Shopping centers: ‘As a whole, the industry is healthy’

Drive down most major South Florida streets, and shopping centers abound, filled with national names like Starbucks and GameStop and Florida names like Publix and Sedano’s. While drivers make their way into those centers as part of their daily routines, many shop online, too. So how does that bode for the future of the shopping center?

With online shopping, the shopping center industry is experiencing one of the most profound periods of evolution since the emergence of the first suburban malls in the mid-1950s. For the most part, the strip-shopping centers have recovered from recession, when a slew of big-box retailers closed. Now, major retailers in indoor malls like JC Penney, Sears and Macy’s, and specialty retailers like hhgregg have announced plans to close some stores.

Early this month, open-air shopping center owners, financiers, tenants and managers gathered in Miami to share experiences and trends affecting the industry. One of the speakers there was Tom McGee, CEO of the International Council of Shopping Centers, headquartered in New York.

McGee, who is helping lead the industry through its evolution, has a lot to say about retail real estate’s role in Miami and the country. He also provides a look at where most retail spending actually occurs, why the latest demographic trends are favorable for the industry, and how shopping centers have improved both their productivity and appeal.

The Herald asked him a few questions while he was in town for the conference:

Q. Big picture, what is the state of the shopping center industry?

A. As a whole, the industry is healthy. Occupancy at most centers is full or close to full. You see the normal churn, but the industry has done a good job of navigating itself out from the heights of the recession. In development, the industry has done a good job of matching supply with demand and now there is new redevelopment taking place.

Surely, technology is having an impact, but when you look at the stats and the numbers, online shopping is still a small percentage of retail sales. There are lots of physical retailers with their own online channels. There is integration taking place in the industry around technology and it is not just about people buying things online.

We see a better-informed shopper who does more research, makes a price comparison and reads reviews. Shoppers put a premium on the right pricing, the right merchandise, the right service and the right experience. Their expectations have increased.

Demographics also play a role what is happening in the industry. We have a huge boomer population that is aging out of its prime consumer years and a millennial generation, which is bigger, migrating into its prime shopping years. There is a perception that millennials only shop online, when actually they want to shop in stores. They like the social experience.

I am bullish on the long-term impact on the industry.

Q. There are people who drive the streets in Miami and believe there are too many shopping centers. On a national level, do you see an oversupply?

A. I think we’re actually at a good place, but there are short-term challenges that need to be managed through.

There is stress in the department store segment and closures. When you look at those stores as a percentage of retail square footage, it’s small. But those spaces are big and prominent and they need to be handled in a systematic way. I think you will see owners transition the spaces into other uses such as big experiential things like movie theaters, restaurants, arcades, laser tags, rock climbing. It’s not just retail real estate, but consumer real estate and looking at what does the consumer want and need.

The other thing that doesn’t get spoken about much is online-only retailers are opening up physical stores. The economics of operating online-only in retail is challenging. The cost of distribution and customer acquisition is hard to generate when you’re online only.

An example is Warby Parker, which started online and has opened retail locations (including one in Wynwood). Anyone who wants to get the masses generally has to open physical stores. There is only one Amazon. There are no others close to its scale. Even Amazon at $136 billion in annual sales is a small percentage of the $24 trillion dollars in retail sales worldwide.

Those facts get missed, although I don’t mean to diminish the important impact technology is having in the retail sector.

Q. The recession led to lots of store closings (Linens & Things, Loehmann’s, Circuit City) that left shopping centers with holes. Have the large blocks of space vacated by big-box retailers during the recession been leased?

A. They have, and the best way to prove that is occupancy rates. Overall, occupancy rates for shopping centers are in the mid-90s (percent full). The industry is doing well.

The thing about retail that gets lost is it’s an integrated part of everyday American life. It’s part of what we do every day and when there are closures, we see it and experience it. But retail has gone through so many transitions. Retailers have gone in and out of spaces for over a hundred years.

What is happening today isn’t different. Clearly there are opportunities and challenges the industry needs to address, but overall it is quite healthy.

Q. People consider the newly opened Brickell City Centre, a combination of retail, restaurants, and housing in Miami’s financial district, to be innovative. What other creativity or innovation are you seeing in the industry?

A. The operative word is mixed-use experience. An example of that is housing, hotels, office and retail in one center. It goes back to the demographic shift. Baby boomers and millennials like mixing different aspects of life. This is not just the trend in urban areas but suburban, too. It’s a huge trend that is only beginning to take shape because it makes life easier to navigate and manage.

Q. What are the financing opportunities to build or buy shopping centers?

A. Every individual transaction is unique. A good property will find willing lenders and buyers.

Q. How else do you see retail changing?

A. A lot of consumer companies are opening their own stores. That is an opportunity for shopping centers. We’re moving away from the department store model. We are seeing folks like Nike and Under Armour who had been in department stores opening their own stores. We’re seeing brands like Sephora partnering with JC Penney. The environment is changing, an evolution is taking place and we’re in the middle of it.

This story was originally published March 12, 2017 at 11:00 AM with the headline "Shopping centers: ‘As a whole, the industry is healthy’."