The current state of retail market trends in the Midwest
For anyone looking at the current state of retail in the Midwest, one of the most fascinating things to track is how some of the macro trends we see in the marketplace today are the end result of years (sometimes decades) of evolutionary change.
The good news is that the general state of retail in the Midwest remains relatively positive. Quality retail is always a good value, and that hasn’t changed (at least it hasn’t in the last 30 years I’ve been in the business). If you have a well-designed, well-located retail development, the odds are good that it’s healthy and there are unlikely to be any major challenges involved.
The compelling convenience of the internet, the growth of powerful online brands like Amazon, and the subsequent necessity of brick-and-mortar retailers establishing their own online component have all shaped the retail marketplace in ways both subtle and significant. But while online and mobile sales have certainly had some impact on brick-and-mortar, the overall percentage of sales remains fairly modest – and it’s certainly not something that prevents well-located neighborhood retail (such as grocery stores, carry-out restaurants, and service retail, like dry cleaners) from competing and thriving. That type of product is extremely healthy in the Midwest.
Taking a step out to look at regional retail, and the story changes somewhat. While quality product in prime locations remains quite positive, overbuilding remains somewhat of a threat in some Midwest markets. Wherever we have more square footage of big box retail available than retailers to fill it, the market can cross over a tipping point. Some of that excess space has been backfilled by value-driven retailers who see opportunities in A markets as prices drop.
Another factor contributing to the overabundance of supply in some markets is the fact that category killers that were historically focused on getting bigger are now working to become leaner and more efficient. With more retailers downsizing their operating platforms and focusing more on sales per square foot, bigger boxes have been more challenging to fill. Far and away the most challenged segment is B product in B or C locations. Many of those spaces will likely be forced to convert to alternative uses.
Fortunately, retail units are relatively easy to convert to other uses such as light industrial or office. Cities that are smart and adaptive will study their zoning ordinances and move in the direction of demand. The more forward thinking and flexible a community is, the better off they will be. In municipalities that are more set in their ways and resistant to exploring different uses, the outcome is rarely positive.
One particular bright spot for converting large space is in the storage sector, where storage operators are converting big-box retail into storage/rental businesses. This is a relatively new phenomenon, but it has intriguing potential. In my own market here in Southeast Michigan, a former Super K-Mart on Telegraph Road just south of 8 Mile recently traded to Storage USA. That’s a 150,000-sq.-ft. space state-of-the-art retail box traded to a Fortune 500 storage company that’s going to convert it to storage, a retail moving store and truck rental facility. The reality is that you simply aren’t going to find a 150,000-sq.-ft. retailer who wants to be in a B or C location – they don’t exist.
Another area where some of these large-format challenges are creating opportunities for others comes from the growth of outlots in areas where large office buildings and sizable retail projects are over-parked. We are seeing a movement, especially here in Michigan, where cities and planning departments are recognizing that and capitalizing on it. Out lots along the Big Beaver corridor and Telegraph Road are being filled with restaurant tenants like Five Guys, Potbelly, Jersey Mike’s and Qdoba and other smaller retailers.
While every Midwestern market is different and has its own unique characteristics, the same general trends are evident across the region. While supply exceeds demand in down-market communities and in some bigger formats, those mid-box and big-box retailers out there today are reasonably healthy – and most urban markets have done a reasonably good job-absorbing surplus.
A clear regional bright spot is Detroit, which is a very exciting development for someone that has watched the city closely for decades. The climate in Detroit right now is ripe for opportunity, and the development cycle has been logical and well-orchestrated. The greatest activity currently is in the core of the city’s central business district and is and spreading outward – exactly what you like to see. What’s happening the Foxtown area and along Woodward, with the new Red Wings arena, joining the existing downtown Lions and Tigers stadiums is generating huge demand drivers. Retail will follow, and there is little reason to think this will slow down anytime soon.
One wild card to keep an eye on as we move through 2016 is what seems to be an undercurrent of caution and uncertainty in the industry regarding the upcoming presidential election. It is tough to say how much political elections like this actually impact the retail marketplace, but it’s something to monitor going forward. Retail is obviously exquisitely sensitive to consumer sentiment, and it’s not unusual for consumers to be impacted by big events like this – particularly as the media coverage builds in the months leading up to the election.