SoCal ViewPoint_How Technology is Transforming Retail_Dec 2015

VIEWPOINT

How technology is transforming retail

Retail Strategies Changing for Big Box

SOUTHERN CALIFORNIA RETAIL

DECEMBER 2015 CBRE Research © 2015 CBRE, Inc. | 1

• Big box retail is evolving and changing, providing new challenges and opportunities for retail tenants and CRE professionals

• Omni-channel retail has proven to be a huge influencer that companies are recognizing to be a valuable tool rather than the death of brick and mortar retail

• Tenants are strategically changing the size and space use of big box locations to suit needs of the market

• Southern California is a prime market for these changes with tenants and real estate professionals adapting and executing leasing and development based around these new Big Box trends

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The commercial real estate retail market has experienced key changes to its fundamentals in the way it executes urban and suburban big box properties. Major tenants are beginning to evolve their overall strategy to better complement shifting trends with today’s most effective retailers being those who have adopted the internet as an active part of their business.

Companies marrying their brick and mortar locations with online presence are evolving which is ultimately changing the stipulation for size and space within retail. Recognizing a lessened need for their retail footprint, many tenants are reducing sizes and locations as companies are continuing to experiment in balancing their physical store use between showroom and goods distributor.

OMNI-CHANNEL RETAIL AS A PRIMARY INFLUENCER FOR RETAIL STRATEGIESOver the last four years, online retail sales have grown from 5% to 8% of total retail sales. This increase is minor but was experienced in half the time of previous growth periods and is a trend that will continue to remain relevant. Although total e-commerce sales remain below early 2000 predictions, companies have begun to recognize that when used correctly, e-commerce can be advantageous to their in-store sales.


Nicole MolerResearch Manager

Ashley HillSenior Research Analyst, Retail


Omni-channel retail provides consumers with a seamless buying experience

Source: U.S. Census Bureau Quarterly Retail E-Commerce Sales Report, 2014.

Figure 1: Year-Over-Year Retail Sales Growth

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

All RetailBrick & MortarE-Commerce

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Rather than opposing online commerce practices, many retailers have adopted an omni-channel retail approach in which consumers are faced with a seamless experience between all shopping channels in person, online, on a mobile phone, or any other outlet available. Retailers utilizing their online success along with their physical store fronts are focusing on creating omni-channel environments and have begun experimenting by presenting smaller format stores and reducing sizes at the mid-point and pre-renewals of their leases.

Displaying the company’s flexibility and relevance, Target has responded by explored many different formats to help tailor stores to fit diverse markets. In the last few years, the company has introduced flexible format stores which were known as CityTarget and TargetExpress. The company’s creation of the urban designed stores formerly known as CityTarget, allowed the retailer to stray from their average 135,000 to 178,000 sq. ft. model for traditional Target stores. Target’s city concept ranges between 80,000 and 160,000 sq. ft. and is typically found as ground floor retail. With locations in major cities such as Los Angeles, Chicago, Portland, Seattle, San Francisco, and Boston, these locations have some of the highest foot-traffic counts within the company. Target’s city concepts are merchandised so that customers walk through “impulse buy” sections to get to higher priced popular goods. They focus more on daily needs, reducing their clothing and automotive sections, offering less bulk items and have an increased level of customer service in hopes that this personalization will persuade shoppers to visit more frequently. The goal of these urban locations is to encourage consumers to stop in daily for their needs rather than buying all at once.



Store Type Average Square Footage Date Initiated

Target 126,000 SF 1962

Target Greatland 145,000 SF 1990

Super Target 175,000 SF 1995

Target (City) 90,000 SF 2012

Target (Express) 20,000 SF 2014

Figure 2: Target Store Concepts at a Glance

Source: Target.com, November 2015.

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316.9

283.5

148.6

80.1 71.9 72.9 83.6 89.2

2007 2008 2009 2010 2011 2012 2013 2014

SF in Millions

Source: Costar, November 2015 .

Figure 3: Amount of New Retail Space Delivered Nationally

The formerly named TargetExpress concept is also a new creation for the retailer. These smaller Target locations are an average of 20,000 sq. ft. and are aimed to reach affluent brand loyal customers who desire a fast and efficient shopping experience customized to their local communities. Target opened its first express model store at the University of Minnesota in 2014 and has since expanded to other major cities such as Washington and Chicago. To date, the company has plans to continue expansion of all store models both flexible and traditional. The company also recently announced that all Target brand concepts will operate under the same, Target. No matter the size or use of the store, the overall goal remains the same. Target is looking to simplify the shopping experience and show customers that they are not only limited to what is in the four walls of that store by encouraging an omni-channel relationship with the retailer.

Several companies such as, Safeway, Office Depot, Giant, and numerous others, have begun to break the mold with reduced sized locations based on population, congestion, and market need. As a way to compete with online powerhouses, retailers are implementing these new concepts and strategically altering their brick and mortar footprint to be more relevant with consumers and use physical locations as a free form of advertising for their online platforms. This has allowed tenants to stay active in otherwise densely concentrated areas merging online and physical stores for consumer convenience. Due to these new and evolving practices, less retail space has been needed as a whole in the overall market and construction deliveries nationally have slowed. Although this can be partially credited to the effects of the Great Recession, which halted development, this is also a result of a new need for retail space by popular tenants. Because desirable updated properties still remain in high demand, the market will see increasing renovation trends of worn down properties and gentrification in emerging and popular markets.

VIEWPOINT

DECEMBER 2015 CBRE Research 5


SOUTHERN CALIFORNIA

The retail market in California has continuously made strides in its overall market fundamentals since the Great Recession. Southern California continues to support a strong retail environment with low vacancy rates and high rents specifically in areas of Los Angeles County and Southern California’s coastal communities. While development continues throughout all of Southern California, large projects are based around centers with multiple modest suites and less about large boxes. Retailers and developers are focusing on creating an experience that consumers cannot get online, giving customers a reason to stay longer and return regularly.

Many vacant and downsized big box locations are sectioned out to accommodate hip, new-age restaurants. Other developments of large available space include new concepts, like The Union Market Tustin in Tustin and The OC Mix in Costa Mesa, in which large box spaces are changing pace to embrace small retailers, local restaurants and boutiques, offering opportunity to rent space within a larger marketplace area without the overhead or risk of traditional leases. Mixed-use projects are also gaining momentum in place of retail-only shopping centers. Alhambra Place is one of the latest developments of this sort, offering a mix of 140,000 sq. ft. of retail space and 260 units of multi-family within an urban infill location. Grocery-anchored shopping center concepts still remain strong with tenants such as Whole Foods, Sprouts, Trader Joes, and Aldi remaining chief in the big box market.

With many big boxes downsizing throughout the market, one of the chief segments in Southern California has been discount retailers such as Dollar Tree, 99 Cents Only, and Aldi who are more than happy to accommodate a vacant 10,000 to 20,000 sq. ft. suite. This is primarily being seen in urban areas throughout Southern California and specifically in the Inland Empire which experienced an unusually high vacancy of big boxes due to the recession and growth in online shopping.

Figure 4: Southern California Big Box Vacancy

4.8%

5.3%

5.8%

6.3%

6.8%

2010 2011 2012 2013 2014 2015

Source: Costar, 2015.

© 2015 CBRE, Inc. |

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DECEMBER 2015 CBRE Research 6


WHY DOES IT MATTER?

While much of the United States still supports traditional big box concepts, select high density regions such as Southern California will continue to see changes at a comparatively accelerated rate. Technology and population play pivotal roles in the success and changes of the retail market and will continue to evolve it as consumers evolve. Tenants downsizing store space creates a unique position for landlords and real estate professionals who are then faced with allocating the remaining square footage. Landlords are becoming imaginative, splitting customary big box locations into multiple suites. Commonly found, these smaller spaces are being repurposed restaurants and retailers that require a more concise amount of square footage. There is also an added layer of business types, working with office tenants who desire to use prior retail locations as creative and co-working office space.

The World Wide Web has accelerated the speed of market trends which has called for the commercial real estate field to respond. These emerging patterns have presented challenges but have also opened many doors for retailers and professionals changing the way they look at consumer spending and physical retail. As the internet continues to influence these trends the market can expect varied strategies in which big box tenants evolve and adapt, securing their position in the new retail market for the 21st century.

© 2015 CBRE, Inc. |

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Disclaimer: Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE.

Ashley Hill

Senior Research Analyst, Retail

+1 949 809 3745

[email protected]

AMERICAS RESEARCH

Nicole Moler

Research Manager

+1 949 725 8541

[email protected]

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SoCal ViewPoint_How Technology is Transforming Retail_Dec 2015