One of the Most Rapidly Expanding Grocery Sectors

A Community Pillar

Asian supermarkets provide their community with a place to shop and find products of their homeland. Their specialty ingredients, fresh produce, fish, meats, and prepared foods can conjure vivid memories of beloved traditions and cuisine for customers. These markets have deep cultural roots, started by Asian Americans who saw a void to fill and an opportunity to provide for the heart of the community. For many new immigrants, they are a welcome taste of home and serve as a pillar for their communities in a foreign land.

X Team Retail Advisors members in Irvine, California, and Charlotte, North Carolina, assessed the most successful Asian grocery chains operating in their regions serving their communities and others. Today’s Asian supermarkets are jockeying for the same anchor spaces as the largest conventional grocery store. Asian grocery stores are enjoying demand from the younger generation of Asian Americans and experiencing cross-over appeal. Many have launched online shopping, Instacart delivery, or their app.

A World On The Move, The U.S. Population Shifts

To understand why ethnic grocery stores across the nation are flourishing, we must examine our country’s population base. The U.S. Census Bureau forecasts that by 2060 non-whites will make up 57% of the U.S. demographic mix. These changes are driving the industry’s expansion. According to the most recent data, more than half of the U.S. population growth between 2010 and 2020 occurred within the Hispanic community. Hispanic and Asian inhabitants have grown by 23% and 35.5% over the past decade. Add to those reporting mixed cultural descent, and the percentages rise to more than 50% for each.

Social media, remote work, and increased international travel have made the world smaller and more familiar. According to IBISWorld research, ethnic supermarkets in the U.S. employ 204,368 people and have a market size of $49 billion.  Grand View Research cites a global market valued at $39.5 billion in 2021 that is expected to expand at a compound annual growth rate (CAGR) of 8.7% from 2022 to 2028.

Savory And Sweet

H Mart, a popular Korean supermarket chain described as “A Korean Tradition That Was Made in America,” has grown in four decades from its first store in Woodside, Queens, to 84 stores in 14 states. It offers a wide range of Asian specialties, housewares, and a famous food court, Market Eatery, that brings together an array of prepared food vendors under one roof. H Mart has built a widespread fanbase that appreciates their stores' variety, presentation, and convenience.

Michelle Zauner, a Philadelphia musician, and writer with mixed Korean American heritage, describes the food court in Crying in H Mart as “A beautiful, holy place. An ideal people-watching spot while sucking down salty, fatty, black-bean noodles.” Zauner’s stroll down the aisles of H Mart unlocks poignant memories of her late Mom and the favorite Korean foods they shared. For Zauner and many others seeking culturally specific foods, a trip to the nearest store, often to neighborhoods on the city’s distant edges, was a journey to a different world.

Sea To Shining Sea

Jay Hagerman, a director and retail broker at the Providence Group in Charlotte, North Carolina shares, “Retail follows people, and the increasingly multicultural communities in submarkets is driving ethnic grocery store openings.” He describes the historical pattern that gave rise to these businesses. “Immigrants saw a void in the grocery marketplace and would open a specialized store to serve the tastes and needs of their community.” An original location would give birth to others as the initial community prospered and moved to suburbs or different regions. Hagerman points to Charlotte’s Super G Mart as an example of organic growth based on the success of their other locations.

Super G Mart promotes itself as “the largest international supermarket in North Carolina” and recently opened its third store in Pineville, roughly 14 miles from Charlotte, a young, affluent, and diverse city, according to Niche.com. A third of the population is between 25 and 44 years old, and 80% hold some college education or higher. The noncitizen community makes up 8.7% of the total population, and 55% of its residents are non-white.

Ethnic food retailers, recognizing their crossover appeal,  are selecting new locations purposefully incorporating a demographic mix and, as a result, are thriving. Tellingly, Super G Mart invites its customers to “Try new things. Amazing Finds in Every Visit.” The store offers a global adventure as customers “travel” across aisles of international groceries and household items. Appealing to Millennials and Gen Z consumers, often described as the Foodie Generation, these intercultural tastemakers desire convenience but demand authentic and fresh ingredients. They are known for seeking new experiences and discovering “finds” that are often captured and shared on social media.

Visionary Founders

Don MacLellan, Managing Principal at Faris Lee Investments, is a long-time retail specialist based in Irvine, California. MacLellan’s focus includes acquisition and disposition services and real estate investment advisory for the retail investor. He shares his insights and experience with 99 Ranch Market, an enduring company relationship that goes back decades. “99 Ranch and other leading Asian supermarkets are looking to aggressively expand their presence and attract a younger, affluent customer. They (the stores) had to pull back on expansion plans during the pandemic because of supply chain issues. These are starting to open up, though rapid expansion is still hindered by the inability to access fixtures and equipment needed for store growth.”

Founded in 1984 by Taiwanese immigrant Roger H. Chen, 99 Ranch Market is one of the largest Asian supermarkets in the country, owned by Tawa Supermarket, Inc. Mr. Chen opened his first store to provide suburban Asian customers an alternative to driving long distances to urban Chinatowns for grocery shopping. The company’s Buena Park, California headquarters operates its own production facilities, farms, and processing factories for its company-owned 54 stores nationwide. 99 Ranch Markets can be found throughout Southern California and Orange County, which has become a draw for Asian customers of various ethnicities, including Chinese, Korean, Japanese, and Southeast Asian.

Jonson Chen, 99 Ranch’s Chairman, wants to grow locations and improve the stores’ ambiance. A fresh interior design in the newer supermarkets offers visual simplicity and shopping efficiency that takes its cue from upscale mainstream players. Their in-house café serves Asian specialty foods and features a Taiwanese bakery. Prepared food stations provide busy professionals with a convenient, high-quality dinner or lunch.

MacLellan explains that Asian grocery-anchored centers have provided the nexus for other immigrant business owners to open complementary dining, shopping, medical, and banking services in that same center. He shares, “Dr. Alethea Hsu pioneered this approach, opening her first development, Diamond Plaza Shopping Center, in Rowland Heights, in the East San Gabriel Valley, a heavily Asian community. She developed the concept, and her family-owned company managed the center, which was a tremendous success.” Hsu’s second shopping center, Diamond Jamboree, opened in 2008 in Irvine, creating a bustling hub and the perfect match for Irvine’s booming Asian population. Anchored by H Mart, the development touts itself as “Orange County's International Eatertainment Destination.” Its success has transformed the vicinity, sparking residential development and a live-work environment.

Crossing Boundaries

ValueRock Realty, a leading retail and mixed-use real estate investment, and operating company based in Irvine, is developing a 41,400-square-foot 99 Ranch Market at Larwin Square, a grocery-anchored community center in Tustin, California. The store will assume the vacant anchor space formerly occupied by Haagen. It is expected to open in the second half of 2023, bringing the surrounding community its only full-service Asian grocery store.

ValueRock’s Senior Managing Director, Dennis Vaccaro, notes that Asian grocery store operators have adopted a successful sub-tenant business model imported directly from overseas. Vaccaro shares, “Asian operators have a completely different business model than traditional American grocers. They sublease a large percentage of their floor area to subtenants. If you enter the new H Mart in Irvine, you'll see this if you look closely. Or, in any Asian grocery store, you'll notice this happening.” He explains, “Usually, the sub-tenant is food and beverage, but not always. Sometimes you will find retailers. So, their business model combines their grocery product and sub-leasing to capture their customer base for multiple, longer stays under the same roof.”

At The Commons at Aliso Viejo, twenty miles down the coast, ValueRock is undertaking an extensive 180,000-square- foot commercial plaza remodel of three defunct big box stores. The shopping center’s grocery anchor will be a 45,000-square-foot 99 Ranch Market alongside a Tesla showroom, a collection of restaurants, and shops, including Daiso, a Japanese dollar store.

Vaccaro explains, “Demographic shifts continue to occur. Specialty grocery stores can draw from a wider radius than traditional grocers. Let’s assume that (an ethnic grocer) is targeting a certain population. They know they can expand a 15-mile radius from their targeted community and still draw that customer, plus others. South Orange County is further behind in the proliferation of ethnic grocery stores. 99 Ranch understands that their new Aliso Viejo store will attract a wider radius of shoppers, positioning them advantageously in the marketplace.”

Know Thy Customer Well

Given the numerous potential opportunities to capture market share, it is unsurprising that other Asian grocery operators are focused on expanding their presence. Vaccaro asserts, “My colleague Don is correct. Our clients are all looking at their growth strategies and new locations. It is a continuous conversation; in my experience, not all ethnic grocery stores have the same approach.” Persian grocers, who Vaccaro believes are some of the best operators in the industry, know their customers well and sell a mix of international items. Vaccaro states, “The inventory mix appeals to a broader consumer base, not one ethnicity but several cross-sections, and these merchants stock a wide variety of products in their stores.” Vaccaro believes that a hands-on manager that caters to their customers will gain loyalty. Vaccaro and MacLellan agree that the merchant, who reads the data and research, talks with the customer, and is responsive, will win long-term business. Understanding consumers’ desires and expectations will become even more essential as we become more diverse. “To me, this makes a lot of sense, right?” Vaccaro concludes, “Because we have mixed demographics almost everywhere in Southern California.”

Boutique Fitness Vaults Ahead

The boutique fitness boom has continued to expand and proven its resilience by meeting consumers’ changing tastes and the at-home workout lifestyle. Virtual work has elevated the need for creating and finding a sense of community outside the seclusion of home. The enhanced wellness services these types of fitness centers provide, nourish the body and psyche equally. The flexibility that subscription-based classes offer appeals to those who value variety and choice and sets them apart from mainstream fitness.

Driven mainly by Millennials and Gen Z, boutique fitness centers fill a niche for those willing to pay a premium price to break a sweat in a curated experience. Demographic and social change is inextricably linked to the sector’s rising success. Aggressive competition from other industry players, emerging technology, market saturation, the economy, and workforce trends will define its staying power.

The Sector Gets Pumped

Even before the pandemic had us spinning on stationary bikes or squatting before fitness mirrors, membership to boutique studios outperformed their large format gym counterparts. Between 2013 and 2017, membership at traditional fitness centers grew by 15%, while membership to boutique studios grew by 121%, according to the International Health, Racquet, and Sportsclub Association. The shift to personalized wellness reflected other consumer-facing industries as people began to value travel, dining out, and events over merchandise. Azoth Analytics placed the global boutique fitness studio market at $49.30 billion in 2021. North America leads the market share, followed by Europe and the APAC region. Studios compete for an even larger share of the $30.8 billion U.S. fitness market. They are expected to grow 0.6% in 2023 and be the sector’s highest performer.

“Jack-ed” Be Nimble

The average leased space for a boutique brand is 1,500-3,500 square feet making them more nimble and less expensive to set up than their big gym cousins. For context, Life Time Athletic fitness centers offer its members a premium “athletic country club” experience, average 100,000 square feet, and offer something for every workout aficionado under one roof. According to its website, the company leases more than 16 million square feet of real estate nationwide. Life Time clubs require a large footprint and expansive parking to accommodate their members. A newly built club can cost between $40-50 million and can be found in regional town centers, luxury malls, and larger shopping centers where space abounds.

Jason Baker, Executive Director of X Team Retail Advisors and Principal of Baker Katz, a Houston-based retail brokerage firm, believes that niche services and the speed of technology-driven transformation will accelerate within the fitness industry and may cull certain brands as a result. “Fitness will continue to evolve and be a highly competitive industry,” Baker shares. “I see a trend toward deepened specialization, and not all boutique operators will strive to fit everyone. We may see some brands, which felt like they were on the cutting edge a few years ago, have a short shelf life.”

F45, a franchised high-intensity fitness studio, generally operates in 1,650-2,400 square feet of retail space within smaller shopping centers, strip malls, or on high streets in the urban core or suburbs. F45 is one of ten brands under its parent company XPonential Fitness, a power player in the boutique sector offering fitness brands in various verticals, e.g., yoga, Pilates, stretch, and cycling. They have expanded to more than 2,350 studios across the U.S., Canada, and internationally. Starting costs to open a franchise are estimated between $50-60,000 with various fees and inventory expenses added, and the franchisee must have net liquidity in the low six figures. Lower barriers to entry have helped this fitness subcategory blossom as many potential operators have joined the fray.

Women have embraced boutique fitness studios for their comfortable, inclusive, and welcoming environment. Tim Miller, Principal of Great Street Realty based in downtown Chicago shares his observations from an urban setting with a large population of single professionals. “Health clubs have been a part of people’s social circles pre- and post-pandemic. I think what has changed are the options available and the size of the clubs. We see a pattern and preference, especially with women, for smaller fitness studios rather than the typical large gym.”

Solidcore is a Pilates-based fitness studio offering a notoriously challenging 50-minute workout on its Pilates machine, Sweatlana. Founded in 2013 by Washington D.C. entrepreneur Anne Mahlum, they currently have more than 80 locations across the U.S. Solidcore offers a virtual platform through Equinox’s app where a user can book a class (or classes), buy a membership, and view the schedule. Baker is working with their corporate leasing team to expand in Houston and praises their real estate strategy and disciplined approach. He asserts, “They are not trying to be all things to all people and are highly selective in the types of space they are willing to lease and improve. They are an example of a good operator with an eye on the ball.”

“The idea of fitness has become more sophisticated,” Baker adds. “This means you do not have to work out in a loud and intimidating environment as your only choice. The boutique model allows people to experience healthy accountability and be seen and known as individuals. These studios provide a personal workout that takes the guesswork out of training.”

Live, Work, Play, Shop, and Shred

Growing urbanization and a young working-age population with increasing disposable incomes have helped drive growth in the fitness industry. These urbanites seek to counterbalance their sedentary work-from-home lives by patronizing downtown retail districts to socialize, shop, eat, drink, and be fit. Workout patterns are changing, with many attending the gym in the evenings. There is less need to hit the gym before heading to the office—when the office is home. And increasingly, the gym is a stone’s throw from the front door. Boutique concepts have recognized this shift and are positioning their locations from super-regional trade areas to community shopping centers, small retail spaces on the ground floor of luxury apartment buildings, or tucked into neighborhood town squares. The benefit to landlords is an increase in general foot traffic. A potential concern is the overuse of parking and whether (or not) customers add shopping to their workout routine. Baker and Miller agree that it is unclear if a center’s retail sales get a bump from a studio, but that healthier food and beverage are most likely to benefit. Baker confirms, “I can think of real-life scenarios where you may have a fitness center two doors down from a good, clean organic juice place.”

Some retailers are introducing fitness spaces in-store, using technology to extend their brand beyond the physical, and forming beneficial alliances with hot studio brands. Lululemon introduced a new fitness platform in late 2022. The retailer has expanded programming and partnerships by blending in-person classes in select ‘experiential’ stores with app-on-demand and live-streamed classes with a subscription to MIRROR—now rebranded Lululemon Studio MIRROR. A studio membership unlocks clothing and equipment savings and class discounts. Content is provided by industry-leading small fitness brands, AARMY, Pure Barre, AKT, Yoga Six, and others.

Going The Distance

The rise of digital fitness, offering convenience and flexibility, has been a sea change in the industry and is not going away. The profitability of smaller studios incorporating technologies will continue to attract operators to invest in their expansion, as long as their members feel their value, and have the means to pay the premium. Complementary offerings like recovery, personal wellness, and dietary consulting can expand audience reach. Larry Conner, the CFO for REGYMEN Fitness and the Covery Wellness Spas, believes in the market’s potential. He shared with CBI Magazine, “It is not necessarily fitness people coming in for recovery. Non-fitness people are getting IVs, cryotherapy, and they might jump to the other side of the tracks and get into fitness.”

Miller observes, “Although boutique brands are chipping away at the revenue of larger gyms, it remains to be seen whether the industry as a whole is sustainable. Most gym members are accustomed to paying $50-100 monthly to join a large club with all its services. When you add boutique classes, that figure can quickly reach $300-$400 monthly for many of these specialized fitness brands.” He asks, “Is that a sustainable expense for most people?” The answer may lie in waiting at the crossroads where our strong desire to deepen health and well-being, and economic forces collide.

For seven decades, the Motor City delivered a reciprocating engine that hummed and drove this nation’s economy from its heartland of innovators and can-doers. Then came a steep deceleration of the auto industry that began in the second half of the 20^th century, which blanched the energy from this vibrant city that seemed unstoppable. Triggered by mismanagement and flawed government policy with destructive urban planning, shifting demographics, and riots, Detroit found itself on the ropes. In 2013, the city declared bankruptcy. It was the largest municipal bankruptcy in U.S. history.

It’s said that America has always embraced redemption and a good comeback story, and Detroit’s bad times may finally be in the rearview mirror. Nowhere is this most evident than in its downtown central business district. Today, walkable, clean, and perceptively safe, downtown Detroit is a far cry from the stark, empty lots and vacant buildings that peppered its corridors a few decades ago, keeping most people away.

The city is an urban development study in the power of collectivism, civic goodwill, and dedication to preservation that pulled it back from the brink. Detroit is being led once again by a new generation of innovators, visionaries, and creatives, whose ancestors initially built the city from its French eighteenth-century roots. The city is on its way up, laying a strong foundation for its spotlight on the national stage. For all the talk of divisiveness and incivility, one need only turn to Detroit to study how it righted its wrongs and bootstrapped its history to rebrand itself as a future city of industry and mobility 2.0.

A Perceptive Perspective Shift

Recently, X Team Retail Advisors, a national alliance of retail real estate advisory specialists met in Detroit to learn about the city’s plans to further develop its downtown retail district. X Team works with high-profile retail brands, real estate developers, and owners in major markets across the U.S. and Canada.

Jim Stokas and Jim Bieri principals of Stokas Bieri Real Estate, a Detroit-based retail commercial real estate brokerage firm, hosted the two-day event. They were delighted to witness the enthusiasm that they have for their hometown ignited in others. Bieri shares, “I genuinely think everyone had a great time. Stokas adds, “I overheard a discussion stating that we should hold the next meeting in Detroit, again. Several colleagues I spoke with looked at me with surprise and shared, “I love your city because it's safe, clean, and walkable. It may be the greatest city in the country, right now.” The partners both chuckle and admit that a few decades ago these words would not have been uttered.

“First of all, we're an overnight success that took about 15-20 years. I mean it's been a real community effort,” Bieri concedes. “We have a great Mayor, Mike Duggan, and former Police Chief, James Craig, Detroit born and raised, who returned from a distinguished career in Los Angeles. He organized a strong community policing program that reached out to an influential group of ministers and other community leaders to create strong partnerships.” In recent years, the community-based policing model is being embraced as an effective strategy to build inclusiveness, understanding, and trust. Mike Duggan, who is often credited for overseeing the resurgence of Detroit, won a third term in office in November 2021.

Stokas adds,” When the Black Lives Matter Movement (‘BLM’) erupted in violence and property destruction in several major cities, Bedrock, a local commercial real estate developer, advised their worried national tenants that it wasn’t going to be necessary to board up their windows. This was being done in many major metropolitan areas, like Chicago, New York, and Los Angeles. Bedrock knew its community and was proven right. Peaceful protests and marches were held downtown, and that was all.”

Tapping Into A Rich Legacy

Downtown Detroit offered everything in one place, shopping, dining, tourism, and entertainment to create a synergy and energy all its own. Retail was centered around Woodward Avenue, originating at Campus Martius Square (re-established in 2004 as an active community park), near the Detroit River and spanning north to Grand Boulevard. This artery was the epicenter of the city’s retail trade and the location of its largest department stores, with smaller boutiques and specialty shops lining adjacent blocks. Department stores included Kern’s, B. Siegel Co. (a ladies’ fashion mecca), Kline’s, Crowley’s (a beloved institution that offered the less well-heeled a vast bargain basement), and the shopping crown jewel, J.L. Hudson Company (Hudson’s), which opened in 1893, and at two million square feet was considered the second largest store in the country after Macy’s Herald Square, in New York City. One only had to mention, “I’m Going To Hudson’s” to impart exclusivity and style. In the early 1950s, the store allegedly had 12,000 employees and made an average of 100,000 sales a day.

Those retail monuments may be gone but their legacy remains. Paradoxically, it was the neglect and disinvestment that petrified many of these grand buildings in amber, preserving their details. A few local property developers have devoted much of their mission to breathing new life into downtown’s vintage beauties, burnishing them for a new generation. Bedrock, downtown Detroit’s largest property owner, owns over 100 buildings across its entire portfolio, totaling more than 18 million square feet. The developer has reinvigorated retail across the downtown core. Its projects include the redevelopment of the old Hudson’s Department Store site, slated to open in 2024, and the landmark Book Tower into a mixed-use development. Book Tower will feature a 200-room hotel, office, ground-floor retail, 150 apartments, and event space.

Bedrock has curated a balanced retail tenant mix to include local businesses and national brands. There are more than 350 retailers in the Central Business District, leasing over 4 million square feet and drawing an estimated 150,000 daytime visitors.

Millennials, whose population grew by 117% since 2010, according to EMSI data, have made downtown their home, residing in roughly 10,000 residential units. An additional 8,700 apartments are being developed, continuing to draw residents, along with good-paying jobs and expanding services. It is estimated that the average income of downtown Detroit residents is expected to increase by 10% over the next five years. The economics of living, working, and shopping downtown bodes well for retailers and those businesses looking to expand to the urban core.

Homegrown merchant, Shinola, has gained national attention as a lifestyle brand that makes beautiful watches, bicycles, and luxury leather goods. Most of the workers assembling watches are done by locals that were employed in automotive manufacturing. During its start-up, the company brought in veteran watchmaking experts to train these workers as watch assemblers.

While there continues to be a fluctuation in retail businesses opening and closing since the pandemic, this is evident across the nation as operators continue to evaluate their strategies. In recent years, Madewell, Nike, H & M, Lululemon, Warby Parker, Bonobos, and Under Armour have operated downtown. While a handful of these brands may have lacked staying power, others are being introduced. National retailers Sugar Factory, McMullen, and Gucci Detroit have recently opened their doors. Some eyebrows may be raised over a global fashion brand opening in downtown Detroit, but Gucci’s heart is in exactly the right place. Their Changemaker North American Impact Fund, begun in 2019, has identified Detroit as one of its 12 North American cities that will receive community grants to foster inclusion and diversity within the fashion industry, and across communities and cities. The brand is working with local nonprofits, artists, and funding scholarships to support education initiatives.

Pop and rhythm-and-blues singer Rihanna's wildly popular subscription lingerie brand Savage X Fenty will be debuting downtown in 2023, along with a small-format Target anchoring retail developed for the new City Club Apartments, a mixed-use community in growing Midtown. Whole Foods Market Detroit opened its doors in 2013, and Meijer Rivertown Market, about one mile east of downtown, opened in the last year to serve the increasing number of residents living in apartment communities nearby.

X Team’s Dan Clark, Principal of Sitings Realty (specializing in retail tenant representation, and retail project leasing in Vancouver, Canada), previously visited Detroit in 2015 but had no occasion to return until X Team’s recent meeting. He shares his experience, “The downtown corridor was incredibly impressive to me in comparison to my earlier visit several years ago. I am amazed at the transformation in a relatively short period. The high-quality tenants and the vibrancy of the city were evident. People were friendly, open and everyone cared about the city’s transformation, and was immensely proud of its progress, as they should be.” He continues, “I believe that the beautiful architecture and character of downtown would be attractive to national retailers if they can identify the right footprint.”

Both Bieri and Stokas agree that although progress has been made there is still work to be done. Stokas, who grew up on Detroit’s West Side, shares that there remain blighted areas throughout the city. He would like to see more retail projects slated for underserved communities to help build them up. “We realized through the development of Gateway Center at 8 Mile Road, the impact that a quality retail center has on the community in terms of jobs, the tax base, and services available to buy food, clothing, and other essential merchandise. So, there’s more progress to be made, but I am tickled, and it is always great to get objective opinions about your city from your peers around the country. In the past, I might have been embarrassed about how the city looked to out-of-town visitors, but not anymore.”

A 2.0 Model For Innovation

Civic and business leaders understand that being a hotspot for creatives and entrepreneurs is envious, but without the infrastructure and opportunities to grow, the ecosystem cannot be sustained. Luckily, the private sector has stepped in to build that capacity through several public-private partnerships. Detroit’s planned innovation district, a collaboration between the Related Companies, the University of Michigan, and Ilitch Holdings, Inc., plans to break ground in 2023. Ally Detroit Center has attracted DT Midstream, IBM, Google, Microsoft, LinkedIn, and several banking and financial institutions, bolstering downtown employment. Apple has opened its first U.S. Developers Academy in collaboration with the University of Michigan. The organization trains young people in communities of color, coding, and app development to help prepare them for skilled jobs in technology, potentially backfilling and growing the workforce. The Academy chose to open in the First National Building downtown, purchased and renovated by Bedrock Development. This historic property, completed in 1922, is the oldest structure surrounding Campus Martius with views of the Detroit River. The 25-story tower was purchased in 2011 as one of the developer’s earliest acquisitions. Significant renovation and restoration increased the building’s value per square foot tenfold, proving the worthiness of preserving the past. Bieri opened his office in First National in 1976 and has had an envious birds-eye perch witnessing downtown’s epic turnaround.

The Ford Motor Company is perhaps undertaking the most audacious project in an intriguing twist on what is old is new again. The company is restoring Michigan Central Station in Detroit's Corktown neighborhood. They have committed to spending upwards of $1 billion to restore the 1913 building and construct a new 30-acre mobility innovation district. The train station will be the centerpiece of the campus, expected to eventually house up to 5,000 workers comprised of Ford employees and smaller businesses. Ford has partnered with Google in a public-private partnership alongside state and local leaders in the project. The train station will offer a real-world testing site called the “transportation innovation zone,” so companies can pilot new technologies like electric and autonomous vehicles. One of the first projects announced is a one-mile roadway with an embedded wireless charging system designed to charge EVs while in motion or when parked. Corktown is Detroit’s oldest surviving neighborhood and is a locus of entertainment and dining. Settled in 1834 and named for its largely County Cork, Irish immigrant settlers, Corktown has been revitalized with the development of several new communities of apartments, townhomes, and other retail and hospitality as a major redevelopment push from the Ford campus nearby.

Detroit is composing the first chapter in what is potentially the great American manufacturing revival. Let us hope so. For those residents who held in memory and steadfastly believed in this great industrial city’s spirit and promise, it may be time to rewrite the script and rebrand the town. “The history of the city of Detroit was one of meteoric rise, great growth, and prosperity in the first half of the 21st century, and beyond.”

Although Santa is expected to hitch up the sleigh to deliver much of the merchandise Americans may desire for Christmas, this is not going to be a typical holiday season, according to several X Team Retail Advisors industry veterans, located in major markets across the U.S. Despite shoppers flowing back to stores, soaring inflation, and economic turmoil, indicate that consumers will most likely not be shopping in the same manner, as they have in the past.

Retailers have taken note, are employing new strategies, and plan to deepen traditional approaches to maximize the buying season. So, what can we expect to see from retailers and consumers? There may not be one overarching presumption or expectation, and a few may be contradictory. Retailers are facing different challenges in 2022, as the pandemic winds down and supply chain hiccups abate. This year, consumers may be making their lists and checking them thrice, to account for tightened budgets, and shifting priorities.

Expect an earlier and extended shopping season, intensified use of data, online tracking, and retargeting, as retailers rely on AI to predict, anticipate and guide consumer preferences. This holiday season will produce digital campaigns and experiences that meld the online and physical worlds in an immersive approach to interconnect the consumer experience across channels.

Shop Early To Maximize The Buying Season
…And Shadowbox Inflation

According to KPMG 2022 Holiday Shopping Report, 75% of retailers surveyed expect to do 40% of their company’s total annual sales during the holiday season. Retailers understand that inflation is a top worry for most consumers, and have kicked-off holiday sales in early October, to allow for an extended purchasing season. Shopping patterns have also changed during the pandemic, driving consumers to online, BOPIS, BOSS, and other omnichannel solutions. Online sales are projected to rake in nearly $210 billion this year, a 2.5% year-over-year increase from 2021, according to Adobe Analytics Holiday Shopping Trends & Insights Report, which tracks data for online retail spending.

However, with wallets tightened, consumer spending is down and gift buying is expected to be smaller and more practical. Consumers may favor entertainment experiences and travel this season over consumer durable goods, which were buoyed with extra stimulus cash during the pandemic. To combat these factors, retailers have been offering increased opportunities to buy, with early and frequent promotions.

The National Retail Federation (NRF) says nearly half of all consumers feel it is better to purchase gifts and seasonal items early to avoid inflation-driven price increases toward the end of the year. Another third believes that it is best to purchase items earlier in the season, as deals won’t get any better. Addressing this sentiment, Amazon has offered a second Prime Early Access Sale this fall to address inflation, and inventory concerns, and to manage their over-expansion during the pandemic. Target Deal Days kicked off their early holiday season with a focus on deep discounts on trending items across many brand categories.

Consumer behavior has shifted in recent years, with many choosing to spread out their shopping over the entire season. Over half, plan to start their holiday shopping early, to avoid any supply issues and locate the best prices. Shoppers are now in the habit of doing research online and using price comparison tools to take advantage of special promotions being offered across the season. Retailers are enticing price-sensitive customers through loyalty club discounts, layaway programs, and digital commerce promotions. It remains to be seen if Black Friday will resume its position as the supreme communal holiday shopping experience.

X Team affiliate Jim Bieri of Stokas Bieri Real Estate, a Detroit-based retail commercial real estate company, believes that online will continue to play a strong role in holiday shopping, as families look for bargains to stretch their budget. “Families are struggling to pay the bills and meet their expenses. I expect online discounts to start early on overstocked items as customers look to beat rising inflation and a deepening recession by buying early.”

Dave Cheatham, President of X Team and Phoenix-based Velocity Retail Group agrees. “I do expect that people will shop earlier online and in-store according to their preference, and will benefit from aggressive promotions and holiday deals. Last year, inventory was so low that retailers were not in any position to offer consumers special markdowns. The retail industry saw high demand for merchandise at all levels and low inventory. This year is flipped. Retailers will have a better level of inventory versus the supply chain drought we had last year. However, the consumer may fill their shopping list with needs and staples for the family, rather than wants and aspirational luxury items. I expect value stores and the basics, such as clothes for the kids, to do well.” Walmart, Nike, and Urban Outfitters have announced an inventory surplus this holiday season that will translate to heavy price promotions and savings for the consumer. Apparel and accessories are top gifts during the holiday season. Mastercard Spending  Pulse expects apparel gift sales to see a 4.6% increase over last year.

 

The Inventory Challenge
Get The Balance Right

During the pandemic, delayed or canceled orders that then arrived in ports, have caused an inventory glut for many retailers. Excess inventory is driving aggressive promotional sales, causing retailers to cut prices to clear merchandise from overstocked warehouses, into consumers’ hands. Industry experts agree that those retailers in the best position to succeed were able to clear old merchandise before the holiday season began, and accurately forecast inventory needs.

Tim Miller, Principal of GreatStreet Realty Partners in Chicago, who specializes in tenant representation and master brokerage, offers, “I believe that some of the global supply chain issues have eased, but those macro issues that poked holes in retailers’ local supply chains, need to be fixed.” Bieri concurs, “Getting the right goods to the U.S. remains a problem. Nordstrom, The Gap, and Tapestry have announced that they will use air freight, if necessary, to deliver merchandise to stores.” Miller offers, “Most retailers were used to a smooth, cyclical season change in their inventory. Now, we see retailers scramble for more space to liquidate old merchandise to make room for new in their stores.” Miller is confident that retailers have learned from the global disruption and will be better positioned to handle issues in the future. Bieri adds, “Inventory will even out and the season should end up with moderate growth. The key is to have the inventory that shoppers seek.” Miller asserts, “Those who can aggressively market and promote events will do well. Level B and C shopping malls may struggle with low foot traffic if they are unable to deliver on promotions and events.”

Data Mastercard; Chart: X Team Retail Advisors

Brands Sleighing The Holiday Shopping Experience

This holiday season is bound to be far more promotional than 2021, as retailers work hard to lure customers. A smart pairing between Macy’s and Toys’ R’ Us will deliver in-store toy shops to help boost holiday sales for both brands and build market share. The department store has been partnered with the toy company for online sales since August 2021, filling a gap in its inventory. Macy’s toy sales jumped 15 percent year-over-year for the first quarter of 2022 according to RetailWire. Macy’s expanded its partnership this past October, to include a Toys’ R’ Us department in every store across the nation for the holiday season.

Sam’s Club has created a virtual Griswold’s Christmas Vacation house offering an immersive shopping experience, stocked with gift items, festive décor, and music. Clicking on a featured item reveals a short product description and links to the website to purchase the item online.

Department store retailers are contextualizing their merchandise by teaming up with influencers to offer shoppers curated shopping collections, and their expertise. Nordstrom and Nordstrom Rack will be hosting in-store and virtual events focused on interior design, holiday fashions, gift ideas, and in-person holiday meals.

The Holiday Spirit, Yet To Come
…And To All A Good Night!

Although the impact of the recession will be felt, the greater inventory will likely account for an increased volume of sales, resulting in a solid holiday retail season. Certain retail sectors will do better than others that may be coping with an excess of inventory. Apparel, furniture, and home improvement will offer deep discounts to spark sales and clear merchandise. Dave Cheatham suggests that to gauge the success of this year’s retail holiday season, it might be wise to benchmark it against pre-pandemic statistics, for a more accurate assessment. He explains, “Although things are getting back to what we remember as “normal,” we are not there yet.” Steve Edwards, founder of The Edwards Company and a three-and-a-half-decade veteran of the retail commercial real estate industry places it all in context. “We are retail brokers representing some of the top tenants and landlords in the country, and are paid to take the pulse of our clients, and gauge consumer sentiment daily. In my thirty-five years in the business, I have never seen such an unpredictable market. Economists are contradictory with each other and sometimes with themselves. The bottom line is, I don’t think that anyone has a bead on how the holiday season will turn out.” Cheatham offers this final thought, “One thing is clear, economic uncertainties will decidedly play a role in this season’s outcome.”

The Great Reset has finally begun in earnest, with Federal Reserve Chairman Jerome Powell instituting a series of rapidly rising interest rates since March 2022, leaving many wondering if we are in for a Cat 5 storm, or more gentle trade winds sailing us toward a soft landing. The whisper of recession became louder in June, as the markets fell to bear territory, and several economists now predict a 50% chance that the U.S. will slip into recession in 2024, if not sooner. Despite these prognostications, many in the retail industry do not view this as a hinderance to getting deals done. In fact, there is a general consensus, that although the current inflationary environment may in all likelihood extend through the end of 2022, it is a welcome return to normal market conditions that rise and fall, despite any current consumer pain.

Many now understand how inflation is affecting their daily lives and lightening their wallets. Everything from fuel to food and energy has surged during the first half of 2022, forcing consumers to make increasingly hard choices to maintain their lifestyles and remain economically viable. U.S. Bureau of Labor Statistics, May Consumer Price Index reports that the all-items index has risen 8.6% year-over-year, with the food index increasing 10.1% for the 12-months ending May 2022. This is the first increase of 10%, or more since the period ending March 1981. Protein essentials like meat, poultry, fish and eggs have risen 14.2%, sending an increasing number of consumers to the local food bank to supplement decreasing trips to the grocery store. The cost of transporting food has been impacted by fuel costs, rising 50% this past year.

The Fed is tinkering with economic tools available, to remove some excess liquidity from the markets, and rebalance the sensitive levers of supply and demand. Most Americans remain anxious as to what can be expected in the second half of 2022 into 2023, and beyond. Consumer demand remains strong, but shows initial signs of softening, and unemployment remains historically low, impacted by a lower labor market participation level. Recently, some companies are beginning to analyze their headcount and adjust employee levels in anticipation of a coming recession. Yet, despite all, most retail experts don’t forecast doom and gloom. 2022 ICSC Las Vegas attendees were notably upbeat, and for many this was the first face-to-face event in three years. Although still down in attendance from pre-pandemic levels, the event enjoyed a bounce and many conference exhibitors and attendees were back and ready to do business. Those brokers interviewed by the media did acknowledge ongoing business challenges, but most were encouraged by opportunities in the sector and activity level. Klaus Schwab, the Executive Chairman of the World Economic Forum stated in his book, Covid 19: The Great Reset that “When devastating things happen, creativity and ingenuity often thrive.” Schwab rightly saw a great reset underway that has been changing the landscape of retail. Let’s dig deeper.

The Ebbs and Flows of Market Cycles

We sat down with two leading industry experts to delve into why a number of retail professionals remain confident. Secretary of the Treasury  Janet Yellen expects inflation to remain high through the end of the year, with the hope that it will eventually head downward. So how do thought leaders in retail view the current situation, and what will it take for the industry to succeed post COVID-19?

Rick Chichester has four decades industry executive-level leadership experience that lends an informed and comprehensive view of retail from all sides. He currently serves as a Managing Member and Board Advisor at MTN Retail Advisors and is an Executive Director of X Team Retail Advisors. John Cumbelich of John Cumbelich & Associates leads his San Francisco Bay Area firm providing commercial real estate services to Fortune 500 retailers and select owners and developers of retail commercial properties.

Cumbelich describes himself as a “glass half full” optimist. He offers, “We’ve seen zero slow down with no dip in end-user demand or activity. I believe that the industry has expected the ramp-up of rate increases for quite some time, so this news is most likely not catching anyone flat footed. Whether the markets are expanding or contracting, there’s still plenty of opportunity in the brokerage space. I will take this market condition any day over our pandemic-mandated shutdown. That was a serious problem, this however, is the normal rise and fall of the markets.” Retail brokers are working with business owners to “right size” their space and many are opting for a smaller footprint. Cumbelich confirms, “There are business opportunities out there for the retailer, dining brand—or the owner and investor, and the broker. Movement is a good thing for the industry, we like movement.” Cumbelich believes that the fundamentals underpinning the economy remain solid and although rates have risen, they are still historically low.

Chichester agreed with his colleague, for the most part. “I agree with John, especially in terms of consumer demand. However, I do feel that retail is going to moderate and change. There is a buying trend migrating from goods to services.” Chichester believes that more expensive purchases like autos and large home appliances will experience a slowdown. However, he believes services are going to continue to expand, perhaps at a slightly slower pace.” Americans can start to chart their futures as the pandemic moves to the endemic phase. Late April, Dr. Anthony Fauci, chief medical adviser to President Biden, said during an interview with PBS NewsHour, that the U.S. is no longer in the COVID-19 pandemic phase, despite the global threat the virus still poses. This new endemic phase will continue to see changes to shopping behaviors that COVID-19 begun, and retailers will need to pay close attention.

McKinsey’s 2022 Consumer Pulse survey findings indicated that Americans are changing their shopping behaviors—and are expected to continue this shift. They report that consumer confidence has decreased with many consumers moving away from branded merchandise to lower priced private labels or channels. Grocery stores continue to do well, while retail apparel sales have declined.

The refocus of buying habits from consumer goods towards services may negatively impact large retailer sales volumes, but it can be argued that this shift may not impact the larger economy. Disputing this assumption, Q2 retail earnings disappointed investors, with Walmart and Target missing the mark. Ongoing inventory problems contributed to an oversupply of pandemic-level stock. Early June, Target announced that it plans to markdown excess inventory on some merchandise to correct the gaffe. Bucking the trend, one large retailer made notable gains in their third financial quarter. Costco announced a 16.9% increase in May comparable sales year-over-year, driven largely by their sale of fuel and increased gasoline prices.

The Global Supply Chain and The Unexpected Consequence of Extreme Efficiency

During a recent press conference at the Port of Los Angeles, President Biden expressed his frustration and anger that only nine ocean carriers, and three main shipping alliances, control key trade lanes. Each enjoy immunity from U.S. antitrust laws, and have increased their shipping fees upwards of 1,000% during the pandemic, without recourse. This news may have come as a surprise to most Americans, unaware of the shipping cartel controlling the flow of internationally manufactured goods to North America. Logistical hiccups resulting from continued lockdowns in key Chinese manufacturing hubs, along with spiraling cost-per-container have cast a harsh glare on the downside of globalization.

Cumbelich offers, “I think that one of the underreported dynamics affecting retail and dining businesses is the nation’s reliance on a global supply chain. U.S. manufacturers, and businesses are beginning to insure themselves from disruption by increasing domestic supplies and resources to mitigate globalization’s control over business, and this is a healthy process. Businesses will have to learn to moderate their reliance on the global supply chain as we continue to deal with the fallout from the pandemic.” McKinsey’s Taking the Pulse of the US Consumer report finds that companies are starting to create more local redundancy in the supply chain and focusing on the products that consumer’s want. They cite analytics as crucial for retailers to maintain a handle on product mix and inventory.

Chichester adds, “I had an interesting conversation recently with a large grocer about the global supply chain’s adoption of Just-In-Time (JIT) inventory management. Just-in-Time inventory management is a system to align raw material suppliers with manufacturers to deliver materials as production is scheduled to begin. Chichester continues, “Efficiency was so fine-tuned that any disruption caused geometric ripples across the entire system, magnifying supply chain issues. The grocer plans to keep globalization components, but will create some redundancies by regionalizing portions of their operations to protect against future disruptions.”

Geopolitics is likely to be a continuous factor that world leaders will need to manage. Chichester illustrates China’s zero-tolerance mandated shutdowns, the Ukrainian war’s impact on wheat commodities, and Europe’s dependance on Russian oil and gas as examples of global disruptors that will necessitate contingencies to manage a more volatile world.

Inflationary Psychology and Appetite For Risk

Despite these threats, Chichester believes that the underlying fundamentals of the U.S. economy are strong, and cites retail as a lead indicator of its strength. Chichester explains, “The most comprehensive and available data resources available are generated by consumer behavior at the time of purchase. Three-quarters of our economy is based on the consumer Chichester explains, “All eyes are upon how much they spend, and what they are buying. Are they purchasing needs or wants?” The acceleration in the consumer spending habits of Americans can be explained in part by the phenomenon of inflationary psychology. Inflationary psychology is a mindset that leads consumers to spend more quickly in the belief that prices are rising. This internalized pressure will drive a consumer to spend money immediately to buy a product, if they believe that the price will increase soon.

Another factor influencing the consumer is their appetite for risk versus tolerance. There is evidence that inflation is dulling consumer’s appetite for risk, leading them to pull back on expenditures and manage budgets more tightly.

The Calm After The Storm

Still, Cumbelich and Chichester suggest that there is a silver lining surrounding the storm clouds ahead. Cumbelich maintains that this is a cyclical cooling off and not a recession resulting from structural issues in the economy. “The market has to lower demand so that supply can catch up, that's the issue. I think the sooner we can get there, the better.” Chichester suggests “The long and short of it is that we are going to go through some difficult challenges, but if these are handled correctly, the economy will be okay and the nation will be wiser for the experience.” He maintains that the economy needed to go through this cleansing process, after decades of monetary manipulation, which was unhealthy. He explains, “The government must allow the capital markets to rebalance themselves. We must also reexamine the science of supply chain management. If we do those things as we should, we will sail into the calm, after the storm.”

An Epoch of Incredulity

The U.S. markets are a tale of two economies. May’s recent jobs report was glowing, adding 390,000 jobs almost universally across the board, in many sectors of the economy. In this season of light, spring delivered hope with continued historic low unemployment at 3.6% for the third month running, and increasing job participation—notably among women—as a reason to be optimistic and feel good about the economy. Consumer sales continue to flow full tap, with an appetite to purchase seemingly untouched by stratospheric inflation.

The May report indicated solid job growth in food services and drinking establishments, logistics, transportation, warehousing and storage. Manufacturing and wholesale trade made gains, along with all aspects of the construction sector adding 40,000 new jobs above February 2020 levels.

There was one notable exception. The retail industry was an outlier to this otherwise buoyant account with employment declining 61,000 jobs in May, although maintaining 159,000 jobs above pre-pandemic levels. Job losses were notable in general merchandise retailers, apparel, grocery stores and garden supply and home improvement stores. This precipitous dip in the last month, countered the good news delivered by other sectors, and it is worth exploring the causes of the drop through the lens of national retail experts.

Dave Cheatham, X Team Retail Advisors’ President, an authority on retail real estate with over three decades experience in the industry, addresses that question. We sat down to discuss trends and economic factors that he considers top of mind affecting the industry. Cheatham points to a troubled set of issues that he calls “worrying,” as we move toward a murky horizon and what many economists and business leaders predict will include a recession.

Retail has been under pressure for some time now, facing thinning profit margins, more complicated and costly e-commerce supply chains, raw-material cost inflation and increased labor costs in the face of worker shortages. Additional distortions coming out of the pandemic lead Cheatham to believe that the industry is experiencing a “perfect storm” dealing with a series of confounding factors that continue to disrupt business models and hobble any strategy for expansion.

The great pandemic created both positive outcomes and negative effects in the workforce, Cheatham explains. “On the one hand, many people realized that the daily grind was no longer desired or sustainable. They redefined their lifestyle and how and where they work. Many chose to work from home, valuing additional time with family, not having to deal with a long commute to the office. Others have requested that their employers be flexible and embrace a hybrid schedule. So, the pandemic fundamentally changed the way we view work and impacted the economy.” Cheatham continues, “On the flip side, the pandemic removed a lot of employees out of the workforce, whether by choice or necessity. We are still managing a scarcity of workers in the retail industry. It is a real problem. We’re challenged to attract workers, and there are simply not enough people available to hire. In fact, some retail establishments had to cut their hours of operation, and many restaurants cannot find servers.”

Cheatham asserts, “Right now retailers find themselves in a reactive state. They are responding to what is being done to them, by outside forces, with limited recourse to be proactive, and get ahead of the economic factors influencing the business.” Supply chain problems are what keep retailers awake at night. Cheatham speaks with top industry executives regularly, who express their concerns with inventory shortages and delivery delays. Most major big box retailers manufacture their goods in factories around the globe, with one country eclipsing others, China. Recent Covid lockdowns in Shanghai and Beijing, once again, have disrupted the manufacturing and transportation sector. “We outsourced much of our key manufacturing,” Cheatham states, “and it left us vulnerable.” He suggests that it is long overdue for American companies to home shore their manufacturing facilities, at least partially, if not fully. If that is not feasible because of costs and other factors, he suggests that retailers manufacture closer to home, in Mexico or Canada, our neighbors to the South and North. Cheatham realizes that this cannot happen overnight, but believes a smarter strategy is needed to guard against future disruptions and protect our national interests. “You can't get any semiconductor chips. A large portion of semiconductor chips are manufactured in China, so that has impacted the availability of new cars in the U.S. A large part of that supply chain and the global economy is being affected,” he says.

An Inflationary Tale

U.S. Treasury Secretary Janet Yellin has recently admitted that she was mistaken when she stated in 2021 that inflation was transitory, calling the risk of inflation “small” and “manageable.” Inflation has reached 40-year highs at 8.6 percent for the twelve months ending in May 2022, according to the latest Consumer Price Index report. We are witness to the reality that it is in fact steep, historic and may be here to stay for some time. Rick Chichester, a retail capital markets veteran, is an Executive Director of X Team and provides a few insights. Chichester agrees that inflation is a present danger and the Federal Reserve’s Jerome Powell must follow data and facts, not models to successfully manage monetary policy. Chichester sees one benefit to retail is necessity-based purchases, such as private label food products and discount grocery stores. He feels that retail has gone through an inflection point and following the pandemic many have reassessed their need for physical space versus the importance of e-commerce. Chichester believes that retail can remain strong with the shoring up of online sales to extend the physical store, despite facing some inflationary and supply chain headwinds.

Cheatham agrees with his colleague, stating, “Retailers have learned in a year or two (about e-commerce) what would have taken them a decade to integrate.” Omnichannel retail strategies are the norm in 2022 and not the exception. Cheatham offers, “Target is a good example of a retailer that enhanced their e-commerce platform to dramatically improve their delivery service to compete with Amazon. Which before the pandemic was not the case.” Retailers have learned to manage online buying, delivery and in-store pickup, and it is this comfort with technology that has advanced in-store automation, already in motion prior to the pandemic.

Almost a full year before Covid emerged, McKinsey’s May 2019 report, Automation in retail: An executive overview for getting ready, anticipated the dramatic changes that automation would bring to the retail sector. They indicated that data analytics would help create a more informed workforce, and cautioned that those retailers who quickly grasped the implications automation would bring, will emerge at the top. Many retailers are adopting technologies, such as flat panel screens, to save labor costs and compensate for a lack of workers. Automation is increasingly playing a role in the reduction of the number of customer service positions within the retail sector, and this trend is expected to continue. Self-serve check-out kiosks, touch screens, phone apps and other interactive technologies are replacing hourly paid workers in many of our largest fast-food establishments, grocery stores and big box retailers.

All this technology is coming at a time when state minimum wages have continued to rise during these last few years. While the federal minimum wage has remained at $7.25 since 2009, the President has signed The Minimum Wage Executive Order, raising the wage for federal workers and contractors to $15.00 per hour. Raising the federal minimum wage for all workers is a centerpiece of the Biden Administration’s jobs agenda, but ultimately this will require an act of Congress. However, states such as California, New York, Washington, Massachusetts, New Jersey, Oregon, and The District of Columbia have followed suit, raising their own state’s minimum wage above $13.00 an hour. Many employers find themselves in a situation where they must pay more for salaries and compete in a limited talent pool.

Another twist in the “perfect storm” are construction costs. Cheatham states, “Construction costs and prices are going through the roof—retailers are asking themselves; how can I expand?” The answer is complex. Cheatham explains why. “Steel, lumber, concrete, equipment—everything continues to rise, and much of it is shipped from overseas. The cost of construction drives up retail rents, and retailers are unable to afford these dramatically elevated levels. This in turn impacts expansion and opening new stores. It is changing expansion plans and most likely will continue to weigh on the retail sector for the foreseeable, until this volatility subsides. Retailers are trying to figure out what they can, and cannot do.”

The Future is Now

Researchers have found that almost half of retail activities can be automated, using existing technology. This may seem to be an alarming statistic, but it is certain that retailers will continue to adopt technology to support and bolster margins and preserve cost competition. Experts have suggested that the reskilling of retail workers and the evolution of retail jobs, will balance initial front-line job losses. Automation is expected to lead to job creation as companies invest in growth. As ancillary sectors of the economy continue to recover, there is a unique opportunity emerging from a “perfect storm” for a reset to embrace innovation, evaluate priorities, reimagine the workforce and move the sector toward growth, profitability and stability.

Shopping Malls proliferated out of the suburban expansion during the mid-1950s, which brought efficient transit to prosperous neighborhoods spread across postwar America. Rising automobile ownership made these retail centers accessible and convenient, offering a bounty of merchandise and services.

Today, those same centers that lifted up suburbia and opened up the world through mercantilism are facing a host of challenges leading to mall re-development across America.

The first enclosed shopping mall opened in Edina, MN in 1956, designed by Victor Gruen, an Austrian-Jewish architect who emigrated to the United States in 1938. The Southdale Centre offered a spacious, climate-controlled environment with shops and public art. Gruen envisioned a core community space that could offer shopping, medical facilities, schools and residences. Gruen’s idea took off and over the next three decades developers offered retailers generous incentives to build department stores in mall settings. Brands expanded into standalone stores and chain stores proliferated. By 1985, 2,500 malls were developed in the United States. Anchored by major department stores, malls provided a safe haven to meet up, hang out and shop.

X-Team affiliate Jim Bieri, Principal with Stokas Bieri Real Estate, a Detroit based commercial real estate firm specializing in retail transactions, has been involved in the mall business since 1972. His firm provides strategic consulting to a wide variety of retailers and property owners. He has witnessed the sector’s growth, apex and current struggles.

Bieri sees a combination of factors, including over-development, demise of Department stores and saturation of the market hurting the sector. He explains, “The population of towns and cities had not changed significantly, and developers just built too many malls.” According to Cowen Research, oversupply of malls outpaced demand with development eclipsing twice the population growth between 1970 and 2015. In the 1980’s the explosion of outlet stores, and “big-box” power centers further siphoned mall business. From 1988 to 2016 department stores market share dropped from 45 % to 15%. Conversely value stores rose from 58% to 80% and is expected to provide continued growth and share gains.

In many cities, consolidation of owners proved a detriment as they cannibalized their own properties. Tenants would opt to lease in the highest producing center in the portfolio, leaving others to die. Financing structure changed and developers began accepting public investment. This placed pressure to produce short-term results, and decisions were made that were not in the best interest of the development.

“A mall is like a sports car; it needs constant attention and capital investment. It is already a fast machine, but must be maintained,” Bieri asserts. “In the past, a $10-15 million upgrade was considered a big deal. Now, it is not even worthy of putting out a press release.”

So, what does the future hold for the mall sector? Cowan’s consumer tracking and studies show that three quarters of customers still prefer to shop in physical stores. Brands, a social experience, current styles and immediate gratification are key preferences for bricks over clicks. Analysts predict that A class malls will thrive with intensified investment to stay fresh and competitive. However, C and D class malls, which account for about 30% of properties are at most risk.

Bieri echoes the sentiment that malls in great markets will rebound. He believes that millennials will embrace them for their conveniences, and many will have private entrepreneurial ownership. South Coast Plaza, Aventura and Bellevue Square are examples of privately owned centers that continue to flourish. Located near affluent communities accessible by freeways, they offer curated luxury boutiques and anchors offering amenities that match their customer’s tastes and pocketbooks. According to its company statement, South Coast Plaza, attracts over 22 million visitors per year, with annual sales (prior to the pandemic), approaching $2 billion and a sales volume of over $800 a square foot. To cater to their sizeable Chinese tourist trade, the center provides Mandarin speaking concierge services and accepts China UnionPay as a payment method. Luxury will continue to lead, concentrating shoppers at the top-tier.

As the gap widens between Class A malls and the rest of the sector, there will continue to be an ongoing retraction in the number of malls throughout the country. By 2030, it is estimated that there will be 300 to 750 malls operating. Bieri states, “In most markets you’re going to end up with one or two malls. I don’t see many of these (redevelopments) taking less then perhaps 10 years. That said, those redeveloped sooner are those retained by the property developer. The demise of the department store hurts everybody. If the developer can repurpose the space to include other uses, this is the best approach- even though the volume (of business) may not be replaced. Repurposing a mall can work if you have a good location, connection to transit, with a demand for entertainment, food and hospitality. If a developer can deliver those amenities and keep to the same price point, in theory, you will provide the customer with what he or she wants.”

The Shops at Westshore, formerly Westshore Mall in Holland, Michigan is such a case. In 2009, the mall was over 30% vacant, and losing its anchor stores to bankruptcy or consolidation. The mall was originally built in 1988 by Bramalea Limited, a Canadian development company. Bieri recalls, “The local developer purchased a dying mall from the lender and began the process of “de-malling” it. He was able to cut about 50% of the GLA (gross leasable area) by demolishing part of the structure. He then had the ability to create additional GLA, by constructing freestanding buildings and reinventing the development as an outdoor mall.” Today, The Shops at Westshore feature a farmer’s market, dining, a studio gym, physical therapy practice, investment advisors and in 2019 signed a new tenant, Grand Rapids Community College. The college has purchased the center’s former JCPenney store to establish a central campus that consolidates four leased locations. This is an example of how smart, community-centric redevelopment can mitigate the loss of property and sales tax base that support basic services.

Bieri sees a growing trend in rezoning lower tier mall developments to industrial use. Empty anchor department stores are being snapped up by online retailers and logistics firms, who convert them into fulfillment centers. Driving this trend, many retailers have implemented a BOPIS/BORIS model, which allows a customer to buy online, pickup or return in-person. And with the shift to the web, omnichannel shopping continues to grow in popularity. Surf the net at midnight, click, purchase and pick up the next day at the store. Other uses for abandoned malls include self-storage and distribution centers. In December 2018, U-Haul acquired 13 K-Mart and Sears stores and converted them into storage facilities. A year later, Amazon bought Randall Park Mall and converted it into an 855,000-square-foot fulfillment center that can process up to 100,000 orders a day, operated by an assembly chain of workers and robots.

And, what of Victor Gruen’s hopes and dreams for the great American mall?

Tempe Marketplace, a 1.3-million-square-foot outdoor mall in Tempe, Arizona may answer that question. The property sits at the intersection of two main freeways, a stone’s throw from the main Arizona State University campus. The mall was built on land once designated as a Superfund site by the EPA. In 2004, Vestar Development partnered with the City of Tempe and agreed to fund the majority of environmental remediation with an additional $7 million loan from U.S. Housing and Urban Development. It became the largest brownfield land cleanup in the history of Arizona. The shopping center opened in 2007 with big-box stores, dining and an interesting mix of regional and national retail and promoted “the District” its lively entertainment core. The success of the mall ignited development of the surrounding area. Multifamily mushroomed along with corporate headquarters bringing employment for thousands. Tempe Marketplace sits adjacent to Arizona State University’s new Novus Innovation Corridor, a 10 million square foot public/private partnership with Catellus Development Corporation being constructed in phases through 2024. Novus will bring an estimated 34,000 jobs, multifamily housing, office, retail, entertainment, hotel, and a research and technology hub.

Toward the end of his life Gruen was asked if he was proud to be considered the “Father” of the mall. He regrettably felt that his ideas were lost from his original vision. The architect might feel differently today as the future of mall development is expected to be mixed use- to shop, work, play, learn and live, as he imagined sixty-five years ago.

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Addition of Affiliates ADMI and Hoffman Boost X Team Platform

"X Team Retail Advisors recently added two new affiliates including ADMI Inc. and Hoffman Strategy Group which bring retail brand, hospitality, mixed-use and themed entertainment expertise. The additions boost the number of companies now part of X Team’s platform to 37." Read More at ConnectCRE...

X Team adds two new affiliates; brings total to 37

"X Team’s nationwide network of boutique brokers and retail advisors has added two new affiliates: ADMI, Inc., and Hoffman Strategy Group." Read More at Chain Store Age...

 

X Team's Evan Albert is featured in the University of Maryland's 30 under thirty!

"Evan Albert started working in retail leasing immediately after graduating from the University of Maryland in 2015. Evan has grown tremendously in the commercial real estate industry since he began including opening his company's Washington DC office in 2019 and leading the young broker's division, X Now, of international retail broker network, X Team Retail Advisors. Evan continues to have UMD spirit, attending basketball games and continuing to network with fellow Terp alumni."

Evan is at X Team member MFI Realty where you can reach him or check out the full listing at the Terrapin Club!