The New Year will usher in new trends poised to change the retail industry and its direction. While many current themes in the retail real estate world will carry over, here are the top five new trends sure to mark the industry in 2016:
- Value as a focal point for retail. The American shopper continues to be focused on brands, and even more so on a good deal. Value-oriented retailers will continue to outperform in 2016, however we’ll also see a bifurcation of the category. In one subsection are stores, like T.J.Maxx and Ross Dress for Less, that have mastered the “treasure hunt” strategy by sprinkling higher-end products in with their rapidly changing merchandise to keep customers coming back. These stores have exceptionally strong sales and will remain high performers.
The other subsection is comprised of department stores that, in response to consumer habits, have opened their own value concepts. Nordstrom Rack was one of the first and a tremendous amount of players have cropped up as businesses realize this concept is their growth vehicle. Saks OFF 5TH, Macy’s Backstage, and the recently announced Find @ Lord & Taylor are all examples.
- Wellness will continue to perform. The wellness concept is a theme we’ve been watching for a while and we’re finding that it’s now become a fixture in our culture. To maintain wellbeing, people are more focused on athletics. Retailers like Nike and Under Armour are doing extremely well, and so are gym facilities. A number of new gyms went public last year, as well as other types of fitness concepts. Whether it be FlyWheel, The Bar Method, or any type of yoga, it’s unbelievable how many different wellness concepts are available to consumers. This is all in addition to vitamin shops (GNC) and beauty retailers (Sephora and Ulta) who fall under the wellness umbrella and are all enjoying strong sales.
While there are exceptions where some have run into headwinds, overall, specialty grocers, such as Whole Foods, Trader Joe’s and Sprouts Farmers Market, are maintaining momentum. These retailers are filling a need for consumers and capitalizing on the mentality of shopping fresh and more frequently. Shoppers are picking up a few ingredients to cook that night, creating a shopping habit where they have to come back multiple times a week, and therefore increasing traffic to shopping centers.
- Stickiness effect of the primary market. A frequent question Kimco fields is where we see capitalization rates (cap rates) going in 2016, especially with the interest rate hike buzz. For open-air shopping centers, we’re starting to see that the primary market will have a stickiness effect to it where, regardless of if and when the rate hike happens, it will still keep its valuation premium and the cap rate approximate to where it is today. This is because of the demand from REITs or institutions to have high-quality real estate in the primary markets, where there is limited supply. Layer on top of that the international investors that want to have U.S. exposure, especially since the U.S. has been outperforming the global economy. More money will pour into that primary market focus.
This is true even more so with real estate becoming its own sector within the Global Industry Classification Standard (GICS) next year. Right now, real estate is classified under the financials sector. With this switch, investors will see more allocations towards real estate as people look to diversify their holdings. This will be a steady progression as people start to think about how much real estate they want in their portfolios and rebalance the assets.
- Small shop recovery continues. In the last quarter, 50 percent of our small shop deals were with mom-and-pop tenants. With the consumer confidence index up, people increasingly feeling secure to tap their home equity, and the relatively stable economy, more entrepreneurs will take the risk of opening a new business and capture their share of retail sales. As we look forward into 2016, the service sector geared towards service and experience, which dominates small shop concepts – nail salons, fitness centers, and restaurants – will expand. As we near full employment rates, we’ll also see wage growth affecting consumer spending and discretionary income flow into retail.
This is tied in with the localized shopping movement that continues in popularity. People like to shop local at specialty markets. It’s the overall “farmer’s market” experience, where shoppers have a cheese specialist and a local honey vendor, which creates an enjoyable shopping experience. That’s the type of environment that will time and time again prove uniqueness is important in retail.
- Property revival with redevelopment. A big focal point in 2016, especially for Kimco, is our redevelopment pipeline. Throughout the industry, ground-up development will remain muted. In our redevelopment strategy, we try to capture all of the above trends and put them to work. The goal is to make Kimco a curator of sorts and add value to existing properties by curating and delivering to consumers the best merchandising mix based on these trends.
It’s critical to keep retail offerings fresh and to attract traffic to shopping centers at all hours of the day to create an all-encompassing shopping experience. To extend shopping center hours, we seek a tenant mix that may include a coffee and bagel shop for the morning, a grocery store for afternoon errands, and restaurants or a theatre to entertain in the evening. Working in special events also helps to boost the entertainment offering and keep the community engaged.
Smart owners will listen to their customers and analyze shopping patterns to adapt shopping centers to these changing times. Overall, these five trends will keep Kimco busy for the next 12 months.