UCLA Retail Forecast: Change or Close-Up Shop
Written by Peter Strauss of Iconic Investments
On September 27, Iconic Investments attended the quarterly UCLA Economic Forecast. The topic of this forecast was “The Death and Life of Retail in America.” Most of you who own apartment buildings are probably wondering if the fate of retail will affect your properties. Pay attention--it does!
Most of the new luxury apartment buildings underway in urban areas of Los Angeles have a retail component to them. In fact, in Koreatown there are 40-plus properties either under construction or planned with more than 460,000 square feet of retail space. Developers of these properties will try to bring in high-end retailers -- such as yoga studios, wine bars and restaurants -- that will directly appeal to their target tenants.
New retail will have a positive impact on the existing occupancy, as tenants will now have access to these amenities. In turn, new retail will exert positive pressure on rents and property values because tenants will pay more for the improved walkability. But what kind of retail will win over shoppers and tenants? Will developers be able to fill 460,000 square feet of retail space in Koreatown alone?
Before I get into the topic of the future of retail and e-commerce, here are some of the general economic observations from the third-quarter Economist Forecast:
Labor Markets are Tight
David Shulman, senior economist at UCLA Anderson Forecast, told attendees that the wrangling in Washington is currently irrelevant to the economy. While Congress battles over tax and healthcare reforms, the GDP continues to chug along with a 2.00-2.50% growth rate. Consumption, capital spending and housing are growing modestly.
The U.S. unemployment rate has bottomed out at 4 percent, Schulman said. This is a tight labor market, and the U.S is running out of workers. Companies, like Target, are increasing wages from $10 to $11 per hour to attract new workers.
Further, the $200 billion in stimulus from the hurricanes will increase wages and inflation, causing the Fed to continue on the path of interest rate normalization.
Schulman’s GDP Forecast? 3% growth beginning in early 2018, assuming tax cuts and hurricane rebuilding. He expects the economy to slow in 2019.
Major Shifts in Job Markets
Over the last two decades, the U.S. lost 6 million manufacturing jobs — the greatest decline starting in 2001, said William Yu, economist at UCLA Anderson Forecast. With the rise of online retailers, e.g. Amazon, he said, the brick-and-mortar retail industry has hobbled over the past decade. The disruptive trend will continue in the future. Therefore, retail may be the next sector to experience massive employment declines.
Yu considered LA’s competitiveness now that Amazon has released its RFP for its second huge headquarters. He said L.A. meets most of the online retailer's criteria for a “Successful City”: stable and business friendly, access to human capital, quality of life, access to mass transit, 30 miles to population center and 45 minutes to airport. It does not, however, have the housing affordability that Amazon seeks. (Housing prices in Seattle skyrocketed due to Amazon's growth.)
When it came to the retail portion of the forecast, the outlook was mixed. Leading retail and retail property executives said the future of retail real estate was bright but only for those who were willing to follow consumer trends and re-invest in their properties.
Traditional Retailers Getting Swept Away
Keynote speaker Gary Schoenfeld, former CEO of Pac Suns and Vans, called the disruption and change happening in the retail market a “retail tsunami.” Why now? The birth of the IPhone in 2007 created the fourth industrial revolution, giving consumers 24/7 connectivity to the power of e-commerce. The smart phone facilitated the biggest change to retail as it provided the consumer with variety, efficiency, excellent pricing, speed and easy access to a wide range of products and services. Amazon alone accounts for one-third of all online sales. By 2020, Amazon sales are expected to surpass the combination of all regional malls in the U.S. Here are some of Schoenfeld’s other insights:
- Class B and C malls with retail sales of less that $500 per square foot and low-quality tenants will fail. These malls will be repurposed and redeveloped. Westfield for example is planning to redevelop the Promenade Mall in Woodland Hills into 1,400 apartment units, a 28-story office tower and a 15,000-seat stadium.
- Lack of reinvestment in B and C malls and the rise of Amazon are the main reasons for the demise of these properties. No value or experience has been created for the consumer.
- The next 12-36 months will determine which retailers will survive and which will fail. In order to survive, customers must “love" not “like” the retailer’s products. They must offer an assortment, experience, knowledge or innovation that can’t be offered through e-commerce.
- Retailers who aggregate other brands --- like department stores ---will find it harder to be competitive. Discount stores like Costco and Walmart, on the other hand, will continue to succeed.
Follow the Brands
Despite all the negative sentiment about the future of retail in the United States, forecast panelist Art Coppola, chairman & CEO of Macerich -- one of the five largest mall owners in the U.S. -- offered a rosier outlook.
Now, it is not surprising that the CEO of a publicly traded REIT probably wouldn’t tell the UCLA audience that the sky is falling for retail. But Coppola believes that, despite the explosion of online sales, traditional retail will survive and thrive because people still want to get out of their houses and have a destination where they can be social. The growth in retail in the near term, he said, will be in brands. “This is a great time for brands to be born,” said Coppola.
He sees more brands leaving department stores and opening their own locations. Meanwhile, many brands that started by building a huge community online -- consider eyewear sensation Warby Parker, for example -- will continue to open brick and mortar locations and drive traffic to their retail stores.
Coppola agrees that the future for better retail malls is promising. He noted that REITS like Westfield, Macerich and Simon have sold off their less attractive assets, keeping only the A-location malls. Mall operators like Westfiled are spending up to $1 billion dollars on any one mall to create an entertainment center.
So what does all this mean for the luxury apartment building developers in Downtown L.A., Koreatown and Hollywood? When filling your retail space, think brands and think out-of-the box. The economy is relatively strong today and tenants want to shop. But, when they can buy most products and services right from their smart phones, the challenge will be to find retail concepts that add an experience consumers can not get online.
Peter Strauss is co-founder of Iconic Investments, a commercial real estate brokerage firm focusing on multi-family (apartment) buildings within the Los Angeles MSA. Iconic represents apartment building owners with the sale of their investment properties.
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