It’s been a tumultuous time for large retailers as consumers gravitate to the convenience of e-commerce and consciously shift their buying habits to local options. As these shifts continue to drive change and stress in the retail industry, many stakeholders still believe it offers significant opportunity. In separate interviews, MiBiz connected with retail advisers to gather their thoughts on the state of the industry, why it’s changing and where it’s going. They were:
- Jonathan Anderson, partner, former chair and member of the real estate practice team at Grand Rapids law firm Varnum LLP
- Matthew Mason, managing director in the Detroit office of turnaround firm Conway MacKenzie Inc.
- Michael Sytsma, senior vice president at Chemical Bank
Here’s what they had to say.
From your industry, what are you seeing as retail goes through significant change?
Anderson: I’ve had several situations where there are 10-year maturities on 2008 mortgages under the Commercial Mortgage-Backed Securitized loans. … In one case, our clients were able to profit by buying out of such a transaction … in the grocery world. Our clients did very well as the new group dealing with the lender. In another scenario, our clients did not do so well. They were on the giving up end. They tried for 10 years and they could not refinance their project. They ended up letting it go under a deed in lieu of foreclosure. You see both sides.
In another scenario, a tenant for our client, the landlord, filed for bankruptcy. We were working through the significance of that, but (also) another group had already expressed interest in reusing the space. It’s a big box space so we’re proceeding now that we’ve got clarity on the bankruptcy side and we’ve got this new user that wants to come in and use the property.
Mason: I spend a lot of my time on … distressed, enclosed regional malls like Rivertown Crossings (in Grandville) around the country. It’s no secret that the U.S. is massively over-retailed. The U.S. has substantially more retail than any other country in the world per capita — by multiples. Depending on which surveys you look at, 30 percent of malls need to go away in order to leave the strongest standing.
Sytsma: (If someone brings Chemical Bank a retail deal), I want to know more details just because of the dynamic nature of the industry right now, specifically what’s taking place locally in retail as a result of purchasing behaviors changing. You look at market disruptions — Amazon into the grocery business being one of them — and what effect does that have as we look at our retail distribution in the West Michigan area.
I think retailers are looking at what services are less vulnerable to e-commerce and what does the consumer want to touch and feel before making a purchase. You’re still going to get your haircut locally, so I think you see a shift in space, taking larger boxes and turning them into smaller boxes. The de-malling of some facilities is another reality, but it’s also ironic that with the shift to e-commerce, Amazon is opening up some bricks and mortar. I think that’s an interesting juxtaposition. Holiday sales were up, gross retail sales were at a record high in 2017. E-commerce is still less than 10 percent of the total retail purchasing.
Are we seeing a shift away from traditional malls and shopping centers to neighborhood and specialty retail, particularly in urban neighborhoods?
Anderson: The clients I’m working with, one client does like to be in retail centers. They’re a large organization and they’re eager to be in existing retail centers. I’d say there’s a demand to be in some of those kinds of centers, depending on location. At the personal level, I appreciate small retail. I live in the Heritage Hill area (in Grand Rapids), so I’m not far from the Wealthy Street or Cherry Street corridors. I know others have that same feeling, that there’s a draw to the uniqueness of a small, single-owner kind of store, as opposed to a big national. Anecdotally, (many people) enjoy that way of shopping. They like the unique, specialty store as opposed to the big mall. Others prefer the big mall because it’s got so many options and tends to be more price-competitive.
Mason: The malls and retailers at the top end are doing very well and the ones at the bottom end are really struggling. The ones at the very low-end — the value retailers — are also doing well. The Dollar Stores are expanding like crazy. What’s getting squeezed are those in the middle, the Younkers, the Kmarts. From the mall and retail perspective, there’s absolutely a change in shopping habits, and I think that’s mimicking a bit what the overall demographics are showing, which is more of a move toward urban areas, and that’s creating smaller, more boutique retailers.
Sytsma: Niche retailers, when they’re specialty, they seem to be doing well. I think it bodes well for local businesses, being able to tailor to the needs of the local buyer. You see a lot of local retailers that are growing. They have a niche business, they’re offering a special service or there’s something unique about their product. I think the retailers that don’t have any added value, they’re vulnerable to somebody purchasing it over the internet. Toys ‘R’ Us is a recent headline if you will. But (the West Michigan retail market) continues to grow. Our vacancy rate has continued to decline in retail.
Do you worry about the long-term viability of physical retail stores?
Anderson: I don’t, but it’s certainly a dominant topic. What is the role of bricks and mortar in the future with Amazon? That’s a topic that gets talked about with frequency. It’s a generalized worry and we’ve seen kind of a cutback with bricks and mortar in some industries (like) the banking industry. It used to be that bank branches were the things on all the street corners because the banks paid the highest price to be there. Now they’ve been able to cut back and they don’t need as many bricks-and-mortar locations. We see a dropping off of that side. I don’t think we’ll see that ultimately on the retail side because so much of retailing requires a touching and feeling. That is one advantage that brick-and-mortar stores have. The other side that’s really important to people is the knowledge of the salesperson about their product. You don’t get that shopping on the internet.
Mason: The broader economy is actually doing very well. It’s growing faster than it has in several years. The retail sector is essentially in a transition, as everyone knows. I think there’s an overall sense of hesitancy across the board, whether it’s from investors, whether it’s from lenders or from developers when it comes to retail. The retail market is changing so fast that it’s tough to make long-term decisions without having a clear understanding of which retailers are going to be around in 10 years. I think a lot of this is overblown. I think there’s a bit of over-reaction to the threat of online. There’s still a very solid place for bricks-and-mortar retail. Online sales still make up a relatively small percentage of the overall retail market, so I think there has been an over-reaction. But while I think there’s an over-reaction, it doesn’t minimize the effect on individual tenants.
From an overall perspective, the retail market looks good. The problem is when you get down to the individual retailer: What does that look like to them as you go forward? You’ve seen a lot of contraction in certain industries where there’s not room for multiple operators in the same space. Over the last 10 years, you’ve gone from two major electronics retailers in Best Buy and Circuit City and now you’re down to Best Buy.
Sytsma: The death of retail (is overblown). But there’s a pivot, yes — a shift in the mix of retailers, the location and the size and how they niche themselves. You have to change strategy to be relevant and sustainable.