Retail evolution
GEOFF COLVIN: The revolution in where we buy picked up speed this past week with a mammoth merger -- Federated Department Stores, owner of Macy’s, Bloomingdale’s, and many others, buying May Department Stores, owner of Lord & Taylor, Marshall Field, and others. Both companies have been languishing, and the combined firm will probably close many stores.
Now department stores are in long-term decline, and a big reason is the radically changing nature of the mall, where most department stores are located. Some malls now do without department stores entirely, and developers are even going beyond the mall, building completely new kinds of shopping venues. Last winter I visited a so-called lifestyle center with Jeff Gunning, a towering architect whose firm has designed many of them, including this one, called Pentagon Row, in Arlington, Virginia. And right off the bat, you can see this place is different. (taped segment begins)
COLVIN: Now I've realized everything here has a purpose, so what is the purpose of the skating rink?
JEFF GUNNING: Most developments need some kind of a signature space and it tends to be the primary public gathering space that people associate with that development. In this case, it's this public plaza, which includes a skating rink.
It's really important when you're thinking about this kind of a project as to what the residents are going to be looking down upon. And in the case of a skating rink, it's an activity that's relatively quiet but it draws people, it's interesting to watch, so it's really the perfect kind of an activity to provide in a mixed-use environment like this.
COLVIN: That's right -- people not only skate at this mall, they live here. Three levels of apartments stand above the stores. And while traditional malls have always been places where some people like to congregate and relax, these new centers are designed for exactly that.
GUNNING: The pergola here is very important because it gives you a place to sit down, have a cup of coffee, and watch other people walking by. People-watching is a really important aspect of these new retail projects that are being done today. So street furniture is important, outdoor lighting, a little bit of green, as this project has, is really important. That's the yard for these people. That's their yard. They look down on something green. It's an urban oasis.
COLVIN: For another big difference from the typical mega-mall, check out the parking picture.
Now in this portion of the development, we do have surface parking.
GUNNING: Right.
COLVIN: The same kind of thing that you of course have in a normal, typical mall, but it isn't vast. It isn't one of those endless expanses of cars.
GUNNING: Exactly.
COLVIN: Is that part of the design idea too?
GUNNING: That's part of the design idea. Most lifestyle centers today have a combination of on-street parking and some surface parking. A few of them, like this one, have below-grade parking.
COLVIN: Put all those elements together and you get a retail phenomenon.
In the world of retailing, this is the coming thing?
GUNNING: It is. This is what virtually every retail developer is looking at some variation on this kind of a format, open-air, street-oriented environment. Not to say there aren't regional malls being done today too, but even those have an aspect of outdoor that's being incorporated into them.
COLVIN: And in the trade, a regional mall means a great big mall.
GUNNING: Anchored by department stores.
COLVIN: All enclosed.
GUNNING: All enclosed, all air-conditioned, fields of parking or parking structures.
COLVIN: Is it an issue, a detraction, in a case like this that you don't have inside? People may not realize when they look around here that this is the outside, but there isn't the traditional inside hallway like you have in a mall. This is where you walk around.
GUNNING: This is it.
COLVIN: Meaning if it gets chilly or if it gets really hot and humid or if it's raining, well, you're outside.
GUNNING: You're outside.
COLVIN: Is that a problem?
GUNNING: It's not really a problem. I think it was assumed for many years that it was a problem, and so you had to provide air conditioning and acres of free parking, and those sorts of things were enough for a long time. But today I think people are looking for a couple of things. They're looking for a sense of community, which these kinds of places provide, and it's also an aspect of convenience to these places.
When you can park in front of a store, as you can in the back side of this project, you don't always find a space there, but you might. So there's that aspect that you may actually be able to park in front of the store where you intend to shop.
COLVIN: Imagine that. Shoppers love these places. They spend $84 an hour at them, on average, versus just $58 an hour at traditional enclosed malls. Retailers and developers love them, too. They bring in more revenue per square foot than enclosed malls yet cost less to operate.
Are the big traditional regional malls in trouble?
GUNNING: I wouldn't say they're in trouble, but they're definitely evolving, they're changing, they're incorporating more aspects of outdoor environments, as this one is. And the ICSC, or International Council of Shopping Centers, will tell you that there are fewer and fewer of them being built every year.
(taped segment ends)
COLVIN: Fewer being built every year – is that bad news or good news for mall operators? How about retailers, shoppers, investors? Stephen Sterrett is chief financial officer of America’s largest mall operator, Simon Property Group, which has about 175 malls and about 70 lifestyle centers. He joins us from Indianapolis.
Kurt Barnard is president of Barnard’s Retail Consulting Group. He’s been spotting trends in retailing for over 40 years and joins us from New York City.
Mr. Barnard, is the big enclosed mall a concept whose time has come and gone?
KURT BARNARD: I would agree with that statement completely. You see, when you go shopping these days, you don’t just go to a department store. You don’t just go to a specialty store. You go to a discount store, Wal-Mart, Target, low-price stores such as Kohl’s, and you don’t find those in shopping malls.
COLVIN: Well, Mr. Sterrett, your company is the biggest mall operator in the country. What do you think?
STEPHEN STERRETT: Well, Geoff, it’s ironic that the footage that you just showed was shot at a lifestyle center that is literally right down the street from a very dominant, very healthy regional mall we happen to own.
COLVIN: It is right next to Pentagon City.
STERRETT: It is right next to the fashion center at Pentagon City, which is anchored by Nordstrom and Macy’s and does over $700 a square foot in volume, which is a very dominant piece of retail asset and actually is located such that it’s in the center of what’s become a very vibrant economic district on the Virginia side of the DC marketplace.
COLVIN: Well, Mr. Barnard, in fact a lot of big regional malls still seem to be doing fine. You say the future for them is not good. Why?
BARNARD: It is really not good. You see you have to remember what it is that shoppers are really looking for. Picture the ordinary, run-of-the-mill mall that we are dealing with these days.
You find that if a shopper goes there, first of all it’s usually a long driving time that is necessary. Then you have to look for a parking space, which is not easy. Then you have to wend your way into the mall, and once you’re in the mall, what do you find? You find 100, 200, maybe 300 stores, most of which, well, how do you tell them apart? The only way in which many of them can be told apart is by what? The name on the door, certainly not the merchandise that’s being shown, simply because the merchandise is all pretty much the same stuff. If you want a pair of shoes, you go to a shoe store, and what happens? You don’t like what you see, so you go to another shoe store and that other shoe store is at the other end of the mall, and of course on a different floor altogether.
So it is basically for the average shopper, shopping at a mall is an adventure, it’s an expedition. And that may have been very interesting to the average woman say about shortly after the ‘50s, ‘50s or ‘60s, but not today.
COLVIN: Well, Mr. Sterrett, Mr. Barnard is talking about real changes in the way people live, and those changes are undeniable, which normally would require that retailers change what they offer. Do malls have to make changes, and can they make them?
STERRETT: Oh, I think not only do malls have to change, but they have been changing. I mean, for example, one of the systemic changes that is happening in our society over the last ten years is that people are eating out more. And so you are seeing more and more food brought into the mall setting. I mean, for example, Cheesecake Factory, which is a very successful restaurant, is a chain that likes to be in a regional mall setting because of the traffic that is generated by a successful regional mall, and it’s a strategy that’s worked very well for them.
COLVIN: And it actually works very well for you as a mall operator, right?
STERRETT: Oh, sure it does. If you think about our business, the fundamental thing about the mall business is having good real estate locations. You know, retailers come and go, trends will change, fashions will change, but if you have great real estate locations, there will always be tenants who want to be in those locations. And while lifestyle centers undeniably have a place in the retail culture of the United States, and I think will play a role and a significant role going forward in terms of new construction, existing dominant regional mall locations are as healthy as they’ve ever been.
We are at all time highs in terms of occupancy levels. Sales have been growing. And at the end of the day, for good, well-located regional malls, there are a laundry list of tenants who want to be in those types of locations.
COLVIN: Who want to get in. Now from the investor’s point of view, the three largest Real Estate Investment Trusts, or REITs, in the retail industry are Mr. Sterrett’s company, Simon Property Group, plus General Growth Properties, and Kimco Realty, and as stocks they are all up tremendously over the past year as the economy has improved. That’s great for them, but as an investor it makes you a little nervous about getting in at this point. Mr. Barnard, in general, the good times, are they going to continue to roll for these guys?
BARNARD: Well, within very restrictive limits. You see, we have to really look at what is it that made malls so very popular at one time, which goes back now many, many decades. It made them popular simply because they came about at a time when the average woman was basically what is generally known as a hausfrau, the woman who took care of the kids and who took care of the fact that the husband needed food when he came home after work.
Today it’s a different story, thank heavens. Today the woman is in the work force, she earns money, she doesn’t have very much time. But her mother used to go to the mall on Saturdays, Sundays for entertainment. It was a break from the routine, which of course was very necessary, and she saw it as a form of entertainment and diversion I would say, and at the same time as a source of new ideas for the home. Today’s woman doesn’t do that. She doesn’t need that.
STERRETT: Kurt, you are right in that our society has changed and that people are more time constrained, but I would argue that one of the things that has happened is that intent to purchase has gone way up. People don’t just go browse as much as they used to, but one of the reasons that malls have been and will continue to be successful, a broad variety of offerings.
Think about the mall as a million square foot distribution center. And for people who are time starved, there’s no better place to go, if I’m going to buy a birthday present or an anniversary present and I don’t know what I want, what better place to go than a mall that’s got 200 stores and a million square feet of space in order for me to find that item?
COLVIN: Let me ask you about another element of this, which is the big stores that anchor a lot of the malls, namely the department stores, because they are going through massive changes as well. Mr. Barnard, which ones are doing it well and which ones are not adapting well?
BARNARD: I would say that a company such as Federated Department Stores does it very well and they are beginning to show the results of that also.
COLVIN: They have Macy’s, Bloomingdale’s, things like that.
BARNARD: Absolutely. Macy’s and Bloomingdale’s and others like this. But I think what we have to really consider here is the fact that today’s mall is not really all encompassing. You said if I wanted to buy something, if I wanted to purchase something, I go to a major mall. I cannot buy at a major mall a television set for the most part, I can’t buy a computer. I have to go to a freestanding store, be it one of Best Buy or Circuit City or one of those companies, and they are not in malls. They are in freestanding locations.
STERRETT: Kurt, the people at Apple Computer will be very disappointed to hear that, because they have, as you probably know, started a program of placing retail stores in regional malls beginning about two years ago and have been very successful in terms of their results of selling computers directly out of good regional malls.
COLVIN: Gentlemen, this is a lively discussion about a topic at the very center of our lives. Stephen Sterrett, Kurt Barnard, thank you.
Farr interview KAREN GIBBS: The president’s efforts to fundamentally change Social Security are drawing lots of heat and attention. But the reality is, it’s years away from impacting anyone’s bank account. Money Manager and Wall $treet Week contributor Michael Farr points out big changes that are happening now which could affect just how much money we’ll have in retirement
You know, Michael, with all the talk about Social Security reform in personal investment accounts, some of the changes that are going on with the treatment of bonds in 401(k) plans are being ignored. Tell me about them.
MICHAEL FARR: You know, Karen, one of the things that’s going on is that this is a bit of a change over what we used to think in the late ‘90s. In the late ‘90s, you wanted all of your go-go stocks in your retirement accounts so that those capital gains when these stocks would go up 14 points a day would be somewhat protected and sheltered from taxes. Now what we’re seeing because of the change in the capital gains tax and the tax on dividends, people now suggest and scholars now suggest that you should have your stocks in your taxable account and your bonds with that interest income in your retirement account, your IRA or your 401(k).
GIBBS: So that when you start pulling it out at 70½ when you have to take stuff out, you’ll be taxed at a lower rate conceivably then versus now.
FARR: That’s right. And in addition, the interest that comes into that account, which would normally be taxed at your regular income rate, is allowed to stay in there without the invasion of taxes, and it’s allowed to compound, meaning you can take that interest after it piles up and you can buy more shares in the bond fund with that interest or as it adds you can buy additional bonds. So then you begin to earn interest on your interest.
GIBBS: The real issue then is that stocks are at a lower capital gains rate.
FARR: Stocks are at a lower capital gains rate, and dividends on stocks are at a lower tax rate. So whatever happens in that taxable account, because of the lower tax rate you’re going to keep more of that. So if you own bonds, you want to put them in that account where basically you’re not going to have to pay taxes for many years, and you can take that interest income and perhaps reinvest it and either buy more shares of your bond fund, or as it builds up in $1,000 increments, simply buy more bonds and begin earning interest on your interest.
GIBBS: Okay, so we’re trying to put money in our retirement accounts. How should an investor go about allocating assets?
FARR: It’s a really strange question. Should I own bonds? Do I need bonds? The answer is no one can really tell you. It depends on your financial situation. Basically bonds are used as an asset allocation tool to dampen volatility, figuring that this is going to be some really safe asset if I have some limited funds that I know I need for my retirement and I want to protect them from really the ups and downs of the stock market.
GIBBS: So you won’t have the roller coaster ride, so it won’t be as risky.
FARR: Right.
GIBBS: But risk and return are commensurate, so it means it’s not going to give you the type of return.
FARR: It’s not, and it’s a tradeoff for security. Bonds typically don’t give you the return. Bonds historically will pay somewhere close to 5.5 - 6 percent over a long period; stocks over a long period, somewhere around 10 percent. So the more bonds you add, you’re going to lower the return on your portfolio, but you’re theoretically also lowering the risk in your portfolio. In about 22 years, $100,000 will turn into $400,000 in a bond portfolio or $800,000 in an all stock portfolio. So that’s the difference. If you go half stock, half bonds, you’ll have about $600,000 in 22 years, and you’ll have a less bumpy ride.
If you have a long term, if you’re young, if you’re in your 20s or in your 30s, you can have a long ride. It’s no big deal. It can be bumpy and the money will compound, so you should own all equities. As you approach retirement, you want to probably increase the bond portion.
GIBBS: Well, we know that inflation is the big bugaboo of bonds. It erodes the value. We know that inflation is picking up, the dollar is dropping, and that’s adding to inflationary pressures, so long-term rates are eventually going to go up. Why should we hold bonds now when we could wait for a higher rate?
FARR: It’s a very good question, and a lot of people would say maybe you shouldn’t. But if you need the stability in your portfolio, then you should own some sort of short-term bond, keep those maturities short. You won’t earn much on them, but you’re not going to lose should rates spike. Bond prices can drop as rates go up, so if you’re doing this to keep things safe, don’t get confused.
I mean I think that investing in and of itself is plenty complex enough. So if you want a return that’s like that 10 percent a year over a long term, and a lot of experts are saying it might not be quite that high, but if that’s what you want, an S&P 500 index fund will work for you. If you want a secure place in bonds, then a Treasury bond fund or iShares will work just very well for you. Don’t get too cute. Everything’s plenty complicated, and it’s tough enough to stay disciplined going right down the middle of the road.
GIBBS: I’m going to keep pushing you on these higher rates.
FARR: Good, okay.
GIBBS: Because when rates rise, it also affects the bottom lines of corporations. So it’s not going to be all that rosy for stocks, a rising interest rate environment. What’s an investor to do?
FARR: What we’re talking about are basically short-term issues. Yes, it does look like interest rates are going to begin to rise, and that will be bad for bond prices, so I suggest keep them short until you can find a better yield. I wouldn’t get too nervous about the fact that we are going to see some rising rates here and an expanding economy that might become somewhat inflationary. Go in for the long term and stay very focused. If you listen to every person on television, and I’m really sorry, and that includes me, really just, you know, ignore me half the time.
GIBBS: But this time listen.
FARR: If you listen to everybody on television about what’s going on with the latest emerging market in South America and you want to know about Asian debt that maybe you ought to have in your portfolio, cut it out. That’s not what you want. You want an above average return. You want a return better than you can get at the banks, better than you can get at a money market, so that it will help you pad that retirement account for the all important day when you’re going to need it. It’s complicated enough. Keep your strategy simple.
GIBBS: All the conventional wisdom, all the studies show that we are going to have to become more aggressive as we get older to have enough money to retire. The prevailing thought is that you have your age as the amount of bonds in your portfolio, or if you’re 40 years old you have a 60 percent stocks, 40 percent bond mixture.
If you turn 50, then it’s more 50-50, and you get the picture. That’s not going to be enough for a lot of people to retire on. How can they become more aggressive?
FARR: Ibbotson’s basically compiles a bunch of market data over long periods of years, and Ibbotson’s data suggests that a 70-30 split probably is optimum for reducing as much volatility and still giving you the greatest amount of return. If you go with that 70-30 split even if you’re older so that your account will grow a little bit faster at an increased pace, then I suggest that you look at your account on a total return basis.
Instead of just spending the income, figure that the stocks are going up at 10 percent, the bonds are going up at 6 percent. Spend 3 percent, spend 4 percent. If you have to, you could spend as much as 5 percent per year of your overall account. Take some from capital gains, take the income and use that blend in order to fund your retirement.
GIBBS: Michael Farr, always a pleasure. Thanks for joining us. FARR: The pleasure is mine. Thanks.
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