S.E.C. Real Estate Observer

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We hear it every day—retail is dying, the internet will make shopping centers obsolete. But is that reality, or is it something that those that do not know retail are saying to hear themselves talk? Is retail dead—or evolving? I would say the latter. But, now more than ever before, successful retail must have a purpose. And the purpose in today’s retail development is as a gathering place and entertainment, not shopping. If we take care of getting the people together, especially millennials, the shopping will take care of itself. Remember, only about 8.5% of retail sales are online. And a lot of that is to procure hard to find items in addition to a lower price.

John Maynard Keynes, the British economist in the early 20th century, basically believed that 1 + 1 = 2. If the whole was 2 and if each of us had 1, then that represented the entire amount. But if you got 75% of the whole, all I could get was 25%. Keynes also believed government intervention was necessary for economic stability.

Joseph Schumpeter, an Austrian American economist born in 1883, coined the term “Creative Destruction” and used it to define the messy way that capitalism delivers new markets and market growth. Schumpeter believed that 1 + 1 could equal 3 if the market was allowed to evolve. He did not believe in government protection. The term Creative Destruction is relevant today in describing the retail market.

A prime example (pardon the pun) today is the fact that internet giant Amazon is buying brick-and-mortar grocer Whole Foods. If grocery stores were becoming a thing of the past, why would Internet-savvy Amazon buy this traditional grocery store? Amazon is paying $13.7 billion for outstanding real estate in upscale markets that will change the way we shop. The deal could give Amazon access to nearly 500 stores that it can use for distribution, returns, warehouses, or showrooms. This is retail, folks. The potential reverberations of Amazon’s acquisition of Whole Foods include lower grocery prices, faster automation, a place for Amazon to experiment with checkout with cell phones or other automation, and so on. The share price of Kroger dropped by 9% the day Amazon announced the acquisition. Wal-Mart has basically quit expanding while trying to assess the current market. Hank Williams Jr.’s song that says “fax me a beer” is not here yet.

Nick Egelanian teaches real estate development at the University of Maryland and is a faculty member at ICSC’s University of Shopping Centers in Philadelphia and the Riordan School in Miami. A recent quote from Nick about why he loves studying the retail market was, “If you add it all up, it’s really because it is a fascinating business. You have to know a little bit about construction. You have to know a little bit about finance. You have to know a lot about geography. You have to know a little bit about human behavior. Then you have to be able to change what you know about it every day.” This is what is going on in commercial retail real estate today.

Egelanian states that we are nearing the end of a 30-year process of “deconstructing the department store.” The sales volume of department stores has gone from $400 million to less than $100 million over the past 30 years. The economic model that was used to create over 3,000 malls in the 1960s and 1970s does not work anymore. J.C. Penney and Sears are not relevant in today’s environment. So what is going to happen to this prime real estate? It will be repurposed. Witness the fate of Valley View Mall in Dallas. Valley View is located on the corner of Preston Road, dubbed as a “golden retail arterial,” and LBJ Freeway, the main inner loop in Dallas. It is an excellent location. Beck Ventures has purchased the 400-acre tract and is developing a $4 billion mixed-use project of office, apartments, a hotel, and yes, 400,000 square feet of retail. Creative Destruction (reconstruction) of an awesome property.

Tell Yaromir Steiner and his partners that retail is dead. The owners of Easton Town Center, the award-winning mixed-use property in Columbus, Ohio, are spending $26 million to remodel one building in Easton: the Station Building. And Easton is adding 40 new or expanded retailers and restaurants in the center in 2017 alone. Annual sales at Easton have grown to over $1 billion with restaurants accounting for over $100 million of that number. This puts Easton in the highest ten restaurant venues in the nation.

According to CoStar Group, 2,300 new neighborhood shopping centers and strip centers have been built since 2010. That brings the total to over 114,000. A lot of these centers are in Texas, where we continue to expand and gain new population from other parts of the US and the world.

Restaurants, especially fast casual restaurants, have had a tough couple of years. Some of the old iconic names like Day Star’s Lone Star Steakhouse and Saloon and Texas Land and Cattle, which has gone from over 100 locations to less than 30, are suffering. Several chains that were previously very successful have declared bankruptcy. But others are doing well. Darden comes to mind. Darden just agreed to buy Cheddar’s Scratch Kitchen for $780 million. What about Panera Bread, which is being acquired by JAB for $7.5 billion?

Sporting goods retailer Gander Mountain has declared bankruptcy. I personally think this is an unintended consequence of Trump being elected instead of Clinton. The market no longer perceives that it needs to be buying guns and ammo in anticipation of our government legislating the Second Amendment out of existence.

A change that is not over yet is America’s newfound taste for beer. But not just any beer—craft beer, especially if it is brewed on site and the bar offers many selections. I was recently with the chief financial officer of a major distributor of one of the largest beers in the world. When I asked him about the craft beer craze, he described it as “death by a thousand cuts.” Maybe so, but the craft breweries get more per glass, they often do not have costs of distribution, and they also sell a lot of food. The number of craft breweries has quadrupled from 1,409 in 2006 to over 5,200 in 2016. That is a great growth curve, and straight up. Craft breweries accounted for over 10 million square feet of absorption in 2016. We can partially thank the millennials for this change.

Retail mega-giants like Best Buy no longer want to restrict uses like gyms, theaters, and grocery stores from the venues where they are considering stores. They are starting to realize that uses like LA Fitness, Alamo Drafthouse, and Cinepolis Theaters bring plenty of people to the centers, and that means traffic for their stores also.

A great draw is the Apple retail stores. They are jammed from opening to the time they close. How about an ice cream or yogurt store next to Apple? Or Snuffer’s, with its large patio and free internet?

We are seeing the revival of hacky sack ball courts in upscale centers.  =It  does not bring in revenue, but it results in people. Customers can have that little ball in their cargo pockets and will spend hours playing with it. If you eavesdrop on their conversations, many times you will hear them talking about how to solve projects at work. Many millennials do not observe typical work hours. To some extent, they are like the baby boomers; they are thinking about work all the time. So accommodate them. Remember, they are going to be around many years after all the baby boomers are dead and gone!

Chess tables and other amenities are in many new centers. The old model of a sea of concrete parking is quickly ending. In order for an existing center to compete, it is going to have to be upgraded and updated, both in retail offerings and in amenities.

Two high-end centers in DFW, Southlake Town Square and Edwards Ranch, have added Tesla dealerships to their lineups. We would not have ever considered an auto dealership next to Neiman Marcus in the past, but that is what is happening at Edwards Ranch. By the way, Edwards Ranch is a joint venture of the Edwards family and Simon Malls. Simon is embracing the new model.

Don’t fall for the story that retail is dead—but it is certainly evolving. Adopt a growth mindset instead of a fixed mindset, as stated by Camp Fire. The next time you find yourself saying something about how you are not good at accounting, writing, talking to strangers, selling, running, or insert your challenge here, consider adding the word “yet.”  A fixed mindset is the belief that one’s abilities stay the same and can’t be changed. A growth mindset is the belief that one’s abilities can grow and change. We have to change our mindset to really know and appreciate the new retail model.

Sound like Creative Destruction? Focus on the “creative” part.