Retail 2020: Supply/Demand, Redevelopment, and Technology to Lead Innovation

It’s no secret that retail is evolving, as it always has, and as consumer preferences shift, so must retailers and landlords. After meeting with more than 50 retailers over two days at the 2019 NY ICSC convention, I have never been more enthusiastic about the passion and experimentation that is occurring across retail. Retailers with a clear vision for the future will drive change in 2020 and beyond. Stores will open, and stores will close, but data is now confirming the importance of the store base to the retailer’s eco-system – the critical role of the physical store in customer acquisition, brand awareness and convenience, and how it can be used as a distribution point for click and collect and ship from store. 

Probably the biggest takeaway from ICSC is that store managers are finally getting credit for ecommerce sales that are made in the same zip code as their store. Previously, the store manager was not given credit for an online sale, but was penalized when an ecommerce sale was returned to the physical store. It appears that retailers are listening to their people and now fully integrating and incentivizing them the right way. While this may seem like a small point, it can have a dramatic impact on store optimization plans and future new store rollouts. 

 At the core of our strategy, we believe our shopping centers are ripe for adaptation for the new world of retail through the addition and mixing of non-retail uses. Our focus on creating long-term shareholder value is built on the three core pillars of our strategy:

 1) Quality Locations: Our assets are now clustered in the top 20 metro markets of the US, where population growth is occurring, jobs are being created, and our assets are primed for growth. 

2) Strong Balance Sheet: Maintaining a strong balance sheet is essential to long-term success. It gives us the ability to prepare for unknowns in the rapidly changing world, and the access to capital to acquire, develop, redevelop and unlock the highest and best use of our real estate. Our enormous amount of liquidity and a largely free and clear asset base give us the opportunity to methodically plan for the future. 

3) NAV Creation: Want to know our secret? It’s all about our team members as we work to find new and creative ways to create value. A platform like Kimco is not just a calculation of Net Asset Value or a sum of all of our assets. It’s an exciting and creative working environment where we strive to innovate and create long-term shareholder value. Our Signature Series? projects have successfully transformed the top assets of the company into unique and dynamic mixed-use environments. We now have close to 5,000 apartments entitled on only eight assets, and master plans being developed across the entire portfolio. We believe the future is bright, and with more density and mixed-use opportunities in the pipeline, it feels like we are just getting started.   

Supply

In the open-air shopping center sector, we expect to see both an increase in land costs – particularly in top 20 markets where our portfolio is concentrated – and an increase in construction costs. These trends will further limit supply and constrain new development, which today remains near a 40-year low, while serving as a boost to well-capitalized landlords who can invest in and redevelop their existing shopping centers.

In retail, there are always some store closures that should be offset by more openings in 2020. The closures will be heavily weighted towards legacy retailers who primarily fall into two categories: those that are short on innovation and those that are long on leverage. No matter how a retailer positions itself, if it doesn’t have an innovative merchant strategy that excites today’s customers, it is doomed from the onset. And those with over-leveraged balance sheets will be unable to compete with more nimble and financially grounded competitors. These are typically retailers owned by private equity firms that have not only taken on enormous amounts of debt but also failed to anticipate the additional capital needed to keep up with the shifts in consumer behavior.

Demand

Demand for new space will be generated by retailers who continue to put their customers first, and who successfully focus on the combination of value and convenience. Retail will be dominated by WATCH – Walmart, Amazon (Whole Foods), Target, Costco, and Home Depot – who have seamlessly integrated brick-and-mortar stores with their ecommerce offerings and are leading the omnichannel revolution. These powerful retailers collect reams of data and use sophisticated algorithms to create consumer profiles that predict what shoppers want or need before they even know it themselves. Retailers in the growing categories of health and wellness/fitness, off-price, medical services, entertainment, specialty grocery, and food and beverage will use similar analytics to target high-quality locations that will best serve their customers. Trade areas will also be redefined and expanded as a result of retailers using multiple delivery options which, in time, might include drones and driverless cars. Even with our anchor occupancy at an all-time high of 98.7%, we believe these demand forces will continue to drive our occupancy to new highs.

Redevelopment

Redevelopment will replace development as the largest contributor to value creation for Kimco in 2020. Our Signature Series? redevelopment platform is focused on creating a vibrant experience where we can mix and add different uses to enhance the growth and value of our largest and most important assets. We are uncovering the highest and best uses of our real estate, and in many instances, if you have the right retail you can drive significant premiums to the non-retail uses. Our opportunities are abundant, and with over 400 assets to masterplan, you can see that the potential value creation and the runway for redevelopment is immense. Our first two mixed-use multifamily redevelopment projects – The Witmer residential tower at Pentagon Centre which is next to Amazon’s planned HQ2 in Pentagon City, Virginia, and Lincoln Square in Philadelphia’s Center City District – have been widely acclaimed. As these two projects demonstrate, retail is more than just a destination. It can be an attractive amenity that drives premiums for other uses that will benefit from a location close to the goods and services our sites provide.

Technology

Technology will further transform retail, especially via the supply chain, fulfillment and automation. Micro-fulfillment centers, fully-automated distribution hubs, home-delivery options, and buy-online-pick-up-in-store programs (BOPIS) are just a few of the initiatives that are rapidly changing the world of retail. Technology will also continue to put pressure on retail employment as point of sale, back of house, and distribution facilities shift towards automation. We expect the overall convenience of our locations and the BOPIS trend to drive more sales out of our centers. It’s amazing to think that over 50% of Home Depot’s online sales are being picked up in-store.

Innovation

One thing is for sure, technology is not slowing down and innovation will continue across all sectors of real estate in 2020. We come back to the three pillars of our strategy 1) Quality Locations and the adaptability of our centers as the sweet spot to drive future growth in a rapidly changing environment 2) Balance Sheet Strength and 3) NAV Creation. The only constant is change, and having the right people who are motivated, collaborative, creative, and inspiring is what makes Kimco uniquely positioned to meet this change head-on.