Looking at the Year Ahead in Retail Real Estate

  • Published in SCBlog
Anjee Solanki Anjee Solanki

 

Thanks to a positive economic outlook for 2015 driven by jobs growth and a sharp drop in gas prices, we are looking at high street markets to continue to grow next year. With the U.S. economy in recovery mode, confidence has increased and banks’ confidence has increased, which has led to loans being given more freely. That translates to a healthy rebound of the ability to finance—whether you’re in the QSR world or the apparel world.

The U.S. economy created 2 million-plus jobs in the first nine months of the year, and nearly 10 million since the beginning of 2010, according to the Bureau of Labor Statistics, with gains expected to continue—even intensify—through 2015. A secondary factor is the sharp drop in gas prices, which puts more money in consumers’ pockets. This has contributed 4 percent, as of September, year-over-year growth in retail sales, according to the U.S. Census Bureau.

Here are the top five predictions of developments we will see in retail in 2015:

1. Luxury retailers continue to thrive. With the lion’s share of income gains going to high earners, luxury retailers are thriving throughout many of the top global markets such as Paris, London, New York and prime cities in Asia. Brands that are rapidly expanding include Netherlands-based Scotch & Soda, Sweden-based H&M and U.S.-based Michael Kors. Scotch & Soda is expanding its online operations and opening new stores in Europe and Asia; H&M is adding 375 stores worldwide; and Michael Kors added 100 stores during the past year, created shops-in-shops and revamped its website.

2. Increased competition for millennials. Retailers have their eyes on the 83 million millennials—those born between 1982 and 2000. This generation, which is larger than the baby boomers, is expected to spend more than $200 billion annually starting in 2017, leaving retailers with the tall task of developing a whole new consumer model that previously had been based on appealing to boomers.

3. Retailers pay top dollar for prime space in core markets. Demand for prime space in core markets is red hot, leading to rent spikes in markets such as Manhattan, San Francisco, Los Angeles and Boston. Despite a decline in capital flows from Canada, cross-border investors have increasingly ramped up their activity in the U.S., with European and Chinese investors emerging as the most active this year. Some retailers either have been squeezed out of prime space in core markets or left with a choice between high-cost prime locations or less-expensive and better-configured “placemaker” space in fringe submarkets.

4. Demand cools in secondary and tertiary markets. Rents are slowly increasing but remain well below peak levels. A growing number of retailers are expanding into secondary and tertiary markets in search of higher yields.

5. Development remains limited. Only 66 million square feet of retail space currently is under construction, a fraction of the historical peak of 258 million square feet in 2006. New supply is focused on in-fill projects in core markets, such as Los Angeles, where nearly 1 million square feet of space is in the pipeline, and Orange County, California, where 600,000 square feet is under construction.

Across the globe, the outlook for retail is promising, led by the ongoing recovery in the United States and growing development in emerging markets. New supply is robust in developing markets in Central and Eastern Europe, the Middle East and parts of Asia, while in developed markets, construction is mostly limited to prime city centers and redevelopment of existing space.

It is important to note that all of this optimism is tempered somewhat by threats to global economic growth and the specter of e-commerce. E-commerce affects both traditional and luxury retailers in all corners of the globe, forcing merchants to become more creative in their use of space. To combat competition from the Internet, retailers are adopting new strategies to lure shoppers, such as using space as a showroom to create an “experiential shopping” environment. The ultimate goal for retailers is to be “everywhere,” 24/7, to increase consumer convenience.

— Anjee Solanki is the national director of Retail Services USA for Colliers International. Solanki has 20 years of retail real estate experience. In her role as national director she provides strategic leadership to more than 400 specialized retail professionals operating across 83 markets to offer brokerage, capital markets and management services.

 

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