Retail N Illinois

This ain’t no apocalypse: Why retail is morphing, not moribund

It was a packed house for the 10th annual Chicagoland Retail & Mixed-Use Conference. It was a packed house for the 10th annual Chicagoland Retail & Mixed-Use Conference.
Pictured from left to right: James Schutter of Newmark Knight Frank, Deena Zimmerman of SVN Chicago Commercial, Matt Hendy of Regency Centers, Robert Karr of Illinois Retailers Merchant Association, Drew McElligott of Horvath & Tremblay and Keith Lord of The Lord Companies. Pictured from left to right: James Schutter of Newmark Knight Frank, Deena Zimmerman of SVN Chicago Commercial, Matt Hendy of Regency Centers, Robert Karr of Illinois Retailers Merchant Association, Drew McElligott of Horvath & Tremblay and Keith Lord of The Lord Companies.
Pictured from left to right: Keith Campbell of CallisonRTKL, Sean McCarthy of Comcast, Kevin Hynes of O’Keefe, Lyons & Hynes, Ellie Whitlock of CIBC, Dan Hanson of Mid-America Asset Management and Lisa Skolnik of Intralink Global. Pictured from left to right: Keith Campbell of CallisonRTKL, Sean McCarthy of Comcast, Kevin Hynes of O’Keefe, Lyons & Hynes, Ellie Whitlock of CIBC, Dan Hanson of Mid-America Asset Management and Lisa Skolnik of Intralink Global.

Every day, another retailer downsizes, closes locations or closes for good. While this has led some to decry the sector all but dead, they are likely ignoring the vast opportunities populating what is arguably a very dynamic asset class.

Yes, e-commerce has drastically disrupted the shopping landscape of years past, but brick-and-mortar retail is going in new directions, not to an early grave. That was the message delivered at yesterday’s 10th annual Chicagoland Retail & Mixed-Use Conference.

The first panel, moderated by Keith Lord, president and managing partner, The Lord Companies, looked at the current state of the retail market, from investment and development climate to the tenants that are actually signing new leases.

“As a retail brokerage, we are morphing. I remember years ago when I bought a Pier One sale-leaseback portfolio. That will probably never happen again,” said Drew McElligott, senior vice president, Horvath & Tremblay. “In single-tenant, net-lease, there are a lot of passive investors. You have to be active. You have to know what your lease says.”

Many younger demographics still want to go to physical stores because they want to touch and feel the product, or they want to post to social media. That foot traffic is leading to in-store sales.

The retailers finding the most success are those that have found a way to bridge their digital and real world presences. Mid-tier department store chain Kohl’s struck gold by partnering with Amazon to offer item returning drop-off centers in their stores. Those who come in to use this service are more likely to browse the racks.

“The most recent Kohl’s numbers are up 10 to 12 percent,” said Matt Hendy, vice president, market officer, Regency Centers. “They tested this in the Chicago market before going nationwide over the last few quarters, and they have real trackable sales when there is extra dwell time.”

The large, destination mall was the retail disruptor of decades ago, but now they are struggling to maintain tenants. This is one segment of the sector that is truly dying. Those malls that do survive in the long term will be those that divert dramatically from their current course. This means more mixed-use programming but even the scope of what that means is widening.

“The days of looking at certain entities like Macy’s or Sears to anchor a mall are gone,” said Robert Karr, president and CEO, Illinois Retailers Merchant Association. “It used to be anathema to anchor a mall with a grocery store but now you would. I think we will start to see medical programs and other mixed-use. It will be a combination of things; I wouldn’t be surprised to see expansion of schools into malls.”

There are other segments that have witnessed a serious upending of the status quo since the end of the recession.

“If you look back 10 years ago, everyone was trying to do drug store deals,” said James Schutter, senior managing director, Newmark Knight Frank. “But Walgreens got rid of their real estate department. Drug stores are reinventing themselves for today’s marketplace.”

However, the panel struck a mostly optimistic tone. The opportunities are out there for those willing to do the work and find them.

“This is the most exciting time to be in retail. More consumers are going from clicks to bricks because retailers are becoming more nimble,” said Deena Zimmerman, vice president and national retail council co-chair, SVN Chicago Commercial. “DSW launched a program where if you go to the rear of the store they have a nail salon. So you can go in for shoes and also to get a mani pedi.”

The second panel, which Lisa Skolnik, senior vice president and chief content officer at Intralink Global moderated, dove into the development, construction, financing and management trends in both retail and mixed-use. What are the design trends? What does the financing landscape look like? What challenges do property managers face?

“Where relevant, we activate the common area as much as possible. We push couponing that tis tied to Wi-Fi, for example, so you have to physically be there,” said Dan Hanson, principal, Mid-America Asset Management. “Millennials and Gen Z are willing to loiter. We want that—there is a positive correlation with people sticking around, though it is difficult to evaluate the ROI.”

One aspect of retail design is making the space flexible enough to serve second- and third-generation tenants, not just the user looking at the space right then. This could mean not pouring a rising, concrete base for stadium seating in a movie theater, for example, so the space could serve a different type of tenant in the future.

“For redevelopments, what we try to achieve is diversity of program uses because we want to extend the activity cycle,” said Keith Campbell, AIA, OAA, LEED AP, NCARB, vice president, CallisonRTKL. Campbell recently provided deeper insights into what is driving the retail sector today.

In terms of financing, the situation may not be as rosy as the first panel suggests. One issue is that the new, alternative retailers filling locations—operations such as axe-throwing bars or escape rooms—aren’t backed by reliable credit.

“We are definitely seeing a slowdown in retail transactions in general,” said Ellie Whitlock, managing director, commercial real estate, CIBC. “Our retail book is down from what we historically held and the pipeline of retail is even less. Also, we are also seeing some traditional retail developers going into other lines.”

Another obstacle that those in the trenches face is the new assessment climate in Cook County following Fritz Kaegi’s election. According to Kevin Hynes, member, O’Keefe, Lyons & Hynes, there remains some uncertainty in the market.

“What I hear from clients is that they are going to sit out for a while and see how things shake out,” Hynes said. “What I’m afraid of is a collision of budgetary needs of various districts and the ultimate assessed values. It’s not going to be a pretty picture. It won’t be a 100 percent increase, but it also won’t be 5 percent increase.”