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International Council of Shopping Centers

Online retailing keeps future of brick-and-mortar stores uncertain

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Despite a less than stellar economy, the retail market is making a comeback, but the long-term survival of many brick-and-mortar stores appears less certain.

The status of the retail industry and its demand for space were the topics of an International Council of Shopping Centers session at the Del Mar Marriott Wednesday.

Gary London, London Group Realty Advisors president, framed the discussion by saying how there has been a huge paradigm shift in the industry as the result of online retailing, and that the story of the impact is still being written.

While online retailing is undeniably having an impact, shopping center real estate investment trust Excel Trust Inc. of Rancho Bernardo continues to bank on the brick and mortar.

Gary Sabin, Excel Trust (NYSE: EXL) CEO and chairman, said his firm has acquired 24 properties worth more than $450 million during the past eight months, and expects to have more than $700 million in acquisitions in 2011.

One of Excel Trust’s acquisitions in December was a 597,787-square-foot portion of a 739,234-square-foot shopping center in Stockton, Calif., anchored by such stores as Kohl’s; Lowe’s; Sport Authority; and Bed, Bath & Beyond, among others. The price was $92.5 million. The firm also signed an agreement last month to purchase a 473,640-square-foot retail center in Gilroy for 68.5 million.

“There’s lots of opportunity out there and we’re buying Class A properties for Class B prices,” Sabin said.

Sabin said while many shopping center investors gravitate to the stronger markets, he is willing to make investments in markets that may not be at the top of a list.

“We don’t mind buying properties in South Carolina,” Sabin said.

As to whether Sabin’s properties will garner sufficient traffic to keep them strong, Elizabeth Schreiber, Donahue Schriber vice president and general manager, suggested that shouldn’t be a problem.

“Folks are darn tired of being frugal,” Schreiber said, adding that she expects the market to steadily improve this year. “This was the best holiday season since 2006.”

Donahue Schriber developed and owns the 273,298-square-foot Del Mar Highlands Town Center in the Del Mar Heights area.

It wasn’t just the best season in a while for brick and mortars. IBM Analytics’ Coremetrics report said Wednesday that the U.S. online retail sector experienced double-digit growth in December when compared to the like month a year earlier.

Online sales were up 12 percent, with consumers pushing the average order value up from $171.06 to $190.42 for a year-over-year increase of 11.3 percent.

Fewer people may be going to the malls, but the IBM report said department stores and health and beauty retailers were more than taking up the slack with their own online business with year-over-year sales increases of 22.6 percent and 23.3 percent, respectively. That may be good for those businesses but can hurt the landlords in the process.

Internet sales may continue to increase but Nancy Johnston, Epsteen & Associates managing partner, says like Sabin, she isn’t giving up on brick and mortars either.

Johnston said while Best Buy’s (NYSE: BBY) stock has experienced some volatility during the past 30 days, it has filled a nice niche left by the demise of Circuit City.

She said Starbucks, which has had to close some of its stores during the past couple years, has managed to rebound even in the face of such “upstarts” as McDonald’s, which got into the specialty coffee business within the past couple of years.

Sometimes what makes for a successful business or a launch may be surprising. Johnston said when Sprinkles Cupcakes held a promotion the other day that gave two free cupcakes, she was amazed that people waited for hours for the chance.

“Cupcake stores. Who saw that coming?” Johnston said.

New and unusual tenants may be arriving but John Still, a Flocke & Avoyer senior vice president, said it could be a long time before a speculative retail is constructed again.

“There are a lot of challenges to ground up development and we’re not going to see speculative retail development for a while,” Still said.

This isn’t to say more retail projects aren’t being planned. A roughly 900,000-square-foot retail and office component is an integral part of Sudberry Properties’ Civita (formerly Quarry Falls mixed-use development, north of Friar’s Road).

Sudberry is also planning a roughly 200,000-square-foot shopping center anchored by a 155,000-square-foot Lowe’s, plus some smaller retailers on the site of the former Olympic Resort in Carlsbad.

“That project is completely driven by the tenant,” Still said.

New construction may be limited to a handful of projects but Still noted that such centers as the Flower Hill Mall and Sports Arena Plaza are undergoing major face lifts so they can compete.

“There’s a lot of that activity,” Still said.

Individual retailers ranging from Smashburger to Ralph’s also continue to look for new locations.

Chris Sullivan, American Assets Inc. vice president of retail leasing, who said he is only too happy to work in what he referred to as “the lion’s den of retail,” addressed the matter of how to keep a tenant.
”Keeping a tenant is just a matter of financial review,” Sullivan said.

Sullivan than warned the retail landlords in the group not to give away the store in their lease agreements, saying that if a deal is too generous with one tenant, “the next tenant will expect similar treatment.”

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