2012 Retail Forecast

Esteemed physicist Niels Bohr is quoted saying, “Prediction is very difficult, especially about the future.”  His thoughts seem especially true in putting together a 2012 forecast for such a dynamic and rapidly-changing industry like the retail business.

Looking back on the past year, there is evidence that the economy is recovering but at a much slower rate than people want.  Real GDP for the United States is now slightly higher than its peak in 2008 but it took a long time to get there.  It has grown at a 1.2% annual rate in 2011 but this unfortunately indicates subpar growth.  According to John Beuerlein, Chairman and Chief Investment Officer of Marquette Asset Management, “The fundamental problem undermining the economy is a lack of demand on the part of both businesses and households.”

While employment is improving, income is not growing.  In part this is due to the fact that corporations have learned how to make more money with less people.  This lack of income growth has directly affected consumer expenditures.  While real consumption growth is up from 0.7% in Q2 2011 to 2.3% in Q3 2011, it is largely due to households being willing to dip into their personal savings.  Consumption cannot be expected to accelerate the economic recovery if income growth remains weak and households continue to focus on reducing their debt.  If these trends remain, consumption growth can be expected to remain lukewarm in 2012.

These economic factors have a direct affect at the checkout line.  For instance, as households look to save money and reduce their debt, dollar stores have risen in popularity.  Due to their continued success this past year, Dollar General has planned 625 new stores in 2012 while Family Dollar anticipates opening 450-500 stores.

Another trend that continued to gain momentum in 2011 was the transition from bricks to click for many of our intermediate goods.  Consumers are replacing plastic DVDs and paper books with digital copies they can access anytime and anywhere via computers, tablets and other mobile devices.  The Association of American Publishers says that the number of U.S. adults with an e-book reader doubled from an estimated 14 million to 28 million between November 2010 and May 2011.  And streaming video, through service providers like Netflix, Hulu Plus, YouTube and ESPN, continues to gain popularity.  The demise of Borders, which closed 399 stores and laid off approximately 10,700 workers, and the struggles of Blockbuster Video in 2011 are in part due to their lack of ability to properly address this shift in consumer behavior.

Overall, changes in the economy and consumption patterns over the past few years have caused retailers, real estate operators and brokers to shift their thinking about how to do business.  So what does this mean for 2012? Here are four things to consider moving forward:

1.)     Retailers will continue to right-size
The buzz word of 2011 was “right-sizing” and it will continue to have a great deal of impact on the retail industry. As in other industries where corporations have learned how to do more with less, retailers are experimenting with the size and format of their stores to best meet their customers’ needs.

Walmart, Best Buy and Staples have all discussed plans about reducing their store footprints.  Even the United States Post Office stated they will right-size their retail network. Postmaster General Patrick Donahoe explained, “Today, more than 35% of the Postal Service’s retail revenue comes from expanded access locations such as grocery stores, drug stores, office supply stores, retail chains, self-service kiosks, ATMs and usps.com, open 24/7. Our customer’s habits have made it clear that they no longer require a physical post office to conduct most of their postal business.”

Real estate operators must continue to adapt to these changes. John Johannson, Colliers International, explained at the Minnesota Shopping Center Association (MSCA) monthly program in November that landlords and retailers must become experts in dividing anchor spaces.  A perfect example is at the Southdale 494 Center where Johannson was instrumental in helping divide a former Office Depot for two tenants, Total Hockey and Staples.  While a costly undertaking, it was the key to driving long-term success for the center.

2.)     Excess space will flood the market

Michael S. Wiener, President and CEO of Excess Space Retail Services Inc., a national consulting and advisory firm specializing in disposition and lease restructuring, told Retail Traffic that 2012 will likely bring more than 5,000 store closings.  Wiener says, “Lease restructuring efforts have staved off many store closings, but as time has worn on, many retailers are now having to face the reality of a grouping of stores within their portfolio that just don’t work.”

Press releases by retailers about closings have been a constant in the media for the past few months.  The list of retailers shutting doors includes Gap (189 locations by 2013), Famous Footwear (75 stores), Christopher & Banks (100 stores by end of January 2012), Lowes (20 stores) and Payless Shoes and Stride Rite (175 stores collectively).  Most recently, discount retailers Syms and Filene’s Basement have filed for bankruptcy, with plans to liquidate in early 2012 and Sears Holdings announced that they would be closing 100-120 Sears and Kmart stores due to weak holiday sales.

3.)     Shopping centers must look for new uses

There is more competition than ever amongst real estate operators to fill their vacant spaces with strong-performing national retailers.  As it continues to be a buyer’s market in most parts of the country, those major players are picking the best spaces for the price they want to pay.  To cope, landlords are learning that to remain competitive they must seek out new un-traditional users to fill their stores and generate traffic to their centers.

According to an article that appeared in The Wall Street Journal in October, real estate operators are becoming more creative in their tenant mix.  Journalists Kris Hudson and Miguel Bustillo report, “Mall giant Simon Property Group Inc. opened an aquarium in July at its Grapevine Mills mall near Dallas. Real-estate brokerage Jones Lang LaSalle Inc. put a fencing academy in a former Old Navy store in Florida’s Tallahassee Mall, and a community theater on the lower level of a former Boscov’s store in Harrisburg, PA.”  And a November article in the Dayton Daily News cited this trend has legs as The Cincinnati Mall had just announced that they signed a 25-year-lease with Cincinnati Sportz Zone, who will build a new ice arena inside the former Bigg’s department store.

From grocery stores and fitness centers to clinics and indoor trampoline facilities, real estate operators are learning that the shopping center is transforming in a way that redefines what one-stop shopping means.

4.)     Minnesota is an important hub for retail

While Minnesota is still feeling the effects of the economic recession, it continues to outperform the rest of the United States.  As of November 2011, the state’s unemployment rate was 5.9% in comparison to the national unemployment rate of 8.6%.  Also, in the first ten months of 2011, private hourly earnings in Minnesota rose 3.2 % from the year before, compared to 2% growth nationally, and hourly earnings in Minnesota outpaced national growth.

Tom Stinson, state economist, told Minnesota Public Radio in December, “It’s not that we’re doing as well as we should. It’s not that there isn’t a lot left to do, but we are outperforming the U.S. economy and we’re expected to continue to do that.”

With the launch of Greater MSP, a private-public partnership whose mission is to stimulate economic growth and prosperity in the Minneapolis Saint Paul region, and the release of the Downtown 2025 plan for Minneapolis, the metro area will continue to attract a wide range of dynamic businesses and retailers.

We shouldn’t forget that the state has a long successful relationship with retailers from the building of the first enclosed shopping mall to now serving as the headquarters to Best Buy, Buffalo Wild Wings, Caribou Coffee, Christopher & Banks, Dairy Queen, Famous Dave’s, Great Clips, Regis Corporation, Room & Board, Supervalu and Target.

The Mall of America continues to be an incubator for new retail concepts with its 40 million annual visitors.  In 2011, its new store openings included a diverse group of restaurants and retailers, such as Desigual, Dick’s Last Resort, House of Hoops, Michael Kors, Pardon My French and Peeps & Company.  Smaller neighborhoods also have attracted the interest of new retailers.  Last month, Athleta opened only its 4th national location at 50th and France while CB2 opened their 11th national location at Calhoun Square.

Overall, Minnesota boasts a robust economy with 20 Fortune 500 public companies and eight of Forbes’ largest private firms. It has a well-educated population (Minneapolis / Saint Paul is the sixth most educated region in the country, according to the US Census) that leads a healthy, active lifestyle (Men’s Health magazine’s 2011 ranking of the most active cities in the country listed Minneapolis as No. 10 and Saint Paul at No. 13).  It will continue to be a highly desirous location for retailers in 2012.

What does this all mean? It means we all must learn to throw preconceived notions out the window about how retail works.  As owners and developers, we must learn to be more flexible and open to new ideas on how to lease space and how to attract customers to our centers.  As retailers, we must be able to adapt to the new experience of how consumers shop and what retail spaces will best fit our needs.  As leasing agents and brokers, we must be able to present a clear strategy to our clients in a way that is cost-effective and timely.

For all of us this will require more information, time and resources. It will demand more thought, caring and creativity to ensure that the deals being done, the spaces being leased and the stores being built will translate into more than quick financial gain but true long-term success for our centers and our tenants.

About Cushman & Wakefield/NorthMarq

​Cushman & Wakefield/NorthMarq is a joint venture formed in September 2011 by NorthMarq Real Estate Services and the Minnesota operations of global real estate services firm Cushman & Wakefield. By combining the talent of both organizations at the regional level with the global platform of Cushman & Wakefield, we offer clients the best combination of regional strength and global capabilities. The result: the leading commercial real estate firm by all measures in the Upper Midwest.
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