, new retail developments continue to be constructed, with strip/convenience centers (<30,000SF), neighborhood centers (30,000 – 125,000SF), and community retail centers (125,000 – 400,000SF) maintaining popularity (ICSC Insight Center, 2019). Is a successful experiential approach feasible in middle-tier retail centers, such as those commonly located near suburban neighborhoods, or is it strictly limited to the high-end retail stores? With the desirable growth locations for major market Southeastern cities located 20+ miles outside the CBD, developers and retailers alike are adapting their strategies to capture that market, with a long-term focus in mind.

Over 9,000 retail store closures were announced in 2019 alone (USA Today, 2019), strengthening the idea that a retail apocalypse is near, often blaming internet sales. Just how much can be credited to e-commerce? According to Lauren Leach, director of real estate advisory services at Conway MacKenzie, e-commerce sales account for only 10.7% of retail sales, indicating that there are other factors influencing store closures (National Real Estate Investor, 2019). Additionally, in the December 2019 Monthly Consumer Surveys conducted by Prosper Insights & Analytics, and endorsed by ICSC, the electronics sector was the only sector where consumers elected to shop online rather than in a physical store. Competition, proven by the nature of the fact that the United States is “overstored”, along with American urbanization, has aided e-commerce in affecting retail growth. By overbuilding commercial retail space, with almost 24 square feet of commercial retail space for every American, retailers in the United States are competing against each other for the consumer’s purchases more than any other country (AT Kearney, 2018). These factors have led to news headlines betting against the future of retail, often generalizing and consolidating the asset class as a one-size-fits-all failure across all geographies.

 

 

In November 2019, billionaire hedge fund investor Carl Icahn became the largest short seller of mall debt by purchasing credit default swaps on the direction of the CMBX 6 index, which tracks 25 commercial mortgage backed securities with large exposure to mall loans. While he has suffered early losses, the majority of the loans in CMBX 6 were originated in 2012, and Icahn is positioned to gain as much as $400 million if these borrowers face debt service issues by 2022. Icahn’s bet is that rising mall vacancies will continue to increase, and borrowers will fail to service their debt payments. While traditional mall tenants such as Sears, Payless ShoeSource, and FootLocker are closing stores, or shuttering their companies altogether, mall owners in primary and secondary markets have filled vacancies with new retail tenants whose store opening numbers continue to increase year over year such as Ross Dress for Less, The TJX Companies, Burlington, and Ulta. Perhaps even more popular in primary markets has been the introduction of experiential retail, which ranges in definition and application type, but includes experiences such as augmented or virtual reality, curated shopping experiences enhanced with the help of big data, personal shopping assistants, and apparel personalization. Some owners have spent millions of dollars retrofitting their space as an experiential world, perhaps most notably the recent renovations to the Saks Fifth Avenue flagship store in New York City. Alternatively, many owners are renovating vacant spaces to service new uses, such as self-storage facilities, distribution centers for online retailers, recreational opportunities, health care, and medical office space. According to CoStar, of the new self-storage properties that have opened since 2015, 7% were converted from former retail buildings. Steve Mellon, managing director of JLL, believes these retail sites are often a good fit for self-storage properties, which in today’s world often rely on being highly visible to potential customers – a trait they share with retail. Mellon has also had many self-storage clients looking to buy big-box stores lose out to medical office competitors (National Real Estate Investor, 2019).

While these reaction-based redevelopment and adaptive reuse trends are being noticed nationwide, retail development in the Southeast is a bright spot in an otherwise uncertain market. Cool Streets reported in October 2019 that there has been an “explosion of overall growth in metropolitan areas considered secondary or even tertiary markets,” such as in Charlotte, North Carolina and Nashville, Tennessee. CBRE’s 2019 Report on Retail in the Southeast states: “Strong demographic growth will keep retail markets active. Most markets in the region feature strong in-migration of talent, which increases the margin of error for operating retailers. As a result, expect absorption to remain elevated and new development to perform better than similarly situated projects in other areas of the country. Do not confuse retail evolution with retail apocalypse—the sector is growing, and vacancy rates are at historic lows.” Suburban sprawl in these southern cities has created a market for mid-level retail outside of the CBD, so much so that CBRE has siloed retail development into two types of product: urban retail and suburban grocery-anchored retail (CBRE Southeast Report on Retail, 2019). Without the clientele or facilities to support a high-end experiential type of retail which the national trend dictates is critical, how are developers curating suburban shopping centers to create a long-lasting high-performing asset?

Perhaps the safest, most popular form of suburban retail, according to JLL and reiterated by CBRE above, is grocery-anchored retail. This is a sector which investors are targeting, because it is experiential, necessity-based, and has low-vulnerability to e-commerce competitors. Even though Amazon and others have entered the grocery-delivery arena, 84% of U.S. adults who responded to a Gallup survey say they never order groceries online (National Real Estate Investor, 2019). While trendy stores such as Whole Foods and Trader Joes have cornered a niche market in urban areas, Sprouts and Publix have established loyal customers in Southern Suburbia, which has attracted a plethora of developer and co-tenant suitors. In addition to creating grocery-anchored centers, developers are increasingly keen on either disposing of, or retaining and leasing, outparcels to service-based operators, with similar low-vulnerability to e-commerce, such as express oil change tenants, fast-food and local restaurants, and higher-end convenience stores, such as WaWa in Florida or Buc-ee’s in Texas–both of which share cult-like followings and are expanding to new locations. While these restructuring efforts do not take place overnight, they are beginning to pay dividends to developers who have implemented these strategies. In November 2019 ICSC released industry insights that reported the U.S. Shopping Center Industry saw the largest NOI growth in three years during Q3 of 2019, with base rents increasing nationally by 5.1% over those for to Q3-2018, and operating income growth of 3.1% over the same period (ICSC Insight Center, 2019).

Retailers are also looking to combat the slowdown of brick-and-mortar sales by providing health care products formally associated with pharmacies and specialty food services. Walmart is currently in the process of rolling out its new “Walmart Health” concept, a 10,000 square foot center that will provide “primary medical services, dental care, and behavioral health services.” Looking to capitalize from the aging baby boomer population, Walmart is also utilizing this new concept in an effort to regain lost foot traffic in their Supercenter stores (Forbes, 2019). Publix and Sprouts have positioned themselves securely in the market by providing customers a premier shopping experience through creation of amenities that are not traditionally associated with grocery stores, such as the infamous “Pub Sub” from Publix’s sandwich shop in their deli and cafeteria area.

The influx of population into the suburban southeast has breathed life into a form of retail that has been left for dead elsewhere. While the urban core has been revived as arguably the most desirable place to live in gateway cities such as San Francisco and New York City, suburbia is sprawling in popularity in cities like Nashville and Charlotte. Those who have been priced out of the big cities, desire a slower pace of life, are approaching retirement, or are seeking tax-havens in states like Florida or Tennessee, among other reasons, are seeking to locate outside of the southern CBD’s. While development opportunity in this pocket of the country is abundant, today’s version of successful brick-and-mortar retail is constantly adapting and improving. Middle-tier retail’s version of experiential has resulted in upward growth in an asset class that is otherwise uncertain, and it appears that as population growth continues to soar in the Southeastern United States, retail trends in this area will follow.

 

References

Anderson, B. (Sept. 23, 2019). Empty Big-Box Stores Offer an Opportunity for Self-Storage Developers. Retrieved December 14, 2019, from https://www.nreionline.com/self-storage/empty-big-box-stores-offer-opportunity-self-storage-developers?NL=NREI-21&Issue=NREI-21_20190923_NREI-21_830&sfvc4enews=42&cl=article_2_b&utm_rid=CPG09000040233095&utm_campaign=23059&utm_medium=email&elq2=1784987a07f544ce995c5905cc303ef6

Brown, M. and Lubelczyk, M. (2018) The Future of Shopping Centers. Retrieved December 14, 2019, from https://www.atkearney.com/retail/article?/a/the-future-of-shopping-centers-article

ICSC (2019). U.S. Shopping Center Count By Type (2019). Retrieved December 14, 2019, from http://ic.quickstats.icsc.com/Default.aspx?pg=281

ICSC (2019). U.S. Shopping Center Definition Standard. Retrieved December 14, 2019, from https://www.icsc.com/uploads/t07-subpage/US-Shopping-Center-Definition-Standard.pdf

ICSC (Nov. 13, 2019). U.S. Shopping Center Industry Sees Largest NOI Growth in Three Years During Q3-2019. Retrieved December 14, 2019, from https://www.icsc.com/uploads/t07-subpage/NCREIF_Q32019_Performance_Series.pdf

Japsen, B. (Sept. 13, 2019). Walmart’s First Healthcare ‘Super Center’ Opens. Retrieved December 14, 2019, from https://www.forbes.com/sites/brucejapsen/2019/09/13/walmarts-first-healthcare-services-super-center-opens/#5d47712279d2

Mander, E. (Oct. 11, 2019). Cities Still Booming, But Suburbs Next, Says Report. Retrieved December 14, 2019, from https://www.icsc.com/news-and-views/icsc-exchange/cities-still-booming-suburbs-next-says-cushman-report?utm_source=sctweek&utm_medium=newsletter&utm_campaign=SCT%20Week

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Tyko, K. (2019, November 26). Retail apocalypse: Nearly 9,100 store closings have been announced in 2019. Retrieved December 14, 2019, from https://www.usatoday.com/story/money/2019/07/03/2019-store-closings-list-these-retailers-shuttering-locations/1597997001/

Wolf, L. (Nov. 21, 2019). Grocery-Anchored Shopping Centers Remain the Safest Retail Bet. Retrieved December 14, 2019, from https://www.nreionline.com/retail/grocery-anchored-shopping-centers-remain-safest-retail-bet?NL=NREI-21&Issue=NREI-21_20191121_NREI-21_69&sfvc4enews=42&cl=article_1&utm_rid=CPG09000040233095&utm_campaign=24096&utm_medium=email&elq2=f11fa94f0739478ea9ca0b7a2062934a

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Zuckerman, G. and Fung, E. (Nov. 19, 2019). Carl Icahn Placing a Big Bet Against Mall Owners. Retrieved December 14, 2019, from https://www.wsj.com/articles/carl-icahn-placing-a-big-bet-against-mall-owners-11574201244?emailToken=fc752cfdf45e8e6927cc0a6a80f57a84LjgLmjuJN05UTkikcdFllktdNFLEM7/DlS/483yPyg3bmsPMkZeY/fSYlsRRakO+QCnrQLyOI7qNMhWT/xgV4l+1LOnLPY6rM7+z+tzNREQ=&reflink=article_copyURL_share

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