First things first…we are not out of the woods just yet! But there is quite a bit of good news lately regarding retail in general, and brick and mortar in particular.
Let’s start with holiday sales results: By most accounts, the industry just experienced its best Christmas since the end of the Great Depression back in 2010. The National Retail Federation (NRF) reported that November/December sales were 5.5% higher than holiday 2016. Although expectations for a good Christmas were in place, the number, which excludes restaurants, automobile dealers and gasoline stations, finished much higher than anyone had predicted. However, the overall gain certainly benefitted from an online sales gain of 11.5% during the same period.
Kohl’s performed admirably with a 6.9% improvement in holiday sales versus last year, while Target experienced a 3.4% increase. Even laggard JC Penney was able to gain 3.4% when compared to holiday sales in 2016. Macy’s gained a modest 1% in sales versus last year:
All merchandise categories except Sporting Goods experienced gains during the November/December holiday season, according to the NRF. Top category winners included Building Materials and Supplies, Furniture and Home Furnishings, and Electronics and Appliance stores. Sporting Goods miscued with a 0.5% decline (see table on Page 2).
If any of you thinks this could possibly be a “one and done” holiday shopping season, it’s likely that you’re mistaken. North American retailers expect a 6.2% increase in sales in 2018, according to research from IHL Group, including a 4.8% increase in store sales. The report also found that retailers are increasing the number of stores in 2018 by an average of 5.6%, with planned remodels of stores expected to rise more than 5%. Additionally, IHL Group research indicates that retail industry sales in North America and other global regions will increase an average of 3% annually through 2021, with a greater emphasis on e-commerce/omnichannel sales.
November/December Sales Change by Retail Category, 2016 vs. 2017:
Regarding the future of regional malls, there’s no question that we will continue to see poorly-tenanted properties shutting down, redeveloped, or repurposed. At the same time, the prospect for quality malls, albeit not without possible bumps in the road, is generally healthy. The ability of mall owners to clear the fallout from department store closings and the success rate of backfilling these anchor vacancies will have much to do with determining long-term viability.
But at the same time you can’t deny that the attention given to some quality mall REITs during the back half of 2017 clearly suggests a vote of confidence in the mall retail sector. Examples include an offer accepted by GGP from Unibail-Rodamco; the bid (although unsuccessful thus far) by Brookfield Asset Management for GGP; an increased stake in Taubman by Elliott Management; and a similar stake taken in Macerich by hedge-fund firm Third Point.
Last but not least is the effect the new federal tax plan will have on retail property owners, retailers, and consumers. Regarding real estate owners, the reduced tax rate should allow landlords to reinvest tax savings back into business either in the form of existing property upgrades or new development. Retailers currently are not eligible for the many tax breaks that tech, manufacturing, financial, and energy companies are often able to take advantage of, resulting in their paying a higher effective tax rate than most other industries. Consequently, retailers have much to gain from the new tax plan. Also, consumer tax savings should translate into higher discretionary spending.
At least for the time being, the developments that occurred toward the end of 2017 in the retail real estate world should bode well for a relatively prosperous 2018. That’s not to say it will last - but for the moment, sit back and smile.
Bob Sheehan, VP of Research