Retail. Retail gets a makeover. Stores and centers trim down and spruce up their image. United States Retail Outlook Q

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1 Retail United States Retail Outlook Q Retail gets a makeover Stores and centers trim down and spruce up their image JLL Research

2 Contents Retail fundamentals approach their apex in major s 4 Retail is in the middle of a makeover 7 Retailers get high-tech 8 Retail centers get a face-lift 9 Retail gets fast and fresh with pop-ups 10 Malls see strong demand 11 More openings coming to power centers 13 Demand hot for small space 15

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4 4 Retail fundamentals approach their apex in major s Total U.S. Type Total s.f. Total YTD Net Q QOQ% YOY% Vacancy Absorption Avg rent Chg Chg General Retail 5,326,008, % 6,802,190 $ % 8.5% Malls 896,785, % 2,329,713 $ % 4.3% Power Centers 755,828, % (514,027) $ % 1.2% Shopping Centers 3,527,134, % 5,425,098 $ % 3.0% Specialty Centers 84,363, % 47,033 $ % -0.5% Total Retail 10,590,119, % 14,090,007 $ % 5.0% Retail subtype Definition Examples General Retail Malls Power Centers Shopping Centers Specialty Centers Total Retail Consists of single-tenant freestanding general-purpose commercial buildings with parking Includes Lifestyle Centers, Regional Malls and Superregional Malls Consists of several freestanding anchors with minimal small tenants, 250, ,000 s.f. Includes Community Centers, Neighborhood Centers and Strip Centers Consists of the combined retail center types of Airport Retail, Outlet Center and Theme/Festival Center All retail building types in both single-tenant and multitenant buildings, including owner-occupied buildings Drugstores, some groceries, streetfront urban retail stores Primarily anchored by mass merchants, fashion and department stores Primarily anchored by big-box tenants and discount supercenters Primarily anchored by groceries and local services Primarily anchored by manufacturers and retailers outlets All retail San Diego, Philadelphia, Orlando, Washington, DC Miami, Dallas, New York City, Houston, San Francisco, Boston Hawaii, Tampa, United States Los Angeles, Seattle, Atlanta Orange County, Chicago Peaking Rising Falling Bottoming Reading the clock The JLL retail property clock demonstrates where each sits within its real estate cycle. Markets generally move clockwise around the clock, with s on the left side of the clock generally landlord-favorable and s on the right side generally tenant-favorable. Most of the major metros including San Diego, Philadelphia, Orlando and Washington, DC, have moved to a peaking as demand grows ahead of new supply additions. Other major metros have just hit peak and moved over to the falling segment.

5 5 Retail performance fundamentals are in a holding pattern of sorts. Vacancy levels remain at their low of 4.9 percent for this cycle, while net absorption softens as quality space gets harder to find thanks to limited development in recent years. Restrained construction and few new retail space additions have also kept rents inching upward, moving many major s to their cyclical peak. Net absorption in the second quarter totaled 14.1 million square feet a slowdown from both the last quarter and the last year. This is right in line with expectations, given that closures have climbed rapidly in the last 12 months. Over 4,100 locations closed during the first half of this year, but momentum is expected to slow during the latter half of 2017, with approximately 979 additional locations to be shuttered by year-end. Vacancies shrink in almost all retail property types Vacancy continues to hold steady at 4.9 percent in mid In all of the United States, vacancy for shopping centers saw the greatest compression of 44 basis points, year over year, as smaller mom-and-pops continue their recovery. Specialty and outlet center retail vacancy saw a reduction of 35 basis points. Mall vacancies dipped 13 basis points, year-over-year. Power center vacancy, conversely, continues to rise, shooting up 61 basis points, thanks to more than 500,000 square feet of negative net absorption in the second quarter. YOY vacancy compression by retail subtype General retail Mall Power center Shopping center Specialty center Total retail Actual store closures should slow in coming quarters as many locations have already been shuttered this year In bps # of stores to be closed Source: CoStar, JLL Total U.S Q1 2017Q2 2017Q3 2017Q4 2018Q1 2018Q2 2018Q4 Effective closure date Source: Credit Intell, JLL It s worth noting that the top 25 percent of retail properties continue to show excellent performance, accounting for 40 percent of total leasing volume in the last three years (source: CoStar). These properties have strong demographics on their side, are close to daytime sales drivers and are situated in areas with relatively low supply. Developers are taking note and focusing on metros with strong population growth particularly the big-spender cohort (those between the age of 35 and 54), which spends roughly 21 percent more per capita than average. Consequently, urban locations are still a hot commodity for development. Landlords are also investing in redevelopment of their existing centers to make them more appealing to consumers. Investment data shows that, while space construction is low, retail dollar figure investment is comparatively higher.

6 6 New space additions remain low Old recessions have long shadows. Developers continue to pull the reins in on new space deliveries. Retail space under construction totaled 71.2 million square feet at the end of the second quarter, down 12.8 percent from year-ago levels. Total retail deliveries also dipped slightly to 17.3 million square feet inching down 1.7 percent, year-overyear. Most large construction projects are mixed-use developments, which combine live-work-play functions. The Texas s Dallas and Houston lead in construction activity, with 6.6 million and 3.8 million square feet, respectively. The majority of retail space being built largely consists of freestanding retail (58 percent), much of which will take the form of urban or high-end mixeduse centers. S.f. under construction by retail subtype (as of Q2 2017) Power centers 6% Malls 17% Specialty Center 3% Shopping Center 16% s.f. Under Construction General Retail 58% Source: CoStar, JLL

7 7 Retail is in the middle of a makeover Retail trims its excess space The results are in. There is very little space for mediocre retail. Consumers choose where they shop based on three main factors: time, touch and money. Shoppers are looking to either save time, save money, or have a rich, enjoyable store experience. Retail stores that do not offer clear benefits in any of these categories are likely to fold. By the end of 2017, retailers will have closed more than 5,000 locations many because of bankruptcy. In fact, retailers declaring bankruptcies announced over 3,500 store closures in the last year, led by apparel and electronics stores. It s important to note that, even within categories with high closures, performance varies widely. Many of the store closures we are now seeing for apparel stores are as a result of a handful of retailer bankruptcies including Wet Seal, American Apparel and The Limited. Junior apparel especially has seen increasing competition from fast fashion retailers like H&M and Forever 21, whose affordable and fashionable merchandise keep young shoppers coming back for more. Conversely, retailers have plans to open more than 5,700 new locations in the next 12 months, led by wireless operations, who will open 1,820 new stores. Dollar stores demand for new space remains strong, with 1,750 new locations planned. Apparel and electronics retailers are closing the most stores Source: PNC, JLL 524 Announced closures Retailers plan more than 5,700 new stores in the next year Electronics Department stores Jewelry stores Pet supply Home improvement Wholesale clubs Health & beauty Grocery stores Home furnishings Beauty & cosmetics Sporting goods Shoe stores Discount department stores Auto parts Apparel Restaurants Specialty stores Dollar stores Wireless Source: PNC, JLL Announced openings

8 8 Retailers get high-tech Consumers have become channel agnostic in the way they shop. They research online before heading to the store to purchase; they order online to pick up at a physical location; they browse store aisles and buy on their smartphones or tablets; they return online purchases in stores and they leave online reviews. As the customer journey evolves, retail needs to evolve with it. Very few retailers who focus on only one channel will survive to tell the tale. So retailers are taking action by investing in technology to improve operations across all channels, including in stores. increasingly in augmented and virtual reality to ante up the in-store experience for consumers. In our recent report, Bagged or Boxed?, we look at various retail categories and the extent to which they will move online. The bottom line is retailers who master an omnichannel approach have the best prospects of success, with few exceptions. Those who offer killer deals and appeal to consumers desire to save money are still going strong. The majority of retailers globally (70 percent) plan to invest in the Internet of Things (IoT) by 2021 to improve the customer experience inside their stores. This technology includes personalized offers to shoppers as they walk into their stores and accurate inventory tracking, for shoppers who want to order online and pick up in-store. IoT technology even involves enhancements like shoppers being able see what s inside their fridges at home as they shop the grocery aisles. Retailers are also looking to invest

9 9 Retail centers get a face-lift Developers are focusing on redeveloping retail space, as consumers tastes and habits shift. They are also following demographics and focusing on urban live-workplay projects. taking place in urban areas where construction costs are higher. Construction spending growing faster than space being built In 2007, the value of retail construction put in place totaled $747.6 billion while construction starts were million square feet. This amounts to approximately $4,602 per square foot. In contrast, construction starts in 2016 totaled only 79.6 million square feet but the value of new construction was billion, translating to $6,473 per square foot. As of June 2017, new construction is valued at approximately $10,230 per square foot. Bottom line: while less retail space is being constructed, more money is being spent. Two factors may help explain this. Developers are in the process of renovating malls to more closely match what consumers are looking for: experiential retail in the form of restaurants, theaters and other entertainment venues, as well as updated interiors and stores. Additionally, a good portion of development is Construction starts (millions s.f.) Value of retail construction put in place ($M, SAAR) YTD 2017 Source: CoStar, JLL, Economy.com $800,000 $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0

10 10 Retail gets fast and fresh with pop-ups The concept of temporary tenants in retail space is certainly nothing new. Seasonal retailers like Spirit Halloween have been around for years. However, a different kind of temporary retail is popping up more and more in shopping centers. Pop-up stores are a growing trend in retail. Benefits include testing out new locations, creating buzz, and building the brand and revenue. While historically, pop-up retail has been viewed as a Band-Aid to temporarily fill available space, times are a-changing. In an industry where consumers are looking for fun, new experiences, pop-ups can breathe new life into existing retail space. This is especially true given the high profile of recent pop-ups like Goop and Kanye West s Pablo. pop-up shops, events and co-working space. The pop-up space, Bespoke Demo, offers 1,000 3,000 square feet of activation space and includes an interactive digital façade composed of three 12-by-7-foot LED screens. In another example, a startup called Bulletin opened a small chain of stores in New York that sell online merchandise from different e-tailers. These stores have different themes, like tech gadgets or novelty clothing. The bottom line here is that as shoppers' needs evolve and demographics shift toward Gen Y and Z, retail needs to become more agile and innovative. Incubating pop-ups can be a solid strategy that not only fills empty space but draws shoppers to a retail location and keeps the tenant mix fresh and interesting. Some landlords are getting proactive by allocating a specific portion of their space as much as five percent to pop-up retail. They are building out vanilla boxes averaging 1,000 1,500 square feet that can be used by consecutive pop-up tenants, thereby making the process easier. In 2016, Westfield San Francisco dedicated its entire fourth floor to a concept called Westfield Bespoke, used for

11 11 Malls see strong demand For malls, most of the major s are now either peaking or falling, with slower improvement in rents and vacancy. Mall Property Clock San Diego, Dallas, Orlando, Philadelphia, Boston, Washington, DC, United States Peaking Rising Falling Bottoming New York Metro, Los Angeles, Orange County, San Francisco Chicago, Tampa, Hawaii, Seattle, Houston, Miami Atlanta

12 12 Mall absorption strong in the first half of 2017 Mall 2017 year-to-date absorption is approaching the level seen for the whole of Net absorption was 2.3 million square feet in the second quarter and another 2.0 million in the first quarter. Total for the first half reached approximately 4.4 million square feet. Philadelphia, Milwaukee and Houston were the top s in the United States for mall space demand. H mall absorption the highest since Q1 Q2 Q3 Q Millions (2) (4) (6) Source: CoStar, JLL

13 13 More openings coming to power centers Power Center Property Clock Orlando, Miami, Seattle, San Diego, Los Angeles Philadelphia Washington, DC Peaking Rising Falling Bottoming Boston, Dallas, Houston, San Francisco, Tampa, New York Metro, United States Hawaii, Orange County As power center absorption wanes, major metros move from peaking to falling s, characterized by softening of rents and vacancy hikes. Chicago, Atlanta

14 14 Retailers with larger footprints head to power centers While power center net absorption has been flat year-to-date, we expect demand to recover in coming quarters. Power centers exposure to big boxes like hhgregg, which announced 220 closures, pulled down net absorption. However, other retailers with large footprints like Hobby Lobby, Target and Dick s have strong opening plans. Coupled with the fact that power center space under construction has been less than five million square feet since 2011 a little more than one-tenth of the levels seen in 2006 power center fundamentals should see some improvement over the next several quarters. Retailers whose opening plans include power centers Orchard Supply Nordstrom Rack Michaels Lidl Petsense Target (small format) Golf Galaxy Dick's Sporting Goods Hibbett Sports Hobby Lobby TJ Maxx/Marshalls Ross Stores HomeGoods Five Below Ulta Announced openings Source: PNC, JLL

15 15 Demand hot for small space For shopping centers, the s on the clock are somewhat closely clustered in the peaking segment, as rent and demand growth begin to slow. As conditions continue to soften, more s should gradually move past midnight into the falling segment. Community, Neighborhood & Strip Center Property Clock Miami, Houston, Dallas, San Francisco, Orlando, Los Angeles San Diego, Boston, Washington, DC, United States Atlanta Philadelphia Orange County Chicago Peaking Rising Falling Bottoming Hawaii, Seattle, New York Metro, Tampa

16 16 Small shops flourish Shopping centers saw a moderate jump in net absorption from the first quarter, increasing 16.5 percent to 5.4 million square feet. Even as some national retailers close their doors, smaller, local in-line tenants in strip and neighborhood centers are benefiting from the housing recovery, since they often use home equity to finance their operations. In fact, according to CoStar, strip and neighborhood centers are seeing the greatest percentage increases in demand over the last two years. Shopping center rents continue to inch upward 12.0% Shopping center rents Shopping center vacancy $ % $17.00 $ % $ % $15.50 $ % $ % $14.00 $ % YTD 2017 $13.00 Source: CoStar, JLL

17 17 Want more information? Greg Maloney President & CEO Retail Americas James Cook Americas Director of Research, Retail Naveen Jaggi President, Retail Brokerage Keisha Virtue Senior Research Analyst Retail Americas

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