If you’ve taken any time to look up from your Amazon cart, you may have heard: Brick-and-mortar retail is dead.
The first half of 2017 has already seen dramatic announcements of store closings from once-surefire anchors such as JCPenney (138 stores), Macy’s (68 stores) and Sears (54 stores, plus 126 Kmarts), while traditional inline tenants like women’s clothing shop Bebe and teen apparel chains Rue21 and Wet Seal have ceased operations entirely.
But as retailers nationwide look to correct their myriad overextensions, South Florida is one spot that experts say is still looking pretty sunny.
A recent report from Ten-X, an online real estate marketplace, placed the Miami and Fort Lauderdale metropolitan areas in the first two slots of its top “Buy” markets for retail investors, forecasting a 10 percent growth in net operating income in the Magic City area during 2017 (before slowing to a perfectly respectable 4.3 percent next year). Its coastal sister to the north is looking at growth above 4 percent through next year.
Investors have seen the writing on the wall for a while now.
During his time as vice president of acquisitions at New York-based development firm Thor Equities, Scott Sherman was a major investor in Wynwood, a former warehouse district north of downtown Miami that has become an arts and retail hotspot. In January, he teamed up with Ben Mandell, the former managing director at the retail leasing and investment sales brokerage RKF, to launch Tricera Capital, a real estate investment firm focused on urban retail and mixed-use assets in the Southeast.
Since then, Sherman says he’s spent an inordinate amount of time fielding variations of the same question: “You just launched a retail-focused venture in a time when it seems like retail’s dying?”
In Sherman’s view, in times like these, you just have to keep your ear to the ground and stay attuned to the trends. “All the headlines have been pretty negative, and for good reason in some cases,” Sherman said, adding that that doesn’t mean the sky is falling. “You just have to be smart and strategic with where you’re investing.”
Tricera, for instance, focuses specifically on downtown corridors in metropolitan areas with healthy population growth, like the Miami area, which has added 84,000 households and a total of 192,000 people in the past five years, according to a recent report from Marcus & Millichap.
And foreign travel to the region is still strong. In April, WOW air opened a direct route to Reykjavik, and in May, El Al Israel announced that it would launch nonstop flights from Tel Aviv starting in November. Getting a nonstop Asian flight remains a top priority for Miami-Dade County, which operates Miami International Airport.
Miami’s status as a global destination has helped it through rough patches in U.S. cycles in the past. Matthew Whitman Lazenby, president and CEO of Whitman Family Development — which owns the Bal Harbour Shops — said that even in “down domestic markets” of the past, “we typically were relatively unscathed because our customer is coming from Brazil or Russia or Canada.”
To Jonathan Yormak, co-founder and managing principal of New York’s East End Capital, this particular rough patch means that location is more important than ever. “We pick places before we pick buildings,” he said.
East End, owners of Wynwood Arcade and the developers behind Wynwood25, looks specifically for properties in areas where the demographics are improving. The telltale signs, Yormak said, are infrastructure upgrades and the accompanying uptick in foot traffic. Despite the drama surrounding the discovery of the Zika virus in the neighborhood last year, Yormak expects that things will only get better as Wynwood’s international cachet continues to expand. This summer’s introduction of the Brightline commuter train and its Miami hub, Miami Central Station, will be a boon to the area, too.
East End’s development strategy in Wynwood is simple: Focus on enhancing the neighborhood’s hip, communal vibe to create a place people want to be. For most patrons, retail options may be important, but they’re secondary at best. “When they go shopping, first and foremost, they want to go there to have a good time. Food and wellness and lifestyle stuff is really what draws people out,” Yormak said. “They want to people-watch or see a show or eat some great food and meet a great chef — that’s what they’re really looking for.”
In July, Wynwood Arcade, the warehouse-cum-retail center on Northwest 23rd Street with the Instagrammable paneled mural facade, will debut a cooking school, a restaurant and a rooftop cocktail lounge from chef Norman Van Aken’s restaurant group.
Millennials have long been known to appreciate a good restaurant meal, but they are also by far America’s healthiest generation. “They have a lower element of brand loyalty, but they do not [skimp] on fitness and food,” said Eric Coffman, a real estate attorney in the Fort Lauderdale office of business law firm Gunster.
Accordingly, space is increasingly being allotted for dining options and fitness centers, which help create return customers in retail centers. Yormak says two fitness concepts will be opening up over the summer at his Wynwood properties. In addition, experience-heavy food halls are becoming de rigeur; examples include Brickell City Centre’s La Centrale — which will offer casual and sit-down options, a wine store and a cooking school of its own when it opens in the fall — and The Citadel, which just announced a third wave of culinary concepts, including a juice bar, a taqueria and an oyster bar.
Coffman, who mainly represents small family offices and private equity firms with institutional partners, said his clients tend to shy away from the urban markets, but they’ve been taking cues from the tenant mix in those spots. “[There’s been a] lot of increases in gyms, in grocers, in the quick service centers: Chipotle, Panera, Shake Shack.”
He said his clients are “looking for more value, better returns,” and there is still demand in South Florida’s suburbs — “as long as there’s still liquidity in the capital markets, as long as there’s sunshine and jobs.”
Indeed, in contrast to the national figures, the Marcus & Millichap report notes that even South Florida’s suburban submarkets are well positioned for success thanks to an expanding number of households and steady employment growth throughout the tri-county area. According to the report, Northwest Broward has seen a year-on-year asking rent increase of 6.4 percent, and the vacancy rate has dropped slightly, to 5 percent, while Cypress Creek rents have grown by 20.1 percent, with a 300 basis point drop in vacancy rates, to 4.9 percent.
Overall, in Broward County retail vacancies dropped slightly, to 4.6 percent in the first quarter of 2017, and rents saw a few cents drop, to $20.06 per square foot. In Miami-Dade, the vacancy rate declined to 3.6 percent, and rents were up by 7 percent at $37.69 per square foot. Palm Beach saw a drop in vacancy rates in the first quarter, to 4.4 percent, and rents were up 3.3 percent at $19.68 per square foot, according to a report by Colliers International.
Though millennial tastes are pushing the commercial narrative, as Gen-Xers and Boomers adopt the technologies of their younger cohort, their preferences are beginning to adapt too. “Boomers and empty-nesters are dining out more,” said Coffman. “They’re spending more time with friends, [purchasing] more experiences.”
And what of the shopping centers that still rely on anchors to generate foot traffic? Well, it all depends on their grades. Incorporating factors like sales-per-square-foot, health of the local economy, tenant quality and physical appearance, the real estate research firm Green Street Advisors assigns a letter value to each of the country’s 1,070 malls. The more than 300 malls in the “A” range are expected to get along just fine for years to come, according to its most recent U.S. Mall Outlook report.
Bal Harbour Shops, which scored an “A” on the report and is the country’s most productive shopping center (with sales of more than $3,000 per square foot), is thumbing its nose at brick-and-mortar naysayers after gaining approval for a $400 million, 340,387-square-foot addition, which will include a Barneys flagship, as well as new store and restaurant space.
“What people often lose sight of,” said Lazenby, “is that the year-over-year growth that brands see in e-commerce, they can brag about it as being double, but that’s because the e-commerce base itself is a fraction of the bricks-and-mortar base.” Of course, Bal Harbour, with its ultra-luxe tenants and international appeal, may be uniquely positioned to beat back e-commerce’s advances, but there are other ways, too.
American Dream Miami, a theme park and mega-mall by Triple Five Group (the owners of the Mall of America) proposed near the intersection of Interstate 75 and Florida’s Turnpike is betting big on experience. The project is expected to include an indoor ski park, a multiscreen luxury theater, a water park, an aquarium and a skating rink within its 5 million square feet.
Meanwhile, malls like Fort Lauderdale’s Galleria have taken a different tack, hoping to reduce their reliance on traffic-generating anchors by adding residential units around their retail. In 2013, Keystone-Florida Holding Corp., Galleria’s owner, began exploring the possibility of wrapping condo towers with as many as 1,600 new residential units around the mall — a plan that was withdrawn in May due to neighbors’ traffic and height concerns.
But Galleria’s owners are not done working with the neighborhood to find a solution that keeps the mall afloat. A spokesperson for the mall declined to comment.
Meanwhile, if tech is ravaging retail on one end, it also may offer hope for the retail landlord of the future. Lazenby is optimistic that analytics will eventually create shopping centers that are more nimble in the face of changing patron preferences.
“We have six restaurants [at Bal Harbour]. Now, it’s difficult for us as the landlord, who is actually one step removed from the shopper … to understand other than anecdotally the impact that has on the retail. All of those customers, are they just coming to eat? Are they coming to eat and end up shopping? Are they coming to shop and end up eating?”
In the end, said Lazenby, “what matters is offering consumers a reason to, frankly, put some clothes on and stop clicking their computers and go out and interact with people and have an experience that matters to them.”