Retail Real Estate in the Digital Age

Serving as ICSC President and CEO affords Tom McGee a unique perspective on the retail industry. He leads a global organization with 70,000 members in more than 100 countries who develop, lease and operate shopping centers from the largest mega-malls to neighborhood centers. McGee spoke with Retail Leader about the evolving U.S. retail landscape, the bricks-versus-clicks debate and what's really going on with traffic.

Retail Leader: What is your vision for ICSC and the shopping center industry?

TM: To be the champion for retail real estate. It is implicit upon us to support our members and serve as a strategic partner to our industry. Few places have the power to bring people of all ages and interests together like shopping centers. In an age of Snapchat and dot.com everything, there's no replacement for "being there."

One of ICSC's undertakings is to continue to educate key stakeholders and the media on the true fiscal health and strength of the retail real estate industry. ICSC's strategic ambition is that the retail real estate industry is broadly recognized for the integral role it plays in the social, civic, and economic vibrancy of communities across the globe. Shopping centers help shape the perspective of people in the communities that they live in and are a source of economic opportunity. So, with that is a sense of responsibility and opportunity to really impact change. Looking forward, the retail real estate industry will remain an integral force in building communities, fueling economies and inspiring innovation.

RL: There's been a familiar narrative for a few years that malls are dying and traffic is declining due to e-commerce. What's your take?

TM: Shopping center occupancy rates are over 93 percent, while base rents increased more than 5 percent for the first two quarters of 2016 compared with the same period in 2015. This means that the demand for new retail space is outpacing the current supply which, to me, points to a very healthy industry.

Keep in mind that as the U.S. population continues to grow, the percentage of shopping center GLA [gross leasable area] per capita has actually slightly decreased in recent years from 43.2 percent in 2009 to 43 percent in 2016, meaning that the industry has successfully constrained the amount of new supply being put into the pipeline and has focused on elevating and redeveloping existing properties.

According to the U.S. Census Bureau, the value of shopping center construction reached nearly $17.2 billion in 2015—a level not seen since 2008. Much of this was spent on redevelopment, which has been a major theme in the industry as properties diversify their tenant mix and incorporate more digital and experiential offerings.

RL: Those don't sound like metrics of an industry in decline.

TM: Retail is a cyclical and competitive industry, and yes, some properties may struggle. However, there are many likely reasons for a shopping center closing, including bigger and better retail being built in the same trade area, or an economic or demographic issue in the area with consumers no longer being able to support discretionary retail. More often than not, a struggling shopping center or big box store is turned into a different format of shopping center, or different asset class of commercial real estate. For example, the departure of large-format anchors was initially perceived as a threat, but has actually paved the way for "junior anchors" that allow for multiple retailers and tenants to occupy the previously single-tenanted space.

RL: There was record attendance at ICSC's global retail real estate convention (RECon) earlier this year, so clearly a lot of interest from retailers in growing their physical presence. What stood out for you at this event in terms of the type of centers retailers find most desirable now?

TM: RECon experienced a record post-recession attendance of more than 37,000 attendees and over 1,000 exhibitors. It was my first time at the conference, and the level of energy spoke to the underlying strength of the industry and the broader economy as well. A deal by its very nature is an optimistic bet on the future, and the record attendance was a clear indicator of that optimism.

In terms of the type of centers, I didn't hear one category stand out amongst the others. Different types attract different retailers, but all seem to be desirable to one tenant or another. There is always incredible opportunity to find a new growing location and serve a community.

In December, the 2016 New York National Deal Making Conference, which is ICSC's second-largest global event, is also slated to experience record attendance. The two-day program has steadily grown since its 2014 debut at the Jacob K. Javits Convention Center, and this year we expect 11,000 attendees, 500 exhibitors and over 170,000 square feet of exhibitor space.

The conference is an important one not only for ICSC, but also for our industry as it is a harbinger of growth prospects over the year to come. Often, when the conference grows, so too does the retail real estate industry and, as a result, the U.S. economy as a whole. Sales at shopping centers represent about 15 percent of total U.S. GDP (total retail is 26 percent) — so strong growth in our industry is a good sign for the economy as a whole.

RL: What are you seeing with regards to the integration of technology into shopping centers and even the overall physical design to accommodate shoppers who are engaging with retailers digitally?

TM: Adopting an omnichannel approach in order to fulfill consumer demand is an important consideration to stay competitive in the retail landscape. Omnichannel shoppers shop more frequently and spend 3.5 times more than their single-channel counterparts. We also know that today's consumers are better informed and connected than ever before. According to ICSC's holiday forecast, 85 percent of holiday shoppers indicated they will research online before making holiday purchases in-store. The rise of click-and-collect is a perfect example of how the line between physical and digital retail continues to blur. Thirty-nine percent of holiday shoppers indicated that they will utilize click-and-collect; what's more is that 83 percent of these shoppers will then make additional purchases in-store when picking up their order.

Developers are paving the way in retail innovation to deliver a more efficient, experiential consumer journey. We are seeing them offer things such as complimentary Wi-Fi, technology that helps you find a parking space, navigation apps that deliver turn-by-turn directions from store to store and even loyalty and rewards programs similar to those offered by retailers.

Finally, in order to cater to the multichannel consumer, retailers are developing multiple point-of-sales (POS) checkpoints and optimizing their supply chains to deliver products from any point where consumers want to buy them. A strategic alignment between technology and real estate is allowing developers to close the gap between e-commerce and traditional distribution networks, helping solve the "last mile" equation.

RL: The effort to make shopping centers "experiential" and generate traffic has led to an increase in food, dining and all sorts of entertainment uses. Do you see this trend continuing?

TM: Absolutely. The industry is successfully evolving to keep pace with the needs of consumers, and right now the consumer is placing a high value on experience. We are seeing upgraded traditional tenants like movie theaters, fitness centers, and food courts/restaurants—but also a new wave of experiential options.

Over the past several years, properties have focused on diversifying their tenant mix to include a range of retailers, restaurants, mom-and-pops, entertainment offerings and specialty shops. More than just retail, developers are incorporating office, hospitality, residential and event space. Additionally, services are a rising proportion of the tenant mix, including opticians, dentists, dry cleaners and medical clinics in addition to public services such as government offices, adult education and public libraries.

RL: The phrase "bricks vs. clicks" emerged to describe competition between physical and online only retailers. Then came the phrase "clicks to bricks" to describe online retailers opening physical stores. Do you see the click-to-bricks movement becoming a full-blown trend that shopping center operators can rely on as a new source of tenants?

TM: I'd take it one step further and say the narrative has progressed from "bricks to clicks" to "bricks AND clicks," with the physical store remaining at the epicenter of the omnichannel experience.

Well-known pureplay e-tailers like Warby Parker, Bonobos and Blue Nile spurred the clicks-to-bricks movement, first testing physical locations via pop-ups and small-format stores, and then committing to expanding their brick-and-mortar footprints after reporting significant returns. In fact, research indicates a synergistic relationship between a physical store and online sales generated within that trade area. This is demonstrated by the "halo effect"—when the physical store thrives, so too does the online business in that region; when a store closes, digital sales in that region also wane.

We view online as an opportunity for retailers. Take recent news of Walmart's purchase of Jet.com, as well as news of Amazon opening physical stores. Both demonstrate the importance of true convergence and alignment in retail. Digital and physical retail are meeting to create a seamless, winning experience for the consumer.

RL: What is the outlook for lease rates, especially in the neighborhood center segment, occupied by traditional supermarkets?

TM: Neighborhood center base rents and occupancy figures have steadily increased since 2011. This means that the demand for retail space is quite strong for this segment, which is a positive indicator looking ahead. Due to the rise of omnichannel, owner and retailer interests have become more closely aligned, yet the structure of rental agreements remains broadly the same. In neighborhood retail centers where small local retailers are common, lease terms are typically three to five years.

Additionally, neighborhood centers' tenant mix have adapted to emphasize the value of consumer opportunity. As such, centers have transformed into places that attract, entice and engage by delivering on experience, convenience and exceptional customer service.

RL: ICSC is quite active in Washington, and now we have a new President. What do you want to see lawmakers get done?

TM: We are working on several top priority legislative issues right now, including E-Fairness, tax reform and reforms to the Americans with Disabilities Act. ICSC continues to aggressively advocate for federal lawmakers to enact E-Fairness legislation that reflects 21st Century retail. Under the current state sales and use-tax system, local retailers must collect sales taxes on all sales, while their online-only counterparts are exempt. When a retailer does not collect the tax at the time of purchase, the consumer is responsible, by law, for remitting the use tax. This is rarely factored into the purchase decision, and as a result, local merchants suffer from this government-sanctioned price disadvantage. This flawed system hurts communities across the country, to the tune of $23 billion in lost sales-tax revenue.

Regarding tax reform, ICSC supports policies that are focused on growing the economy in communities across the country, spurring investment and new development. The right U.S. tax policy could positively impact decisions to develop or redevelop new retail and restaurant destinations that make a community great. Improvements to existing tax structure can grow the economy in communities across the country, spurring investment and new development.

Lastly on ADA reform, the House Judiciary Committee recently approved HR 3765, the ADA Education and Reform Act of 2015. The legislation, which has bipartisan support, takes steps to ensure the ADA continues to provide meaningful benefits for those it was meant to protect instead of largely enriching attorneys taking advantage of a loophole in existing law. Additionally, Sen. Jeff Flake of Arizona introduced a companion bill, S 3446, the ADA Education and Reform Act of 2016, which enhances compliance mechanisms and addresses the unintended consequences of ADA enforcement that has resulted in a surge of Title III lawsuits over the last few years.

RL: The E-Fairness issue has been going on a long time. Is 2017 the year it finally passes?

TM: This continues to be ICSC's top legislative priority. We're hopeful this is something Congress gets done. It is time to fix our country's sales-tax system, which unfairly picks winners and losers. Online retailing is a mature business, and these retailers should compete with brick-and-mortar sellers on price, inventory and customer service, not on sales-tax treatment.