Retail’s biggest newsmakers

The last year in retail has been marked by stories that would have been unimaginable a decade — or even a few years — ago, from the struggles of iconic chain stores like Toys “R” Us to the consolidation of some of retail development’s biggest companies. And while a grim narrative pervades much of the recent discussion, many U.S. real estate experts insist it’s much more of a mixed bag, with a few surprising success stories, including tech innovations, shaping the future.

“I’m really excited about retail because yes, there are definitely the stories of Toys ‘R’ Us, Sears, etc., but I also believe that it’s like any business. There’s going to be ups and downs,” said Anjee Solanki, national director of retail services for the U.S. at Colliers.

Here, The Real Deal provides insight into the most significant stories of the past twelve months.

1. Major retailers file for bankruptcy, mass store closures ensue

In 2017, more than 8,000 store closures were announced, but no single retailer’s collapse generated more shock waves than the March 2018 announcement that Toys “R” Us would be closing 800 of its stores across the country. The company is the third-largest retailer to ever file for Chapter 11.

Days after the announcement, Sam Zell, billionaire chairman of Equity International Group and Equity Residential, described the retail sector as “still a falling knife.” And that seems an apt description, given the number of stores slashed from the balance books of many retailers. In July, the Children’s Place clothing retailer announced that it would close 300 of its 1,014 stores by 2020. Walmart closed 63 of its Sam’s Clubs locations in January. Best Buy confirmed it would shutter all 257 of its mobile stores in March. And home goods and apparel brands owned by Ascena Retail Group — including Ann Taylor, Dress Barn, Lane Bryant and Justice — will also close at least 250 stores, but the chief executive of Ascena, David Jaffe, said an additional 400 stores across those brands could close if the firm wasn’t able to negotiate lower store rents. Add to the list of distressed retailers the many shopkeepers who’ve filed for bankruptcy since the start of 2018, like Nine West, Perfumania and Claire’s.

GGP’s the Shops at the Bravern in Bellevue, Washington

2. Mall mergers

In December, Australian property group Westfield, which owns the shopping center at New York’s World Trade Center and Westfield Century City in L.A., announced that it was being acquired by Unibail-Rodamco, Europe’s largest commercial real estate company. The $15.7 billion deal signaled a tremendous consolidation, given the significant magnitude of the two corporations. It was soon followed by news that competitor Brookfield Property Partners had acquired the remaining two-thirds of America’s second-largest mall company, GGP, for $9.25 billion. Brookfield purchased the first one-third after GGP filed for bankruptcy in April 2009.

“Brookfield is confident that because of the quality of GGP’s portfolio, it is safe from the pressures of retail closures and e-commerce,” said James Cook, JLL’s director of retail research for the Americas. “In fact, these are the types of centers where a growing list of e-commerce retailers like Warby Parker and Untuckit now desire to open physical stores,” he said.

3. Amazon acquires Whole Foods

The e-tailer’s June 2017 announcement that it would be taking over the Austin-based grocer had big implications for consumers and retail real estate. With a nearly $13.7 billion sale price, the chain, with more than 470 stores, was Amazon’s largest acquisition yet, in addition to being the company’s largest foray into brick-and-mortar. The buy has raised questions about the future of grocery stores, given that Amazon can easily afford to spend and lose billions in order to crush the competition.

“Amazon has put ripples into everyone’s work, there’s no question,” said Laura Pomerantz, Cushman & Wakefield’s vice chairman and head of strategic accounts. “There may be some consolidation in terms of people buying or merging” in order to stay competitive with such a powerful figure in the market, she said.  With the acquisition came newly launched services for Whole Foods customers, such as free two-hour delivery in cities such as San Francisco, Los Angeles, Denver, Austin, Atlanta, Dallas and Cincinnati.

Nordstrom’s first store in New York City

4. Nordstrom arrives in New York City

Nordstrom’s decision to open its first New York full-service outpost — a $500 million project — at a time when so many of its rivals are shuttering or downsizing immediately made waves in the retail world. The Seattle-based company leased a 47,000-square-foot space at 57th Street for the men’s store, which opened in early April. A seven-story, 320,000-square-foot women’s store across the street will follow in the fall of 2019. The store will stand at the base of the Central Park Tower, a 179-unit condo project from Extell that will be the city’s tallest residential building and second only to One World Trade Center when it comes to tallest buildings in the U.S.

The move was significant from a Manhattan real estate standpoint, putting a major department store several blocks west of the 57th and Fifth luxury retail epicenter where competitors like Lord & Taylor are struggling to stay afloat (see item 5). The type of financial investment that Nordstrom is making in the two stores — the company’s most expensive project to date — is unusual in this market, experts said. The retailer’s counting on full-service amenities — such as a tailoring staff of 16, a 24-hour pickup service and automated returns at in-store kiosks — to distinguish it enough to pick up a large percentage of market share. If the play proves profitable, its likely that Nordstrom’s move will help shape expansion plans for its rivals, brokers said. 

5. WeWork purchases the famed Lord & Taylor Building

While Nordstrom faces plenty of local competition in Manhattan, one longtime rival will have a reduced presence. The October news that Lord & Taylor’s stately Fifth Avenue location had been acquired by WeWork in an $850 million sale signaled a significant turning of the tides for American retail. Adam Neumann’s eight-year-old co-working company will operate its headquarters at the address, leasing back 150,000 square feet for retail use to Lord & Taylor. The retailer is owned by Hudson’s Bay Corporation (HBC), which also owns Saks Fifth Avenue and Gilt Groupe. The move was made after company shareholders suggested unloading pricey real estate holdings in order to avoid future closings. HBC is said to be using the capital to pay off debts.

The move made clear something that those in commercial real estate have known for a while: Though WeWork is known primarily as a tech startup, it’s also a real estate company. The Lord & Taylor space isn’t the only marquee building the company has acquired. In April, WeWork went in with two other companies on the $826 million purchase of the Central London office complex Devonshire Square Estate. WeWork currently has more space in London that any other entity save for the government.

Planet Fitness in Pembroke Pines, Florida

6. Empty big box stores go experiential

With vacant big box stores too large for many retail brands, the spaces are increasingly being transformed into fitness facilities, rock-climbing gyms and other entertainment venues.

“Planet Fitness is signing leases all over the country,” said Glen Kunofsky, executive vice president of investments at Marcus & Millichap. “You talk about Sears and other things between 20,000 and 50,000 square feet, there’s probably four major fitness chains that are backfilling a lot of those spaces.”

The “experiential retailers are proving to be a lifesaver where no higher-paying tenants exist,” he added.

In 2017, Planet Fitness opened 210 locations.

“If you have a former Kmart or a Sears 20 miles from Chicago and you don’t get traction with another big retailer like Bed, Bath & Beyond, you’ll lease it to a trampoline park for whatever they’ll pay,” Kunofsky said.

OneMarket’s e-receipt program, Hadley

7. Westfield introduces OneMarket … and then spins it off

OneMarket is a new Westfield-created property technology company that seeks to equip brick-and-mortar shops with the kind of data that Amazon so handily utilizes. Led by Don Kingsborough, a former PayPal executive, the company offers products like Live Receipts, which allows stores to keep in touch with customers after they purchase an item, and Shopper Exchange, which provides advertisers access to data from retailers. Nordstrom was one of the company’s first clients.

Embracing these and similar strategies is critical for a retailer’s success and survival, said Solanki of Colliers. “[Shoppers] are not put off, so to speak, by being inundated with ways to connect with their own social community as well as the brand community in terms of how they’re shopping,” she said.

OneMarket is in the process of a demerger, something Westfield says was in the works prior to its deal with Unibail-Rodamco. The company said the spinoff will allow OneMarket to work with brands and companies unrelated to Westfield.

8. Curated markets make their way across the country

While food halls and venues like New York’s Chelsea Market and Los Angeles’ Fig at 7th or Spring Arcade have become de rigueur in the biggest cities, 2018 saw the trend pick up steam in smaller markets.

The Eatery, St. Louis’s first food hall, opened in January. The 10,000-square-foot space on the first floor of JLL’s One Metropolitan Square features outposts like Dino’s Deli and Kimcheese. And City Foundry — a reportedly $230 million project from Lawrence Group in St. Louis that will include a food hall, standalone restaurants and retail — is under construction. Announced tenants include Alamo Drafthouse and arcade, restaurant and karaoke bar Punch Bowl Social. New Orleans’ beloved St. Roch Market opened up a second location in Miami’s Design District in February and is reportedly looking to expand to Chicago. Raleigh, too, has gotten in on the trend, with Morgan Street Food Hall underway and expected to open this year.

Panera Bread in Miami Beach, Florida

9. Fast food and convenience store chains expand

The growth of chains like McDonald’s, Panera Bread and Chick-fil-A has been one of the year’s rare real estate success stories, echoing the market growth of budget-focused businesses like dollar stores. “Panera opens 30 to 40 stores a year, consistently. They’re doing extremely well. They were taken private but they’re signing very aggressive leases in markets all over the country, both urban and suburban and pretty rural as well,” Kunofsky said. European corporation JAB Holdings acquired the fast-casual chain with 2,000-plus stores in July 2017. In November, Panera announced it would purchase Au Bon Pain’s 304 locations.

A similar movement is underway within the convenience store division. “The sector that’s just going gangbusters is the convenience store sector. 7-Eleven, QuikTrip, Wawa, these companies are opening hundreds of sites,” said Kunofsky. “These new stores that they’re building are 4,000 to 7,000 square feet … They’re big rents and big properties.” 7-Eleven made its largest-ever acquisition with the January purchase of 1,030 Sunoco locations across 17 states, bringing the company’s total locations in the U.S. and Canada to 9,700.

10. Major players downsize their stores

One solution major retailers found in looking to cut costs was smaller-sized stores. Target, Kohl’s, Walmart and Macy’s are among the major chains opting for slimmed-down locations as a way of reducing spending on rent and staffing costs. 

In April, Target announced that it would be employing the strategy at three upcoming New York City area stores, with plans to have 130 up and running by 2019. The Minneapolis-based company’s diminutive locations are generally below 40,000 square feet — as compared to an average of 125,000 square feet for suburban locations — and they cater their offerings to the specific location. In addition to providing savings, Target’s CEO has said,  the small-format stores are more profitable per square foot than the standard-sized locations.

Kohl’s has turned to small stores in order to avoid having to close locations, taking many of its nearly 1,200 locations from 90,000 down to 60,000 square feet. Twelve locations are 35,000 square feet, and the company has cut inventory at 500 stores as a precursor to deciding which can be shrunk and share space with chains like Aldi and Planet Fitness.