ICSC Research: Shopping centers performing well even as they undergo profound evolution

NEW YORK, 2014-10-15— /EPR Retail News/ —  Shopping centers are performing well even as they undergo a profound evolution, according to a report by ICSC Research. “The shopping center industry is currently vibrant and healthy,” writes Michael P. Kercheval, ICSC’s president and CEO, in the introduction to Shopping Centers: America’s First and Foremost Marketplace. “We believe [the industry] is poised for unprecedented success going forward — not in spite of e-commerce, but because of it.”

The 18-page report, available at ICSC.org, blends statistical data with big-picture analysis by a host of observers. And the big picture is quite encouraging, they note. With new supply in America’s developed markets growing at its slowest pace in some 40 years in 2013, the relative lack of shopping center construction is restoring the supply-demand balance and helping to shore up occupancy rates. New tenants are likely to lease even more space in the U.S. over the next two years as retailers open an estimated 77,000 stores — a five-year high. Other positive trends include rising demand driven by population growth; the opportunity to tailor tenant mix to meet the needs of increasingly important demographic groups such as Hispanics and Millennials; growing interest in brick-and-mortar space among formerly online-only retailers such as Athleta, Bonobos, Boston Proper and Warby Parker; and the successful efforts of landlords to broaden the appeal of their shopping centers, in part by means of a creative tenant mix.

Given the ubiquitous story line that e-commerce is killing brick-and-mortar retail, the assertion that online sales could actually help the industry might seem counterintuitive. But precisely because online retail offers such an easy and convenient way to buy commoditized goods, its popularity has forced developers to think harder about how to create high-energy experiences at their properties, according to Mark Toro, a partner at North American Properties who heads the firm’s Atlanta office. The effect of all this is a paradigm shift that will strengthen the industry, Toro says. “Back in the day when shopping centers were being built in every suburb, all you had to do was line up the retailers and provide convenient and easy access, and people would come shop,” Toro said. “We have turned that on its head now: Instead of providing the most convenient, quickest way to shop, we’re providing guests with a place to be, which extends dwell times.”

Owners of the larger regional centers will continue to focus on the experiential dimension by adding restaurants, entertainment features, lively outdoor space and the like, the report says, while neighborhood centers, by contrast, are likely to keep leveraging convenience factors.

In-store conversion rates continue to be four times higher than online-only conversion rates, the report authors point out. “Consumers still prefer in-store shopping. Ninety-four percent of total retail spending happens within the four walls of a physical store,” the report says. (In 2013 online retail sales came to some $263 billion, which accounts for only 6 percent of total retail sales, according to the U.S. Commerce Department. In-store sales, meanwhile, accounted for the rest, totaling some $4.3 trillion.)

Meanwhile, investors show confidence. Retail REITs, in particular, have maintained strong property performance amid the challenges of the Internet age, thanks largely to savvy management, observers say. “The REIT industry as a whole has produced returns averaging nearly 11 percent per year for more than 20 years, and yet retail REITs have produced returns averaging 11.82 percent per year — even better than an industry that has done very well overall,” said Brad Case, senior vice president of research and industry information at NAREIT. Annual returns for institutionally owned (i.e., non-REIT) retail properties on an unlevered basis, he says, have averaged 8.65 percent.

Click here for the whole report.