January 18, 2017

Retail Sector Evolves as Consumer Preferences Change

Holiday Sales Reveal Promising Outlook

 Retail sales from November through December 2016 increased with a 4% gain on a year-over-year basis. This gain outpaced the 10-year average of 2.5% growth, allowing consumer confidence to reach the highest level since August 2007.  

 Department Store Sales Struggling

This past year department stores battled to gain traction, with category sales decreasing 8.4% due to spending shifting to online destinations.  As a result, Macy’s, Sears, & K-Mart announced store closures over the past month.  For a decade, Sears & K-Mart have been trying to retail supply & demandrestructure their merchandise and footprints to drive more consumer traffic.  Sears announced they will close 30 unprofitable stores which represents 10% of the firm’s total footprint.  Also, Macy’s has announced they will close 68 stores after they announced closures of 100 stores earlier this year.  However, on the online front Macy’s cited a double-digit gain in online sales over the past year, prompting additional investment in e-commerce and distribution to meet demand.

 Closures of Traditional Anchor Stores Affect Malls & Strip Centers

Strip Center and mall operators are repositioning their spaces into different uses to increase traffic. While some landlords have redeveloped empty department stores into apartments or office space where zoning allows, more common uses involve new restaurant and bar concepts combined in open-air settings. The revamped tenant mixes can often generate more revenue through higher prices per square foot from multiple leaseholders and greater customer traffic than previous department stores, providing a positive outcome for landlords and new choices for consumers. 

speciality retail leads 2017 openingsConsumer Preferences Change to New Brands & Discount Stores

Consumer preferences have gravitated to new brands and discount stores.  While department stores struggle, other retailers have recorded booming sales.  Discounter Dollar General Plans to open 1,000 stores during 2017, while apparel outlets including Ross Stores and T.J. Maxx are also expanding their footprints.  Traditional department stores are trying to adapt to this consumer trend by rolling out fresh concepts such as Nordstrom Rack and Macy’s Backstage.  Ulta Salon also continues to grow rapidly, with 100 stores planned annually through 2021 to meet demand.  Retailer expansions and re-tenanting reduced the vacancy rate 40 basis points to 5.6 percent as net absorption outpaced construction by nearly 30 million square feet over the past year. This year, a slower pace of development will support similar circumstances, allowing the national vacancy rate to decline by 40 basis points.