Commercial Investment Real Estate May/June 2017 - Page 29

Malls also are adapting to that shift by positioning them- selves as a social and entertainment hub and not just a place to buy things. Malls and shopping centers are adding social experiences, such as gyms and restaurants, that stay open much later than the retail stores, Meier notes. Retailers are creating more in-store experiences. In Ontario, Canada, for example, several of the grocery chains have added event space where they hold cooking classes, wine tastings, and new product launches, as well as provid- ing an area for childcare, he says. Walls also are coming down between individual retailers. For example, a coffee shop might decide to locate a store within a bank, while drug stores are providing fresh food and take-out options. “It is about getting the consumers into the store and keeping them there, so their dollars are spent all in one location,” Meier says. At the same time, retailers are fig- uring out that it is not one-size-fits-all in how and where consumers shop, he says. Reinvention of Malls Online sales have already taken a toll on power centers and battered big box categories such as office supply, electronics, bookstores, and home furnishings. That focus is now shift- ing to department stores, soft goods, and apparel retailers. “Department stores are dying,” Graul says. “The age of department stores anchoring retail is all but over, and that has been coming for 20 years.” Retail soft goods uses seem to be following close behind the department stores — expanding and thriving only in the top 20 percent of regional markets and projects, he says. The retail market is still reeling from major announce- ments in the past year that Macy’s will close 100 stores, and J.C. Penney expects to close between 130 and 140 stores. Those closings have landlords scrambling to find new anchors that will draw traffic. For example, Macy’s closed its 149,000-sf store at The Marketplace Mall in the Rochester, N.Y., metro at the end of 2016. “That is a big dump of space. There is just not a back- fill use for that square footage in new retailers,” says Ira Korn, CCIM, owner and managing broker at GENESEE Commercial Real Estate/CORFAC Inter- national in Rochester. In most cases, replacing one department store with another is simply not an option, as department store retailers across the board have curtailed new store growth. Landlords are looking to redevelop those large spaces to smaller shops and junior anchors, as well as restaurants, entertainment, and alternatives such as an indoor golf range to create more of an entertainment district, accord- ing to Korn. The A malls are continuing to do well in many metros, while the B and C malls have been hit hardest with the worst likely still to come, Graul notes. “The bottom 50 per- cent of regional malls are in for a tough ride,” he says. “The remainder will have to be re-invented, repositioned, rede- veloped, or de-malled.” Across the board, developers and landlords are working to internet-proof shopping centers with restaurants, enter- tainment, and service retail to help drive traffic to their centers and backfill empty spaces. “People go out because they want experiences, and restaurants and entertainment In fact, the volume of food, beverage, and entertainment tenants at malls has jumped in the past decade from an average of about 10 percent of the merchandising mix in 2007 to roughly 20 percent today, according to Cushman & Wakefield. However, there are signs that growth may be beginning to slow. According to Reis, the rate of job growth for restaurants decelerated in 2016 to 2.2 percent from 3.3 percent at the end of 2015. In addition, some categories that have experienced heavy growth may be saturated and headed for a shakeout. Restaurants that have not changed with the times also may see fallout. It is getting very tough to make money in the restaurant industry with occupancy costs that are rising out of control and outstripping the growth in sales, Graul notes. CCIM.COM Restaurants are battling increased competition and too many seats in many markets, as well as higher labor costs. That could create some additional vacancies ahead, particularly among full-service restaurants that are overpaying for real estate and cannot generate the sales to support their high occupancy costs, he notes. For example, gross asking rents of $75 psf are now typical in the top suburban markets of Washington, D.C., which rival rents in the best downtown D.C. locations, Graul says. That means a 6,000-sf restaurant would have to generate about $6.5 million in sales to account for their overhead, and there are very few restaurants out there doing that type of sales volume, he says. “So margins are getting thinner and thinner, and there is definitely a reckoning coming,” he adds. May | June 2017 27