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Shopping Centers Today -> March 2007
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RETAILERS ON A ROLL
Tenant expansion plans show no signs of slowing down in the coming years
By Jennifer Hopfinger
Retail chains are rolling out new stores in the U.S. so fast that it’s sometimes hard to keep up with demand, landlords say. Specialty chains are lining up for space in the country’s best-located malls.
“The most important issue we will face in [2007, 2008] will be finding ways to fit into our malls all the retailers that want to be there,” said Robert A. Michaels, COO of General Growth Properties, at an investor conference.
Meanwhile, the off-mall migration of such department stores as JCPenney and Kohl’s is fueling the development of open-air centers. “Retailers are having a hard time finding space and being able to grow as quickly as they’d like,” said Mary Lou Fiala, president and COO of Regency Centers. “But the industry can’t respond to demand overnight. Developing takes time.”
Just how much new space could be coming on? Merrill Lynch surveyed 33 retailers about their projected store openings to gauge demand for the coming year. According to the findings, released in January, these retailers plan to open a total of 1,794 stores this year, down from 2,458 last year. But most of that decline is attributable to just one retailer: Dollar General, which plans to close 175 stores this year, against the 525 it opened last year. Thus, when Dollar General is excluded, the number of this year’s anticipated store openings is 1,969, up slightly from 1,933 in 2006.
This year’s expansion plans are actually about the same as last year’s, says Craig Schmidt, a retail REIT analyst at Merrill Lynch. That means the leasing environment in 2007 will probably be as good as it was in 2006, and this should continue for a while, he says. “Retailer expansion is not so aggressive that it’s not sustainable,” he said. In addition, store closings are way down. The Merrill Lynch report says store closures in 2006 and 2005 declined nearly 30 percent from the four previous years and that the percentage of these caused by bankruptcy was less than 20 percent for the past two years, a 10-year industry low.
While new-store growth in the aggregate is relatively flat, the outlook on a company-by-company basis is mixed, with some retailers slowing their pace of store launches and others ramping up their expansion plans significantly.
Much of the expansion taking place can be attributed to retailers that are gaining market share. Some categories have expanded because of the success of one retailer, says Schmidt, but what Victoria’s Secret has done for lingerie and what Starbucks has done for coffee are matters of exception. Most merchandise categories have remained fairly static, he says.
Another factor driving the expansion of some chains is a reasonably solid U.S. economy. Inflation and interest rates are still relatively low, and despite such pressures as weakening real estate markets and rising energy prices, consumer spending appears to be going strong. The amount consumers spent at the world’s top 250 retailers hit a record $3.01 trillion in the 12 months ended June 2006, up 6 percent year on year, according to research firm Deloitte Touche Tohmatsu.
Demographic trends, too, are boosting certain retailers’ fortunes. Baby boomers, for instance, with their income and sophisticated tastes, have been a boon to upscale retailers, says Paul Morgan, managing director and head of real estate research at Friedman Billings Ramsey. As a result, there is strong demand for the types of locations that serve a higher-income demographic, says Morgan. But retailers are also snapping up in-fill sites in high-density areas that may serve low-to-middle-income customers, because there aren’t many new shopping centers going up in such markets, he says.
Finding space for expanding retailers will be one of the biggest challenges facing shopping centers in the coming year. In a report assessing the nearly 1,400 regional malls and lifestyle centers in the U.S., Friedman Billings Ramsey projected that the greatest new supply of malls and lifestyle centers since 1990 would hit the market in 2006 — an estimated 38 new centers, totaling nearly 18 million square feet. Total industry square footage rose to an estimated 1.09 billion in 2006, with much of the growth attributable to significant increases in lifestyle center space. “Based on the pipeline of new development, 2007 looks to be roughly equal to 2006,” Morgan said. “However, that doesn’t take into account the consolidation of productive locations and the disappearance of unproductive locations. So we’re not necessarily seeing a lot of growth in new space.”
Because of consolidation over the past two years, the number of department stores has declined considerably. Shopping centers are in a position to recapture some of the space previously occupied by department stores and reallocate it to expanding retailers. Department store consolidation has resulted in a major round of redevelopments that Friedman Billings Ramsey says will last through 2010. Many traditional malls are replacing department store anchor space with lifestyle elements: full-service restaurants, cinemas, large-format bookstores and the like. In addition, nontraditional anchors such as Target are increasingly moving into in-fill locations. “It’s a once-in-a-lifetime opportunity for retailers like Target to get access to so many highly productive centers in one fell swoop, so they are increasing the number of store openings that they might typically make in a given year,” Morgan said. Target operates about 1,500 stores across 47 states. During its fiscal third quarter (ended October), the company opened 59 stores, boosting its total retail square footage by 8 percent from 12 months before.
Shopping centers can prune underperforming retailers to make room for more-successful retailers looking to expand. Still, occupancy rates will probably remain high, leaving little wiggle room to accommodate new stores. In addition, department stores are looking to make a comeback this year, with 55 new store openings expected this year, versus 52 closings last year, according to Merrill Lynch.
Mid-tier department stores Kohl’s and JCPenney are rapidly filling the void created by the August 2005 merger of Federated Department Stores and May Department Stores Co., says Fiala. Federated had said it would close about 75 overlapping stores.
Kohl’s operates about 800 stores in 45 states. In October the company opened 65 new stores across 30 states in the largest one-day opening in its history. Kohl’s plans to open 415 stores over the next four years. JCPenney is similarly in the midst of an aggressive expansion campaign and has plans to open 150 stores through 2009, representing annual square footage growth of about 3 percent. JCPenney currently operates about 1,000 stores. Nordstrom is also looking to expand over the next couple years, Morgan says. The retailer operates about 100 full-line stores in the U.S. and has plenty of room to expand. Its existing stores have delivered outstanding same-store-sales growth in recent months.
The growth prospects for specialty retailers look less bright. The specialty retailers Merrill Lynch surveyed reported plans to open 449 stores this year, down 8 percent from last year. But fewer new specialty stores does not constitute entirely bad news for shopping centers, says Schmidt, as retailers looking for the best locations will trip over themselves to get into high-productivity centers to compensate for lower store growth.“The category has been going strong for several years now,” Schmidt said. “But 2007 appears to be an inflection point. Some retailers have rolled out second and third concepts, and not all of them have worked.”
Yet some have, particularly in lingerie, which will result in new concept stores this year. In January American Eagle Outfitters announced that it would open 15 stand-alone stores this year for its new intimate-apparel brand, Aerie by American Eagle. In October Charming Shoppes, which operates Lane Bryant, opened its first store with Lane Bryant apparel on one side and Cacique lingerie on the other. The company says it hopes to open 300 more of these side-by-side stores over the next three or four years.
Other specialty names show no signs of letting up on their expansion plans. Fiala cites women’s apparel retailer Chico’s, coffee retailer Starbucks, drugstore chain Walgreens and specialty grocer Whole Foods Market. Whole Foods, which operates about 170 stores in the U.S., has signed leases for 88 new stores scheduled to open through fiscal 2010 and totaling 5 million square feet, about 77 percent of existing square footage. Walgreens expects to increase its stores from 5,580 currently to 7,000 by 2010. Starbucks, which currently operates 12,000 stores worldwide, has a long-term goal of operating 20,000 stores in the U.S. and another 20,000 abroad. Chico’s announced plans to boost its sales square footage by 30 percent (about 150 new stores) for fiscal 2006. (The fiscal year ends in January, but Chico’s had yet to release results at press time.) The company’s stated goal for a square-footage increase by the end of fiscal 2007 is 25 percent, roughly 180 stores.
Morgan says strong consumer demand is driving expansion among some lifestyle-oriented retailers. Full-service restaurants, such as P.F. Chang’s and The Cheesecake Factory, and large-format bookstores, such as Barnes & Noble and Borders, are expected to continue opening new stores.
Another trend fueling specialty store growth is department store vendors that open their own stores and sell their products through those and in the department stores. Coach is one example. “Coach uses its own stores to brand their retail concept and test new products,” said Patricia Pao, CEO of Pao Principle, a New York City-based retail consulting firm. “The stores create a brand halo effect that helps them sell their merchandise in department stores as well.”
Department store expansion, after two years of consolidation, and selective new store growth among specialty retailers could exacerbate an already tight space market. “The manifestation of a squeeze is rents go up,” Morgan said. “There already is excess demand for highly productive properties, and we’re already seeing disproportionate rent growth in those locations.”
Demand is exceeding supply, which is helping landlords but holding retailers back, Fiala says. Regency Centers is currently 95 percent occupied and targets about $500 million in new development every year, adding about 35 new shopping centers annually.
Among the REITs Morgan follows, most of the portfolios are at peak occupancy levels — 95 percent to 96 percent for open-air centers and 93 percent to 94 percent for regional malls. “It doesn’t get much higher than that,” he said, “because you always have a certain amount of frictional vacancy with stores moving around and isolated bankruptcies.”
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