Thomas J. Phillips, Real Estate Chair and a Partner at Brown Rudnick LLP, a full-service international law firm takes a look at the current state of the US market and the opportunities that are still available for global brands.

These are truly “interesting times” in the US retail real estate market. Perhaps never in recent memory has there been such a constant barrage of concerning news during an otherwise seemingly strong period of consumer spending. Separating the noise from the news is key to understanding where the market is and where it’s headed, what are the perils and what are the opportunities?

Perhaps the leading story of the current market is the sheer number of store closures and tenant bankruptcies. After the shuttering of over 5,000 stores in 2017, nearly 5,000 more store closures have been announced so far this year.

Just last month, iconic retailer Sears Holdings filed for Chapter 11 protection, saying it will close 142 stores by the end of the year, with another 40 to close in February 2019. The recent bankruptcies of Toys R Us -- one of the original “category killers” that helped fuel the explosive growth of suburban shopping centres in the 1980s and 1990s -- and Mattress Firm will result in a combined 1,400 store closures as well.

Downsizing at specialty brands Abercrombie & Fitch, Ascena Retail Group, Footlocker, GNC, J Crew and Victoria’s Secret are expected to account for hundreds of other store closures.

These operators have closed for a variety of reasons, including competition from e-commerce and failure to adopt sufficient omni-channel strategies, failure of perceived value to the customer, poor merchandising, oversized footprints and overexpansion. But there is no single explanation for their difficulties.

Many of these retailers will be replaced by expanding retailers whose services cannot be replicated online (like Ulta and Sephora), retailers that continue to provide first rate shopping experience and value (like Ross and TJ Maxx/Marshalls), formerly online-only retailers (such as Bonobos and Warby Parker), growing local and regional operators and expanding global retailers (particularly in fast fashion). Indeed, global retailers that have recently expanded into the US (such as Lidl, Primark, Sports Direct and Superdry), as well as those that have been here for several years now (such as Aldi, H&M and Zara), are seizing the opportunity created by the recent wave of US store closures.



There is great opportunity for global brands (whether haute couture, fast fashion or otherwise) to come in and quickly take aggressive positions in multiple locations either regionally or throughout the country. Striking deals with mall owners with national footprints such as Simon, GGP, Macerich and Unibail-Rodamco-Westfield, or with prominent open-air centre owners like SITE Centers (formerly DDR), Kimco or Brixmor, can be a global retailer’s portal to hundreds of prime locations. That said, global operators need to continue to be keenly focused on understanding the US consumer, embracing US management and being flexible.

The closure of so many department stores, with footprints of between 100,000 to 300,000sq ft in each location, is resulting more in redevelopment and repositioning opportunities than in traditional re-tenanting. This “breaking up the box” trend is capitalising on the industry’s evolution from “retail” real estate to “consumer” real estate -- where food and beverage, health and fitness, recreation and entertainment (including movie theatres and bowling alleys) are more critical than ever to a project’s success. Even grocery is getting in on the action, with high-end grocers such as Wegmans, Whole Foods and The Fresh Market having taken over spaces previously occupied by JCPenney and Sears.

This evolution in what makes retail real estate successful is in part driven by the currently youngest generation of adult shoppers – the so-called “millennials” (born between approximately 1977 and 1995). The millennials have now replaced their parents, the so-called “baby boomers” (born between 1946 and 1964), as the largest demographic cohort of US shoppers. The millennial shoppers are as much driven by experience, personalisation, authenticity, technology, health and social goods, as they are by the traditional metrics of price and convenience.

Overall e-commerce in the US has been and is expected to continue to grow by about 15 per cent per year. While there is no question that traditional “bricks-and-mortar” real estate continues to be challenged by e-commerce, different categories are affected very differently and the strongest retailers will survive by creating the best in-store experience and embracing successful omni-channel strategies. “Pure play” e-commerce is and will remain a small segment of total retail sales in the US.



Perhaps nothing better exemplifies the future of omnichannel retailing more than last year’s acquisition by Amazon (the world’s largest online retailer) of Whole Foods (the country’s largest upscale/natural foods grocery chain). The deal enabled Amazon to utilise Whole Foods’ well-located real estate and superior demographics as “last-mile” delivery points, expand to traditional off-line consumers the value of an Amazon Prime subscription, diversify product mix within Whole Foods stores, and leverage Whole Foods’ product quality. Although much remains to be seen, if nothing else, this enormous investment in traditional bricks and mortar from the world’s largest e-retailer should offer the retail real estate industry one of its most comforting endorsements of the past several years.

In summary, despite many challenges, retail real estate in the US is strong and the US consumer will never tire of spending money for good merchandise at good value in good locations offering a good experience. Global brands that understand the market, commit people and resources on the ground; and adapt an omni-channel approach will win the US advantage in retail real estate.


From Retail & Leisure International, December 2018/ January 2019. Reprinted with permission.