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The Starbucks View of Retail Real Estate

Howard Schultz reportedly told Starbucks employees that the retail sector was reaching a point where landlords of even prime centers would need to lower rents.

As retailers continue to make headlines with bankruptcy filings and liquidations, one major tenant is said to be predicting that if the current environment persists, it might permanently reduce its real estate costs.

The Financial Times reported details of a memo that Starbucks Executive Chairman Howard Schultz reportedly sent to the company’s staff, in which he shared views about the trajectory of the retail property market. Schultz reportedly told employees that the retail sector was reaching a point where landlords all over the country, including those who own prime real estate space, would need to lower rents as the shift from shopping in bricks and mortar locations to online eventually affects them, the newspaper reported. Schultz apparently noted that the changes do not represent a temporary, cyclical change, but a permanent one that would reduce the cost of the Seattle-based retailer’s real estate.

Aside from Schultz’s reported comments, industry observers have expressed mixed opinions about what is in store for the retail property sector. In its U.S. Retail Investment Outlook for 2017, JLL found that rents grew by 5.5 percent in 2017, which represented a slowdown from 2016. Retailers’ ability to afford rent will be a key concern in 2018, as they continue to announce store closures.

The average U.S. rental rate was just under $18 per sq. ft., a slight bump up from a little over $16 per sq. ft. in 2016. But rates had not grown much since the start of the year, according to JLL’s research.

In measuring buying activity, transaction volume reached $51.5 billion in 2017, a decrease of 22.5 percent. The mall sector saw the largest decrease in transaction volume, a 53.5 percent drop. JLL noted that pricing continues to be bifurcated, as fewer strong-performing properties come up for sale. “Mall assets are becoming more difficult to transact given heightened underwriting standards, providing another reason for investors to sidestep malls for the time being.”

A shifting business model might cause more challenges for retailers, and property owners might also be seeing slower growth, but experts who have observed the industry for a long time are not anticipating a reset of property prices to a lower level.

Retail REITs had an occupancy rate of 95.8 percent in the fourth quarter of 2017, according to NAREIT data, notes Calvin Schnure, senior vice president of research and economic analysis at NAREIT. “That is almost the highest that it has been in almost 15 years,” Schnure says. “That is a picture of a successful business model.”

Schnure does concede that growth in demand for retail real estate space is at only 40 percent of where it had been about a decade earlier. That metric is not a major threat, however, because new construction levels are only 25 percent of what they had been a decade earlier, he says.

“Builders have recognized the changing retail environment,” Schnure notes. “They are not constructing much new real estate at all, and that is why retailers out there still coming to the properties that the REITs own.”

Starbucks did not return messages seeking comment.

One area of the retail real estate sector that remains relatively insulated from the prevailing issues in the business are net lease properties.

“We don’t see a lot going on with outparcels to larger shopping centers,” says John Feeney, a vice president at Northbrook, Ill.-based The Boulder Group, a boutique brokerage firm. “Those are in high demand.”

Days after the Financial Times reported that Starbucks memo made its rounds through the company, Claire’s Stores, the teen-focused accessories retailer, announced that it had filed for Chapter 11 bankruptcy protection as it restructures about $1.9 billion in debt.

In a statement about the filing, Claire’s highlighted its reputation for ear piercing, noting that the service helps insulate it from e-commerce competition. It noted that it has pierced ears for more than 3.5 million clients in 2017 alone, stating that its “services are unmatched and cannot be replicated online.”

Claire’s also asserted that the company was not retreating from the retail landscape, and that it still has plans for significant growth, even in 2018. The company said it expects its concession business to grow by more than 4,000 stores in 2018. Concession stores are the company's smaller footprint store-in-store concept. Yet reports also said the company will close about 92 stores.

Correction: March 26, 2018
Editor's note: A statement on new construction levels in paragraph seven had been updated on March 26, 2018.
TAGS: Leasing News
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