ICSC 2014 Tennessee/Kentucky Idea Exchange. The Retailers Strike Back: How Bricks and Mortar Will Survive and Thrive in the Age of E-Commerce

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1 ICSC 2014 Tennessee/Kentucky Idea Exchange The Retailers Strike Back: How Bricks and Mortar Will Survive and Thrive in the Age of E-Commerce Market Knowledge. Insight on Trends. Expert Forecasts.

2 Garrick Brown National Retail Research Director

3 Industrial is on Fire! Occupancy Growth MSF (Q4-12) MSF (Q1-13) MSF (Q2-13) MSF (Q3-13) 20.8 Billion SF Inventory MSF (Q4-13) MSF (Q1-14)

4 2014 Might Break Records Top Five Industrial Occupancy Growth Years USA MSF 1997 MSF Billion SF Inventory 2014 Occupancy Growth Will Likely Reach MSF MSF 2013 MSF 2005 MSF 1998

5 E-Commerce Mega Space

6 Technology Changes Everything

7 The Future According to a Visionary We always overestimate the change that will occur over the next two years and underestimate the change that will occur in the next ten. Bill Gates The Road Ahead 1996

8 The Future According to the Rest of Us I was a peripheral visionary. I could see the future, but only way off to the side. Steven Wright

9 Millions, SF U.S. Shopping Center Development Shopping Center Deliveries Million SF of Shopping Center Space Built in US Shopping Center Development. Source: Cassidy Turley Research, Costar Group

10 The Amazon Effect Amazon Today: 56 Million SF of Distribution Space Throughout the US

11 The Amazon Effect Amazon in 2016: 90 Million SF of Distribution Space Throughout the US

12 Game Changer or Sport Changer? The Race for Same Day Delivery? 20.8 Billion SF Inventory

13 Old Paradigm: A Few Days/A Few Warehouses

14 New Paradigm: Same or Next Day/Lots of Warehouses

15 Approaches to E-Commerce Fulfillment Existing Bricks & Mortar Storefronts Combination E-Commerce/ Distribution Centers 20.8 Billion SF Inventory Segregated E-Commerce Fulfillment Centers

16 Retail Boom in Form of Industrial Space Industrial demand is all about retail demand 20.8 Billion SF Inventory Amazon s Not the Only One Growing.

17 A Quick Case Study CapEx Budget Store Unit Growth E-Commerce as % of CapEx (estimate) 12 Months Ending 2/14 $643,000, % 12 Months Ending 2/13 $785,000, % 20.8 Billion SF Inventory Kohl s Shifted CapEx Budgets Away from Bricks and Mortar to Building E-Commerce Platform and Supply Chain They re NOT the Only One.

18 ($) Millions E-Commerce as Share of Retail $80,000 The Good News? E-Commerce $70,000 Only Accounts for 6.2% of all US Retail Sales $60,000 $50,000 7% 6% 5% $40,000 The Bad News? $30,000 E-Commerce Only Accounts for 6.2% of all US $20,000 Retail Sales $10,000 4% 3% 2% Total E-Commerce $ (millions) % of Total Retail Sales Source: Census Bureau

19 E-Commerce as Share of Retail 16.0% Forecast Online Market Share (excluding groceries, gas & auto) 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% Forecast Online Market Share (excluding groceries, gas & auto) Source: FTI Consulting Source: FTI Consulting

20 Growth in $B Y/Y Change % E-Commerce The Rise of E-Commerce Online vs. Traditional Retail Sales Growth 3,000 20% 2,500 2,000 1,500 1,000 1,877 1,915 2,014 2,105 2,442 15% 10% 5% % % U.S. Retail Retail % Change U.S. Online Retail Online % Change

21 Retail Sales Performance % Change Sales Y-o-Y May 2014 Automotive Non Store Retail Furniture & Home Furnishings Health & Personal Care Restaurants Food & Beverage Clothing & Accessories Grocery Electronics & Appliances General Merchandise Miscellaneous Gas Stations Sporting Goods, Hobby, Book & Music Department Stores Retail (excluding automotive) ALL RETAIL % Change Sales Y-o-Y May Source: Census Bureau

22 What s the Difference? 20.8 Billion SF Inventory Typical Big Box Industrial: Land Cost: $24 PSF/$12 LSF Building Cost: $26 PSF Soft Cost: $20 PSF TOTAL: $70 PSF Rents: +/- $4.20 PSF Annually (So Cal Costs) Source: Ware Malcomb/Panattoni

23 What s the Difference? 20.8 Billion SF Inventory E-Commerce Fulfillment: Land Cost: $20 PSF/$30 LSF Building Cost: $149 PSF Soft Cost: $45 PSF TOTAL: $214 PSF Rents: +/- $12.75 PSF Annually (So Cal Costs) Source: Ware Malcomb/Panattoni

24 Mega Bulk Industrial Market MSF Suitable for Modern Users 20.8 Billion SF Inventory Industrial Development Skyrocketing! Million SF Total Demand Next 3 Years

25 Grim Outlook for Bricks and Mortar Retail? Closing 175 Closing 150 Closing 400 Closing 80 Closing 100+ Closing 30

26 Bad News Keeps on Coming Closing 225 thru 2015 Closing 50 Closing 1,100? Closing 125 Closing 40

27 But Wait There s More Coming Closing 76 Closing 200+ thru 2018 Closing 130 Closing 100 Closing 170 thru 2017

28 Retailer Contraction 2014 Bookstores Video Stores Mid-priced apparel DECLINING Mid-priced grocery (particularly unionized) Office Supplies Stationary/Gift Shops Shipping/Postal Stores And Casual Dining (Older, Struggling Concepts Shrinking) DECLINING

29 So Why is Vacancy Down? Shopping Centers Top 20 All Below 7.0% Vacancy National Shopping Center Vacancy Q (Prelim): 8.4% Q1 2014: 8.5% Q % San Francisco Oakland/East Bay San Jose Santa Barbara Los Angeles Orange County Hawaii Salt Lake City 20.8 Billion SF San Diego Inventory Austin Minneapolis Des Moines Little Rock Boston New York City Pittsburgh North New Jersey Baltimore Washington DC Miami Source: Costar Analytics/ Cassidy Turley Research

30 Shopping Center Vacancy Q (Prelim) USA Vacancy Rankings Top 20 Rank Market Q2 14 Q2 13 Rank Market Q2 14 Q San Francisco 2.9% 3.5% 11. Los Angeles 5.6% 6.1% 2. Hawaii 3.2% 4.4% 12. Baltimore 6.3% 6.7% 3. San Jose 4.4% 5.6% 13. Austin 6.4% 6.9% 4. Pittsburgh 4.7% 5.2% 14. Salt Lake City 6.4% 5.7% 5. NYC Metro 4.7% 5.1% 15. Des Moines 6.5% 6.4% 6. Oakland/East Bay 5.2% 6.4% 16. Miami 6.6% 6.9% 7. Washington DC 5.2% 5.7% 17. San Diego 6.6% 6.8% 8. Boston 5.3% 5.4% 18. Little Rock 6.7% 7.0% 9. Orange County 5.6% 6.3% 19. N. New Jersey 6.7% 7.0% 10. Santa Barbara 5.6% 6.1% 20. Minneapolis 6.8% 7.1% Source: Costar Analytics/ Cassidy Turley Research

31 Shopping Center Vacancy Q (Prelim) USA Vacancy Rankings 21 thru 40 Rank Market Q2 14 Q2 13 Rank Market Q2 14 Q Raleigh/Durham 7.0% 7.3% 31. New Orleans 8.0% 7.9% 22. Seattle 7.4% 7.5% 32. Tulsa 8.1% 8.4% 23. Denver 7.4% 7.8% 33. Richmond 8.1% 8.5% 24. San Antonio 7.6% 7.8% 34. Louisville 8.2% 8.9% 25. Portland 7.6% 7.7% 35. Tampa 8.7% 9.7% 26. Philadelphia 7.7% 8.0% 36. Omaha 9.1% 10.3% 27. Charleston 7.8% 7.9% 37. Albuquerque 9.1% 9.9% 28. Houston 7.8% 8.6% 38. Orlando 9.1% 10.0% 29. Tucson 7.9% 8.9% 39. Dallas 9.6% 10.2% 30. Hampton Roads 7.9% 8.5% 40. Charlotte 9.6% 9.6% Source: Costar Analytics/ Cassidy Turley Research

32 Shopping Center Vacancy Q (Prelim) USA Vacancy Rankings 41 thru 60 Rank Market Q2 14 Q2 13 Rank Market Q2 14 Q Nashville 9.9% 10.9% 51. Cincinnati 11.3% 12.1% 42. Indianapolis 9.9% 10.1% 52. Atlanta 11.4% 12.4% 43. Oklahoma City 10.1% 10.6% 53. Detroit 11.5% 12.1% 44. Inland Empire 10.1% 10.7% 54. Birmingham 11.7% 12.1% 45. Milwaukee 10.2% 10.6% 55. Sacramento 11.8% 12.3% 46. Kansas City 10.3% 10.1% 56. Las Vegas 12.0% 12.1% 47. Jacksonville 10.5% 10.6% 57. Phoenix 12.0% 12.7% 48. St. Louis 10.6% 11.1% 58. Cleveland 12.1% 12.5% 49. Chicago 10.7% 9.9% 59. Memphis 13.6% 13.7% 40. Mobile 10.7% 9.7% 60. Reno 14.8% 14.5% Source: Costar Analytics/ Cassidy Turley Research

33 Top Rents Growing Rapidly Rent Growth MSA s in the US Seattle Portland Salt Lake City Sacramento Reno Denver San Francisco East Bay San Jose Los Angeles Orange County Inland Empire 20.8 Billion SF San Diego Inventory Greater than 10% Growth Las Vegas Phoenix Austin San Antonio Minneapolis Milwaukee Detroit Boston Chicago Cleveland Hartford Columbus Pittsburgh New York City Kansas City Indianapolis New Jersey St Louis Philadelphia Cincinnati Louisville Washington DC Nashville Raleigh Oklahoma City Atlanta Charlotte Dallas New Orleans Houston Tampa Jacksonville Orlando Miami 5% - 10% Growth Source: Costar Analytics/ Cassidy Turley Research

34 Shopping Center Absorption Q Q Growth: 750k sf+ last 12 months Detroit 1.3m Boston 1.1m Sacramento 1m San Jose 784k LA Inland 20.8 Billion SF Empire 2.3m 1.3m Inventory 823k 1.2m Phoenix Orange County Denver 1.4m Dallas 2.5m St Louis 1m Atlanta 2.6m Cincinnati 805k Cleveland 793k Northern New Jersey 1.3m Philadelphia 1.1m Washington DC 1.8m San Antonio 1.0m Houston 2.5m Tampa 1.3m Orlando 940k Source: Costar Analytics/ Cassidy Turley Research

35 Top Center Rents Q (Prelim) USA Top Rents Rank Market Top Rents Rank Market Top Rents 1. Hawaii $ San Diego $ Los Angeles $ Chicago $ NYC Metro $ Oakland/East Bay $ Orange County $ Dallas $ San Francisco $ Las Vegas $ Boston $ Houston $ Miami $ Northern New Jersey $ San Jose $ Seattle $ Washington DC $ Atlanta $ Miami $ Austin $30+ Source: Costar Analytics/ Cassidy Turley Research

36 Top Center Rents Q (Prelim) USA Top Rents (continued) Rank Market Top Rents Rank Market Top Rents 21. Indianapolis $ Reno $ Nashville $ St. Louis $ Tucson $ Birmingham $ Jacksonville $ Omaha $ Minneapolis $ Pittsburgh $ Milwaukee $ Santa Barbara $ Raleigh/Durham $ Oklahoma City $ Richmond $ Des Moines $ Louisville $ Little Rock $ New Orleans $ Mobile $18+ Source: Costar Analytics/ Cassidy Turley Research

37 Top Center Rents Q (Prelim) USA Top Rents (continued) Rank Market Top Rents Rank Market Top Rents 41. Baltimore $ Detroit $ Denver $ Orlando $ Inland Empire $ Charleston $ Kansas City $ Salt Lake City $ Sacramento $ San Antonio $ Philadelphia $ Tampa $ Phoenix $ Albuquerque $ Sacramento $ Cincinnati $ Portland $ Cleveland $ Charlotte $ Hampton Roads $24+ Source: Costar Analytics/ Cassidy Turley Research

38 The Rising Tide Lifts All Boats? 20.8 Billion SF Inventory

39 Nope Divide in Rents Growing

40 Shopping Center Rent Growth (ALL) Rent Growth MSA s in the US Seattle Portland Minneapolis Omaha Milwaukee Chicago Detroit New York City Cleveland Salt Lake City Indianapolis Pittsburgh Northern New Jersey Denver Kansas City Sacramento Reno St Louis Cincinnati Baltimore Philadelphia San Francisco Oakland Louisville Washington DC San Jose Las Vegas Nashville Albuquerque Richmond Tulsa Memphis Raleigh Los Angeles Inland Empire 20.8 Billion SF Oklahoma Little Rock Atlanta Charlotte Phoenix Orange County City Charleston San Diego Inventory Tucson Dallas Hawaii New Orleans Austin Jacksonville Houston San Antonio Orlando Tampa Boston Greater than 10% Growth 5% to 10% Growth 0% to 5% Growth 0% to -5% Growth Miami Source: Costar Analytics/ Cassidy Turley Research

41 Trends for Landlords 20.8 Billion SF Inventory Rising Tide Not Lifting All Boats Acceleration of Class Bifurcation Growth slowing in initial recovery markets because of lack of quality space Accelerated growth in secondary markets for quality space Skyrocketing rents for quality

42 The Moral of the Story? BE CLASS A!!! BE CLASS A!!! BE CLASS A!!! 20.8 Billion SF Inventory

43 The Three Types of Malls 1. Trophies 20.8 Billion SF Inventory

44 The Three Types of Malls 1. Trophies 2. Trannies (Transitional) 20.8 Billion SF Inventory

45 The Three Types of Malls 1. Trophies 2. Trannies (Transitional) 3. Terminal (Wrecking Ball) 20.8 Billion SF Inventory

46 What Does it Mean for Shopping Centers? New Shopping Center have More: Food-Related Service-Oriented Entertainment Mixed-use Blending of Formats Retailers Are Looking For The Sure Thing Landlords Need to Deliver it!

47 Feeling Better in the Neighborhood Largely Business as Usual for Neighborhood Centers Grocery/Drug Anchors Less Impacted by E-Commerce 20.8 Billion SF Inventory Core Tenancy: Drug/Grocery (E-Commerce Immune So Far) Restaurants Service Mom-and-Pop (Coming Back Slowly W/Home Values)

48 Power Centers Adapting 20.8 Billion SF Inventory The New Power Center: Beefed Up Food Presence (Walmart/Target Superstore Anchors Bulletproof) Smaller Boxes/More Discounters Restaurant/Service Concepts Tenant Mix Exploits Regional and Neighborhood Draws

49 But Who is Still Growing? Planned Unit Growth by Retail Sector (Next 12 Months) 17,208 42% 15,935 The retail marketplace will change more in the next 5 years than it has in the past 20 E-Commerce is radically impacting who is growing 3,437 1,655 1,052 1, Restaurant Other Apparel Dollar Home Grocery Drug

50 Retailer Growth 2014 Grocery (Smaller Format Concepts) Discount/Ethnic/Organic/Upscale Pet Supplies Fast Food/Fast Casual Upscale Dining Fitness/Health/Spa Concepts Medical Automotive Parts & Services 20.8 Billion SF Inventory Thrift/Dollar Stores Arts and Crafts Stores Furniture/Mattress Stores Drug Stores Off-Price Apparel Luxury Apparel/Accessories Children s Apparel Sporting Goods Wireless Stores Banks

51 Growth Still Impacted by Economics Growth 2014 Growth at the far ends of economic spectrum o Luxury retailers are back o Discounters exploding o Mid-Priced retailers shrinking (mostly)

52 Increasingly Impacted by E-Commerce Growth 2014 Retailers NOT competing with online sales o Restaurants o Grocery/Food Related o Service Related

53 What Are They Looking For? Fewer Rooftops to follow Stage One of Recovery ( ) Good Future Growth Prospects Growing Retailers Looking for Sure Things High Density Population Higher Levels of Jobs Higher Levels of Income

54 What Are They Looking For? More Rooftops to follow Stage Two of Recovery (2014?) Slightly More Risk Tolerance Growing Retailers Looking for Sure Things Still Higher Density Population Cheaper Rents Secondary and Tertiary Markets Still Higher Levels of Income

55 Class More Important Than Ever Stay Classy Class A Everywhere Class B Demand spilling over in stronger markets Class C Mom and Pops Bottom Feeders

56 The Bad News for Bricks and Mortar Retailers shrinking footprints Twilight of the big boxes Sharp contraction among segments with heavy e-commerce competition o Office supplies o Consumer electronics o Bookstores, toys Negative to flat growth o Mid-priced hard goods, apparel

57 What s it All Mean? Have/Have Nots CLASS A Winners, Losers And Not a Lot in the Middle CLASS B Greater Bifurcation Between Classes CLASS C

58 Something to Consider Opening 700 Opening 400 Over the past three years Dollar Stores have opened more than 1,800 units per year on average ONE EVERY 4.8 HOURS Opening 340 Opening 60 Opening 35

59 Coming to an End? Is Market Saturation Finally at Hand? In April reduced planned store openings from 600 to 400 Announced plans to close 370 stores

60 Something Else to Consider US Food Expenditures Food Sales ($ Billions) Thru March 2014 At Home Away From Home Percent Change From Previous Year At Home Away From Home

61 What About Restaurants? Restaurants have accounted for more than 40% of all unit growth in US since 2010 But is the pie big enough? Are we due for consolidation?

62 Will the Cavalry Come in Time?

63 Will the Middle Class Consumer Return?

64 Home Prices Still Gaining Y-o-Y Gains in Median List Price April 2013 vs April 2014 Portland +8% Minneapolis +8% Detroit +17% Salt Lake City Reno +25% Sacramento +20% Denver +24% Chicago +19% Indianapolis +7% New York City +6% San Francisco +7% Los Angeles +7% Orange San County+8% Diego +14% Las Vegas +24% 20.8 Inland Billion Empire +20% SF Inventory Phoenix +9% Tucson +9% Houston +18% San Antonio +11% Kansas City +9% Oklahoma City +9% Houston +19% Atlanta +13% Orlando +10% Nashville +10% Charlotte +8% Orlando +11% Miami +7% Washington DC+7% Source: National Association of Realtors/ Cassidy Turley Research

65 Return of the Wealth Effect A one dollar increase in housing wealth increases consumption 9 cents Consumer Wealth and A Changing Wealth Effect, Wells Fargo Economics Group = Source: Cassidy Turley Research/Wells Fargo Economists

66 Income Growth Slowly Kicking In $ Billions $15,000 Income Growth Slowly Improving 3.0% $14, % $14, % 0.0% $13, % $13,000 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q % Personal Income ($ Billions) Quarterly Change

67 Retailers Strike Back: The New Paradigm Experience Shopping Bricks OMNI CHANNEL E-commerce Clicks Convenience

68 Omni-Channel Website to Drive Customers to Stores Store experience to drive customers back to website

69 Focus on Demographic Shifts 1. Millennials 2. Boomers 3. Hispanics

70 Demographic Shifts Gen-X Nobody Loves You

71 Boomers vs. Millennials 24% Population by Generation 12% Greatest Generation Boomers Millennials: 77 Million 24% 24% Generation X Millennials Boomers: 77 Million 16% Generation Z Source: Nielsen

72 % of internet users Boomers vs. Millennials 81% 83% 81% Boomer Internet Users (Ages 46-64) 70% 68% Millennials (Ages 18-29) 62% 55% 58% 27% 26% Research Products Buy Goods Travel Reservations Banking Auction Source: Pew Internet & American Life Project: Baby Boomers In The Digital Age, by Lee Rainie, 3/10

73 Demographic Shifts Ethnicity as % of U.S. Population White/Non-Hispanic Asian Black Hispanic Hispanic Population Doubles by 2050 Source: Census Bureau

74 Demographic Shifts Ethnicity Growth Through 2050 Asian 142% Growth Hispanic 167% Growth Latinos Make Up 20% of All Youth in US However Their Share is Much Higher in Many States New Mexico 51% California 42% Texas 40% Arizona 36% Nevada 31% Colorado 24% Florida 24% Source: Nielsen

75 ($) Billions The Emerging Hispanic Consumer $2,000 Hispanic Buying Power $1,500 $1,000 $500 $ Source: Selig Center for Economic Growth, University of Georgia--Athens

76 Experiential Retail Make Shopping Centers the Center of the Community Movies Concerts Fashion Shows DIY Workshops Cooking Demos Wine/Food Events Yoga/Fitness

77 Retailers Adapting Experiential Retailing Interactive Displays More Store Events

78 In-Store Tech Experience Retail Kiosks for Ordering Goods Online In-Store Digital Touch Screens In-Store Remote Control/M-Phone Purchasing

79 Landlords/Retailers Adapting Look for More Retailers Using Bricks and Mortar as Online Showroom Space Creative Use of Vacant Space Storefront Windows More Online Retailers Going Bricks and Mortar Bonobos Art.com Google?

80 The M-Commerce Wave and Beacon Technologies Tracking Consumer Behavior on Smartphones Offering Free Wi-Fi and tracking it

81 The Future is Now

82 Renewed Emphasis on Customer Service Shopping is about experience. Ignore at your own peril

83 Get On My Mailing List! Thank You! Garrick Brown Research Director Cassidy Turley