5 reasons that retail, real estate are getting a divorce

LAS VEGAS - The relationship between shopping centers and their tenants is among the biggest storylines to watch in the retail sector.

The future of the relationship was the talk of this year's International Council of Shopping Centers' annual RECon convention that ends Wednesday, making the gathering the most important in the last decade.

Here are five reasons that leading industry analyst Garrick Brown, based at Cushman & Wakefield's Sacramento, California office, gave convention-goers to explain why the retail sector is at a crossroads nationally and in the Cincinnati region.

High-stakes drama between malls, tenants

Apparel and department store retailers understand with the growth of online shopping, they do not need as many brick-and-mortar locations, Brown said. But in the last two months, Wall Street has hammered the stocks of publicly traded retail companies and pressured them to accelerate store closing plans.

That could cost retailers a lot of money, Brown said, especially if they have to pay hefty fees to break leases.

At the same time, mall operators are aggressively raising rents on tenants. High-performing "trophy" malls such as Kenwood Towne Centre in Sycamore Township have had a lot of market power in the last few years, Brown said. However, he added that mall operators may want to reconsider their strategy because if retailers decide en masse they could operate profitably in a lower-rent location, those retailers will be hard to replace.

"Either we're going to start to see the death spiral of a whole lot of mid-priced apparel companies or they're going to have to get very creative with their real estate strategies," said Brown, national retail research director at the commercial real estate firm. "(That means) getting away from trophy malls where they can't afford it anymore.

"It will burn these guys (mall operators) to be this aggressive. They are overestimating the strength of the Class A mall. The tenant pool is not very deep. We are not positioned for all our Class A centers to be luxury malls."

Saturation of once high-flying concepts

It's not a problem today, but Brown said it's likely that retail categories that have powered the industry for several years to return to earth.

Within the last five years, the top dollar store concepts such as Dollar General and Family Dollar have opened the equivalent of a store every 4½ hours, he said.

Brown said off-price apparel stores such as T.J. Maxx, Ross and others will soon reach their limits for growth as well.

But for now, the discount and off-price apparel concepts are expected to drive growth in North American retail growth into 2017, Brown said.

Is there too much retail space available?

Paraphrasing another retail official, Brown said the nation isn't over-retailed, it's under-demolished.

"The problem we have is old product nobody wants," he said. "Everyone wants quality and we have a shortage of it."

There's very little speculative development in retail and most new projects have a majority of tenants in placed before construction moves forward, Terry Ohnmeis, a Cincinnati-based retail broker for Cushman & Wakefield, said.

Ohnmeis said the hottest product in the demand in retail are out parcel spaces offering between 6,000 and 10,000 square feet of space and outdoor seating in high-traffic corridors.

Less than a year ago, Tri-County Mall in Springdale completed construction on a new outlot building with Starbucks with a drive-through, Chipotle and Men's Wearhouse. A second outlot building is being built to house Outback Steakhouse. Earlier this month, the city's planning commission approved construction of a third building outside the mall for an unnamed tenant.

Restaurants have been a boon for landlords

Restaurants will remain the strongest category in terms of growth across all sectors, according to a new report from Cushman & Wakefield. The lion's share of the growth in the category will be from franchise-driven and fast-casual chains like fast-fire pizza and sandwich shops.

Brown said the growth in restaurants is fueled by Americans continuing to increase spending on dining out. Americans spend more money at food and beverage establishments compared to grocery stores in 2014 and that trend continued in 2015, according to the U.S. Department of Commerce. Spending at food and drink establishments rose 8 percent in 2015 from a year ago, according to retail data.

"That's the world of retail now, if you want growth, you're going to need a kitchen," Brown said.

Suburban shopping is still strong 

Retailers are paying a lot of attention to figuring out how to serve urban customers, Ohnmeis said.

But that doesn't mean interest in suburban shopping destinations is falling anytime soon.

Millennials are expected to drive growth in suburban shopping as they age, form families and seek places to live as affordability concerns rise in urban areas, Brown said. Developers of suburban destinations want to create mixed-use districts that have an urban feel and are walkable.

Columbus-based real estate developer Steiner and Associates said the new Liberty Center destination in Liberty Township was built to be a vibrant, urban-like town center. Blue Ash city planners and real estate groups want to remake 98 acres of the former Blue Ash Airport to create a walkable district featuring retail shops and restaurants, office space and residences.