Forced to Count Every Dollar, Retailers Re-evaluate Site Selection Practices
Sep 15, 2009 6:03 PM, By Elaine Misonzhnik
Amid all the not-so-great news reported during the dog days of summer—weak back-to-school sales, falling rental rates—there were signs the retail industry might be coming out of hibernation.
Men’s apparel seller Jos A. Bank, for example, announced it would accelerate its store openings for the fiscal year 2010 to 30 or 40 new locations from the previously announced 10 to 15. Electronics chain Best Buy revealed it was working on 22 new store openings in the third quarter, more than the chain opened in the first and second quarters combined. Apple confirmed it planned to open its fourth New York City store on the Upper West Side of Manhattan, while rumors swirled that discount department store chain Kohl’s was scouring sites near Herald Square, next to a recently opened JCPenney. Microsoft was rapidly prepping its first two stores to open in October in the Southwest. And even Starbucks decided to keep 30 stores open that it previously had planned to close.
These modest moves toward expansion show that even in the worst of times healthy retail operators continue to have some appetite for new real estate. In fact, discounters, warehouse clubs, drug stores, restaurants and wireless service providers are already actively looking for new stores, while retailers in other sectors are beginning to review their plans for 2010, says Devon Wolfe, managing director for Americas strategy and analytics with Pitney Bowes Business Insight, a Troy, N.Y.-based site selection firm. A recent report by RBC Capital Markets and Retail Lease Trac, a Dahlonega, Ga.-based real estate research firm, estimates retailers will open 64,926 new stores in the U.S. over the next two years. (And that number doesn't include every retail firm. For example, neither Target nor Wal-Mart is included in the figure.)
Meanwhile, retail developers will deliver approximately 60 million square feet of new retail space to the market in 2010, according to data from Marcus & Millichap Real Estate Investment Services, an Encino, Calif.-based brokerage firm. Another 163.8 million square feet of retail space had been proposed for construction over the next four years, but not yet approved, reports the CoStar Group, a Bethesda, Md.-based commercial real estate information provider.
“What we are seeing now is demand that’s starting to pick back up after everything went south last year,” says Wolfe. “It doesn’t mean we are back to 2006 or 2007, but we are seeing signs of movement and that’s good.”
But though retailers might feel the worst of the downturn has passed, many firms don’t have a lot of cash set aside and execs are worried about how long it might take for consumers to open their purse strings again. So retailers have adopted more stringent return hurdles for new locations. If in 2006, a retailer might have decided to open a store based on a 9 percent expected rate of return, today the figure might be as high as 12 percent. That means each new store is eyed with a lot of caution and has to satisfy a wide set of criteria, including the presence of high-spending core customers, the availability of a competent workforce and attractive rental rates. For example, many chains now want to know what kinds of incentives they might be eligible to receive from state and municipal governments, something they wouldn’t have necessarily looked at before, says Todd Caruso, senior managing director in the retail service group of brokerage firm CB Richard Ellis. And according to some brokers, certain dollar store chains won’t consider a new location unless they can get rents per square foot that are in the low single digits.
“Tenants are turning down a deal unless it’s almost a sure thing,” says Wolfe.
Next page: Time is money
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