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Lots to Cover: Next Hot Retail Segment, DTC and More on Tenants, Plus ORC, Inflation and Lending

Photo Courtesy of Julien Eichinger.

Collaborating on Organized Retail Crime

Combatting increasingly violent organized retail crime requires a more coordinated effort among retailers and landlords, according to a report from Coresight Research. Pharmacies, big-box retailers and home improvement stores are the three biggest U.S. targets of such crime, which ranges from smash-and-grab theft to shrinkage along the supply chain. Best Buy, Burberry, Bloomingdale’s, CVS, Louis Vuitton, Macy’s, Nordstrom, Ulta Beauty and Walgreens all have been affected in recent weeks. And Starbucks’ plans to shut 16 stores over safety issues also drew attention recently.

Fighting back requires a multipronged approach that includes more information sharing among affected retailers, investment in security systems and programs and lobbying for stricter laws. According to the research firm, retailers can best share information through councils formed by trade groups, including National Retail Federation’s Loss Prevention Council, the Loss Prevention Research Council and RILA’s Buy Safe America Coalition, of which ICSC is a part.

Additionally, Ulta Beauty vice president of loss prevention Julie Giblin will be on hand at the 2022 ICSC+OAC event in early September, to discuss loss prevention at an interactive boardroom discussion in which attendees can ask questions. And ICSC has advocated on behalf of H.R. 5502/S. 936, the INFORM Consumers Act — which requires online marketplaces to collect, verify and disclose certain information from high-volume, third-party sellers — as well as H.R. 7499, the Improving Federal Investigations of Organized Retail Crime Act.

The Cost of Theft

• Organized retail crime cost U.S. retailers an average of $719,548 per $1 billion of sales in 2020, up 59% from 2015, NRF reported. • Designer clothing is the item targeted most for theft by organized crime, according to NRF. • More than half of retailers surveyed by NRF in 2021 were allocating capital specifically to fight organized crime.

Did Somebody Say Inflation?

Don’t worry about rising interest rates and inflation too much, CBRE global chief client officer and senior economic advisor Spencer Levy recommended at the recent ICSC@NewEngland event. “The 10-year Treasury has peaked,” he said. “The long end of the curve is not going to get much higher.” CBRE foresees interest rates peaking around 3% and starting to go back down in 2024 as supply chain snags unravel and freight costs and energy concerns abate, he said.

The trend has some implications for how today’s property deals are financed. Levy said his recent advice to institutional investor clients had them falling out of their chairs. “When you underwrite your purchases of real estate, you should have a flat cap rate on the exit because inflation is going to be a lot lower than it is today,” he said. “If your convention is putting 50 to 75 basis points on the exit, if inflation is going down, maybe it should be flat.”

A little inflation is a good thing for capital values and rents in the long term, he said: “It feels bad today, but economists fear deflation, not inflation.” Europe and Japan, he added, have been suffering from deflation caused by low birth rates.

Lenders Are Playing Hard Ball, Despite Strong Fundamentals

Despite a stellar quarter, Macerich said it’s having a hard time finding favorable rates at which to refinance some of its long-term debt. The REIT’s net operating income increased 5.4% year over year in the second quarter, and it expects NOI to climb as much as 6.75% for the full year. But balance sheet lenders and commercial mortgage-backed securities servicers aren’t offering favorable terms for long-term debt, according to Macerich executive vice president and CFO Scott Kingsmore. The landlord needs to refinance mortgages on a few of its malls. “The Fed’s actions to temper inflation are significantly impairing debt financing activity within all commercial real estate sectors,” he said on an earnings call. That means the firm will have to do some short-term financing until the market changes, he said. “Mortgage financings have slowed during the past several weeks. As a result, we will continue to utilize loan extensions as an important tool within our capital plan.”

Attention Landlords and Leasers: The Next Hot Retailer

Streetwear sneaker retailers are stepping into more stores. Air Jordan, Antisocial, Kaws, Off-White, Supreme, Vlone and other labels have rabid online fans who are acquisitive, logo-conscious and known as “hypebeasts.” The trend is generating tenants for every type of landlord. Celebrity-driven brands like APL are taking high-profile mall and streetfront space, and pop star Kanye West even has trademarked a concept store called Yeezy Supply, or YZYSPLY, for his Yeezy footwear and athletic apparel brand. Meanwhile, throngs of sneaker fanatics are opening their first businesses selling multiple labels in suburban strips. Leasing agents with spaces to fill: Check out local sneaker collectors.

High-Flying DTC Brands Hit Turbulence

Some of the direct-to-consumer brands that expanded into physical stores in recent years are slowing down. Eyewear juggernaut Warby Parker will cut corporate jobs due to declining sales. The company has 160 stores in North America. Shoe retailer Allbirds, another digitally native brand that grabbed headlines by going physical, also is slowing head count growth due to a decline in profitability. The companies didn’t say if long-term store opening plans have been affected. Allbirds has 46 stores globally.

What Does the Future Hold for Bed Bath & Beyond?

The iconic home decor chain has been making headlines as the latest meme stock to surge and stumble based more on social media trends than on company fundamentals. The retailer is also on some landlords’ watchlists for possible bankruptcy filing. Its profits have been dwindling as inflation-weary consumers trade down to cheaper competitors and supply chain issues leave key inventory unreplenished. The company also tried to introduce its own private labels and lost some shoppers who preferred famous brands.

While Bed Bath & Beyond was the largest home retailer in the U.S. by market share prior to the pandemic, it has been unable to keep up and is now the fifth largest. Wayfair, HomeGoods, Big Lots and Ikea all have passed the chain in building market share, according to YipitDataInsights. In late June, both the CEO and the chief merchandising officer left after sales at stores that had been open at least one year dropped 27% year over year in the second quarter. The retailer lost $351 million in that quarter, which ended May 28. The company closed only three of its 955 stores during that time. Now analysts anticipate a cash crunch, and the company has hired financial advisors to find additional capital to fund operations.

Source: 2022 ICSC.

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