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Thursday, Jul 25, 2024

Landlords Can Weather The Retail Apocalypse

While the stock market had a banner year in 2019, not every company enjoyed robust gains. Chief among the exceptions were apparel retailers, particularly big box department stores, which together were the worst performing sector on the Standard & Poor’s 500 Index, according to a recent report from Bloomberg News. While the S&P 500 scored an annual gain of 29 percent – its best performance in six years – the department store index suffered a drop of more than 30 percent. Macy’s Inc. endured the biggest loss – nearly 45 percent – while shares of The Gap Inc. and Nordstrom Inc. both fell about 30 percent. That retailers floundered in 2019 is no surprise considering the effect e-commerce has had on traditional industry players throughout the decade. Barneys New York, Avenue, Payless and Forever 21 all filed for bankruptcy last year, while a slew of other companies downsized significantly in efforts to keep afloat amid the rising popularity of online shopping, discount retailers and peer-to-peer marketplaces. Those store closures – and the underlying evolution of the retail industry – present a special challenge for owners of big box real estate. “We have a shortage of land,” said retail real estate broker Matthew May, president of May Realty Advisors in Sherman Oaks. “You have a need for residential. You have a need for medical. For senior housing. Because you have a dense, urban, affluent area, people want that land. (Big boxes) either disappear or get downsized.” In the Valley last year, that manifested in the closures of Gymboree locations in Encino, Sherman Oaks, Glendale, Northridge and Valencia; the 69,000-square-foot Sears in North Hollywood’s Valley Plaza, downsized from 140,000-square-feet in 2017; and a 72,000-square-foot Kmart in Burbank. Increasingly, May said, developers and mall owners are forced to find more creative and profitable ways to use the valuable land where big boxes once sat. He pointed to the former Sears building at Westfield Topanga shopping center in Woodland Hills, which is now slated for transformation into a dining and entertainment district featuring restaurants, bars, a movie theater and other recreational offerings. The redevelopment is an apt representation of the pressure on retailers to provide “experiences” and dining options to stay competitive. May said Ikea is one big box retailer thriving in the current market because it employs these techniques. In 2017, the Swedish home furniture company reopened a whopping 456,000-square-foot store in Burbank — it’s largest in the U.S. — after an expansive renovation. What is Ikea doing that others aren’t? Well, for one, it sells hot food. But it also offers a free, supervised play area for children, and leverages emerging technology like augmented reality to help shoppers make better-informed buying decisions. May said this all adds up to an above-and-beyond shopping experience that resonates with the average consumer. He said mall owners in the Valley would do well to pick up similar strategies as their typical anchor tenants shrivel. “Mall operators need to create more reasons to go,” May said, adding that in other parts of the world, particularly Europe and East Asia, landlords have already figured this out. “(Malls there) have equestrian centers. They have tutoring. They have museums. It’s a whole world inside of a building. It’s educational and it’s experiential,” he said. He added there is one local developer who seems to understand how to keep pace with the industry’s evolution: Rick Caruso. “Caruso creates a sense of place — an emotional experience,” May said. “Why did he have trains? He didn’t have to do any of that. He had the money to do it, which is important, but he gets the returns. He has the highest sales per square foot. He didn’t invent this, he just took Europe and brought it here.” May noted that Westfield’s use of stage theater producers to help program the entertainment offerings at its malls was a big reason Unibail decided to acquire the company in late 2017 to create Unibail-Rodamco-Westfield. “When you connect on an emotional level with your customer, that’s when they’re your customer for life,” he said.

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