Texas Real Estate Business

MAY 2016

Texas Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in Texas.

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34 • May 2016 • Texas Real Estate Business www.REBusinessOnline.com G rocery stores are always getting a better understanding of the priorities of their core custom- ers. Convenience, value and service are the top reasons people shop where they shop. However, those priorities are expanding. The focus has shifted away from simply providing a "one size fts all" solution toward a customized strate- gy to attract a cross-section of custom- ers — from the everyday shopper to experienced foodie. By doing so, retail spaces are successfully opening across the state at an elevated rate, address- ing growing customer demand while navigating the ever-changing market. Here are fve items impacting gro- cery stores in our state. Educated Customers Customers are becoming more edu- cated about the products they buy. Their expectations are changing. Re- tailers are fnding creative ways to successfully addressing them. To increase revenue and margins, drug stores are getting into the mix, with mixed results. Established chains like Walgreens and CVS/Pharmacy are renovating over 400 locations, with increased empha- sis on rebranding their drug stores as health/wellness re- tailers and expand- ing the grocery items kept in stock. Big box stores, like Walmart, are also making chang- es as they try to re- fne their market strategies. The com- pany announced that approximately 102 of its smaller Walmart Express stores will be closing, and in its place would be 50 to 60 superstores and 85 to 95 smaller, grocery-focused Neigh- borhood Markets. The net impact for retail real estate would be an addition of 4.3 million square feet — a fair posi- tive outcome for the industry. Population Increase The 2 percent population growth in the Texas metro areas has fueled demand for groceries and big box- anchored centers during the past year. Absorption levels have seen a signifcant increase over the last year as well. In 2015, Dallas posted over 8.1 million square feet of absorption, and Houston has reached 4.2 million square feet. Construction and activity is taking place, predominantly in the suburbs where job growth and hous- ing remain steady. Urban retail development is follow- ing suit. Retailers are making a point to stake their claim. There is increased popularity and a growing population in downtown and near-downtown areas. While the resident base is still modest, new retail and mixed-used properties are giving retailers the op- portunity to establish themselves to tap this market. Culture Shift Social aspects are playing a role in where people shop. Factors previous- ly not highly considered, like a store's reputation or product sellers' ethics, have gained a higher level of impor- tance. Whether in reaction to millen- nials or by the retailer's design, social implications are coming to fruition and a great importance has been put on shopping at particular places. Additionally, there's a sense of im- mediate gratifcation for the customer. Patrons want their products when they want them and are willing to make multiple stops to get what they need. Millennials have established them- selves as a buying force and compa- nies are taking notice. Established grocers are updating traditional stores to include the freshest, newest prod- ucts on the shelves and provide a new buying experience. Several others are investing in expansion and in renovat- ing existing stores to give these cus- tomers a new shopping experience. No Frills There is defnitely a segment of con- sumers who focus on price, not value, who operate in a specifc profle — "the discounter's discount store." One development we expect to see in the near future is the growth of Aldi and Lidl stores in U.S. markets. The key to their success is reduced over- head providing limited products with reduced staf and a no-frills approach. Items are laid out throughout usu- ally smaller stores in their cartons and each store has a much smaller staf than traditional or boutique grocery stores. But, because of this, Aldi and Lidl are able to sell their items at sig- nifcantly discounted prices. Aldi has become more prevalent in the Dallas area and Lidl is looking at locations all over the state. Haves and Have Nots We have also seen both locally and nationally a pattern of retail centers that we characterize as the "haves" and "have-nots." We are seeing high performance from well-located retail centers, which have good access and visibility, stable or expanding demo- graphics and a compelling tenant line- up. Consider your daily commute. The well-placed, high-trafc shopping centers are fourishing with vacancy well below 5 percent. These are the centers that every tenant wants to be in. Places like Albertsons or Tom Thumb, for example, have a lot of cross shopping at multiple stores. On the other hand, centers that are not well located, have less than de- sirable in-place demographics or a lackluster tenant roster are sufering. Vacancy levels in these properties are rising and can sometimes approach 40 percent. These locations are attractive to places like dollar stores. On a case- by-case basis, centers in this situation can be backflled with non-retail uses such as schools and libraries, churches or medical uses like walk-in or diag- nostic clinics. In terms of leasing, most retail ten- ants will not accept the risk to move into these locations at any rental rate. This is forcing owners to decide how best to invest or reinvest in the assets or decide they are functionally obso- lete. In the grocery industry there is a very loyal customer base. There's something to be said for going to a store and knowing where everything is. By navigating the changes in con- sumers' taste and shopping habits, companies are establishing or re- establishing their footholds in their respective communities and markets, inevitably feeding the competition. n Clay Smith is a managing director with the Dallas offce of JLL. THE GROCERY LIST: WHAT'S IMPACTING THE MARKET IN TEXAS By Clay Smith Clay Smith JLL Millennials have established themselves as a buying force and companies are taking notice.

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