The current retail malaise is not universal. Amid the sick and wounded there are companies focused on growth, ranging in size from such giants as Wal-Mart and German discount grocer Aldi down to the likes of Urban Active and Noodles & Company, a casual restaurant chain. For these retailers, the industry’s troubles bring a respite from the overheated real estate market of recent years and present the chance to flex some muscle during negotiations.

“There aren’t that many retailers out there interested in expansion,” said C. Britt Beemer, chairman of America’s Research Group, a consulting firm based in Charleston, S.C. “But anybody who wants to open up a store right now is going to get a rock-bottom lease, probably 20 or 30 percent under the market values of two years ago. The value is incredible.”

Whether a retailer is shutting stores or expanding now depends on many factors, but one big determinant is how skillfully a company navigated the red-hot real estate market of the past few years, says Jim Kovacs, managing director of retail services at Colliers Arnold, in Tampa, Fla. “Those that were smart and didn’t overdo it during the high times and don’t have a hangover today are the ones who can really focus on looking for the best centers, the best co-tenancies and the best markets,” said Kovacs. “The retailers that had a good real estate model going into the downturn are the ones that are continuing expansion. Those that expanded for the sake of expansion when the times were wild are the ones in trouble.”

Michael Niemira, ICSC's chief economist and director of research, says 105,000 to 110,000 new stores will probably open in the U.S. this year. What kinds of stores will they be? According to a list compiled for Colliers International by brokers at its affiliate firms, they range from such household names as Costco, Panera Bread and TJX to lesser-known names like Party City, which sells party supplies, and Smart & Final, a nonmembership grocery warehouse chain. Kovacs cites Panera and TJX — parent of HomeGoods, Marshalls and TJMaxx — as retailers with effective real estate models. Panera “has always paid attention to the bottom line and how real estate affects it, and when real estate leasing in power centers and lifestyle centers got out of hand, Panera was fairly quiet,” he said. “Now that real estate is becoming more in line, we’re starting to see more action.” Similarly, TJX “wouldn’t break its model just for the sake of expansion,” he said. “Now they are in terrific shape.”

With consumers struggling to make ends meet, discount retailers are more likely these days to have the means and the desire to expand. Aldi says it plans to open 75 stores in the U.S. — fewer than the 100 it opened last year, but a substantial investment even so. Most of those will be in the Midwest and the East Coast, where Aldi already has a presence. Wal-Mart says it plans to continue an aggressive expansion, though its capital expenditures for the current year will be lower than last year. Wal-Mart will open 125 to 140 Supercenters, 17 grocery-format stores and about 20 Sam’s Clubs.

Discounters are not the only ones capable of growth in a down market. Noodles & Company has opened 204 restaurants across 18 states on the strength of its eclectic menu, which features a variety of ethnic takes on noodles. The chain plans to open as many as 35 stores this year, most of them company-owned and in the Denver, Minneapolis and Washington areas. “Certainly, we are still cautious about the economy, and we are certainly being prudent,” said Tim Mosbacher, the chain’s vice president of real estate. “But we have to date weathered the storm fairly well with our comparable sales, and we still believe our brand has opportunities for additional growth.”

Mosbacher says he is getting more calls from property owners. “We have risen to the top of some people’s lists. We probably would have been on their radar screens anyway, but given that so many retail tenants have pulled back, that’s helped our cause.”

That popularity has translated into a bargaining advantage. “Developers are willing to make better deals to fill space,” he said. “I don’t think there have been wholesale discounts, but we are striking some very favorable deals for our company. We’ve been able to get a few things that historically we have not been able to acquire.”

Landlords’ potent new marketing tool: Sustainability
Shopping center owners are seeking to sell prospective tenants on environmentally conscious, energy-efficient projects, even to the point of asking them to share in the expense of such development — and this at a time when the retail sales picture is less than rosy. The tenants are largely reluctant to spend the extra money up front that such facilities require. But landlords are finding ways to address this resistance, and some of them predict that a center’s environmental sustainability will someday be second in importance only to location as far as investors and tenants are concerned.

Center owners say they can promote their “green” core-and-shell developments based on several practical benefits, including lower utilities and operating costs, a healthier work atmosphere, the opportunity for market leadership, and a better return on investment. “Any retailer who comes into a green center finds it immediately becomes an asset on their checklist,” said Terry Montesi, CEO of Fort Worth, Texas–based Trademark Properties, which developed Watters Creek, near Dallas. “It’s not an easy explanation, because it takes courage to spend the money. But the results are some fairly heroic energy savings.”

The U.S. Green Building Council’s LEED for Retail: Commercial Interiors program, which is expected to launch sometime this quarter, could kick-start additional tenant participation. The program awards points to tenants choosing to locate in LEED-certified or brownfield developments, and additional points to those using renewable-energy equipment, environmentally conscious parking and pavement, light-reduction technology and the like.

“The reward for a tenant is good sales and the confidence that the space they are occupying is a good investment,” said Justin Doak, retail sector manager at the USGBC, which introduced the LEED ratings in 2000. “If you’re in a good, energy-efficient center with daylighting, good indoor-air quality, good transit access and extensive levels of connectivity, then you’re going to see a positive return.”

And pressure on tenants to go green is coming from a growing number of industry organizations, such as the Green Restaurant Association, whose mission is to create an ecologically sustainable restaurant industry. Robert L. Garafola, New York City’s deputy parks commissioner for management and budget, says the Parks Department will consider how well restaurants and food concessions in city parks comply with association standards when it grants contracts.

Still, it is hard to justify to tenants the costs of adding green elements in common areas, says Mark Peternell, vice president of sustainability at Regency Centers. Regency is seeking LEED certification for several redevelopments. Macerich, meanwhile, calls for sustainability partnership programs to get retailers more engaged in green practices, says Jeff Bedell, Macerich’s vice president of sustainability. “At the end of the day, they control the highest percentage of space and utilities, so we need them on board. But we’re not there yet, and I don’t know anybody who is.”

Plotting a future for music stores
Over the past decade, the iTunes software platform, Internet file-sharing applications and — for those who still buy physical CDs — Amazon.com have all played a part in pushing music stores toward obsolescence.

Yet, landlords surely look back with fondness on the days when at least one music store, with its loyal and lingering shoppers, could be found at almost any mall. With an eye toward bringing music back into the brick-and-mortar retail environment, the National Retail Federation invited technology companies to showcase in-store technologies with the potential of “bringing the music store of the future to life” at its annual convention and expo last week.

The featured concept store at the convention included self-service, touch-screen kiosk systems, wireless payment systems that e-mail music to an iPhone or a BlackBerry, digital jukeboxes, virtual shopping guides and loyalty programs that market products and giveaways to consumers based on their past purchases.

“We chose music for the concept store this year because it is the most challenged retail environment,” said Susan Newman, NRF’s vice president of conferences. “We wanted to demonstrate how to keep consumers coming into the stores. Technology can bring you what you can’t do at home. There are three primary ways to do this: exclusivity, community and interactivity.”

CRI Creative Realities, a marketing firm that specializes in creating “consumer experiences,” brought the various technologies together into the concept store, which was dubbed “Sonic Bar.” Virgin Megastore, one of the last remaining national music store chains, sponsored “Virgin Live,” a theater area designed by CRI that would bring live streaming video of concerts into the retail environment.

Ironically, as the NRF convention was getting under way at New York City’s Javits Center, Virgin announced that it would close its flagship store just a few blocks away, in Times Square, in April. This highest-volume music store in the country, with $55 million in annual sales, has long been one of the most visible retail icons in midtown Manhattan. The closure is strictly a real estate decision, published reports say, as the tourist destination takes in some $6 million a year in profits. Those reports also say that Virgin is paying about $54 per square foot in a neighborhood where $700 per square foot is considered market rate.

The closure is hardly a surprise. Virgin Megastore’s U.S. footprint — 11 stores as of the time Vornado Realty Trust and Related Cos. acquired Virgin Entertainment in 2007 — will now shrink to six stores. The chain’s largest remaining outpost — in New York City’s Union Square — is reportedly on the block as well. Vornado owns the Bertelsmann Building, which houses the Times Square store, and has reportedly found a taker for the 75,000-square-foot space: teen apparel chain Forever 21.

TRANSACTIONS
Amsterdam, Netherlands–based ING Real Estate paid $167.4 million for the 540,000-square-foot Nisa Liberec (Czech Republic) shopping center.

Santa Monica, Calif.–based J.S. Rosenfield & Co. acquired Larkspur Landing Shopping Center, a 173,000-square-foot retail center in Northern California’s Marin County, from Oak Brook, Ill.–based Inland Western Retail Real Estate Trust for $65 million.

Denver-based JRF acquired Palm Valley Village Center, a 30,560-square-foot neighborhood center in Goodyear, Ariz., from Tempe, Ariz.–based SunCor Development for $10 million. The Wal-Mart anchor was excluded.

THE COMMON AREA
Europe was ICSC’S fastest-growing region last year, with membership there up nearly 40 percent from the year before. ICSC Europe now has 2,300 members, a record number, according to Ermine Amies, the managing director of ICSC Europe. “During an economic downturn, developing networks and opportunities is essential to create and capitalize on early opportunities when the recovery comes,” said Amies. “Associations become even more important.”The European Conference will take place April 22–24 at the Catalonia Palace of Congresses, in Barcelona, Spain.

Circuit City is seeking court approval to close its 567 remaining stores and liquidate. The No. 2 electronics retailer (after Best Buy) says it reached an agreement with four liquidators to start a process that will run through March. Circuit City’s Canadian unit, which operates 765 stores and dealer outlets in that country, will continue to operate.

Simon says it has cut hours of operation at several properties in New England, including Burlington Mall, Northshore Mall, South Shore Plaza and Square One Mall to maximize energy efficiencies.

Gottschalks filed for Chapter 11 bankruptcy protection, blaming the credit markets and the economy. The department store chain, which has negotiated $125 million in debtor-in-possession financing from a lender group led by GE Capital, is looking at putting itself up for sale. Fresno, Calif.–based Gottschalks operates 58 stores across six states, primarily California.

Cost Plus says it will close 26 stores throughout Arizona, California, Florida, Georgia, Illinois, Indiana, Maryland, Minnesota, Mississippi, Nebraska, Ohio, Tennessee and Virginia, as well as Ontario, Canada. The Oakland, Calif.–based specialty home retailer will continue to operate 270 stores across 30 states.

New York & Co. announced plans to close about 15 stores this year and up to 50 over the next five years. The New York City–based women’s wear chain says it expects to generate roughly $175 million in pretax savings through the cutbacks, $30 million of it this year alone. Currently, the company operates 600 stores across 44 states.

Dallas developer Trammell Crow died Wednesday at his farm in East Texas. He was 94. Crow founded Trammell Crow Co., which in the 1980s was one of the largest commercial space landlords in the U.S. and recently merged with CB Richard Ellis. Colleagues call Crow an innovator who pioneered the practice of speculative development and focused on holding properties rather than selling them off for quick gains. “You can get rich selling real estate,” he once told the press, “but you can only get wealthy by owning it.”

Developers are anticipating a wave of retailer bankruptcies early this year, but David Simon, CEO of Simon Property Group, said at an event for merchandising executives that the number of chains filing for Chapter 11 bankruptcy protection might turn out to be lower than expected. The credit crunch has dried up sources of debtor-in-possession financing, he said, which will provide less incentive for chains to pursue Chapter 11.

Developers seeking to ride out the economic slump should rely on forward-looking indicators, such as stock market returns, rather than on lagging ones, such as unemployment data, advises Michael P. Niemira, ICSC’s chief economist and director of research. “You have to look for leading indicators, or you’re held hostage to the past,” he told ICSC members on a conference call. Leading indicators include building permits, factory orders and the spread between the 10-year Treasury and the federal funds rate. U.S. retail sales, including food services, will probably fall about 5 percent in the first half (6.1 percent, excluding food services), Niemira said, but rise 2.7 percent for the second half in either case.

(SCTWeek is a publication of Shopping Centers Today, January 19th, 2009. Vol. 14 No.3)