Situs Newswatch 6/21/2017

Brick-and-Mortar Killer Turned Brick-and-Mortar Savior?

It’s the company most often blamed for crippling brick-and-mortar stores — but is Amazon now coming to the rescue of sticks-and-bricks?

The online behemoth’s $13.7 billion purchase of Whole Foods is being hailed by many as a new start for retail and a shot in the arm for the Commercial Real Estate business.

Forget that stocks ranging from Walmart to Kroger to Sears took an initial dive on the news. Many experts see Jeff Bezos’ purchase of the high-end grocer as a new beginning for brick-and-mortar.

“I was at a University of North Carolina CRE conference recently, and the former director of logistics at Amazon was speaking,” says Situs Executive Managing Director Steven Bean. “He talked a great deal about Amazon wanting to conquer the grocery space, but how the company was challenged to develop logistics for perishable items — think bananas without bruises — to customers in optimum condition, often referred to as the ‘last mile.’ Seems like this time, Amazon decided to join ‘them’ — buying into sticks-and-bricks.”

The more than 460 Whole Foods stores across the country give Ama­zon ac­cess to the kind of re­frig­erated dis­tri­b­u­tion system its reg­u­lar ful­fillment net­work lacks, while tap­ping into the up­scale nat­ural and or­ganic foods mar­ket that it has barely touched.

“Supermarkets that don’t adapt quickly to changes in con­sumer be­hav­ior and busi­ness dy­nam­ics won’t survive,” warns Situs RERC President Ken Riggs. “It may all start with keeping bananas bruise-free, but what does Ama­zon do next? Once they’ve mastered the Whole Foods space, they’ll learn how to play in main­stream retail, too.

No telling how Amazon will tweak the format in the end. But be warned, as Amazon moves into bricks-and-mortar stores, we are looking at the clash of the titans, Amazon versus Walmart. There will be causalities among those that compete with these titans.”

Ama­zon has tip­toed into the brick-and-mor­tar gro­cery-store busi­ness this year, open­ing two Fresh Pickup stores in its home­town of Seat­tle, and has ex­plored var­ious ideas for other types of gro­cery stores.

Situs’ Bean cautions, “Make no mistake about it: There is a huge change going on here, and in the long run, Whole Foods may become a retail distribution center for more than just groceries.”

Stop Blaming Millennials for All Your CRE Problems

Situs RERC Assistant Vice President Jennifer Rasmussen joins the Jim Bohannon Radio Show at 11 p.m. (Wednesday) to explain. We invite you to tune in.

Showdown: Amazon vs. Walmart
With Amazon buying the high-end grocery chain Whole Foods, something retail analysts have known for years is now apparent to everyone: The online retailer is on a collision course with Walmart to try to be the predominant seller of pretty much everything you buy.

Each one is trying to become more like the other — Walmart by investing heavily in its technology, Amazon by opening physical bookstores and now buying physical supermarkets. But this is more than a battle between two business titans. Their rivalry sheds light on the shifting economics of nearly every major industry, replete with winner-take-all effects and huge advantages that accrue to the biggest and best-run organizations, to the detriment of upstarts and second-fiddle players.

That in turn has been a boon for consumers but also has more worrying implications for jobs, wages and inequality.

Walmart and Amazon have had their sights on each other for years, each aiming to be the dominant seller of goods — however consumers of the future want to buy them. It increasingly looks like that “however” is a hybrid of physical stores and online-ordering channels, and each company is coming at the goal from a different starting point.

Amazon is the dominant player in online sales, and is particularly strong among affluent consumers in major cities. It is now experimenting with physical bookstores and groceries as it looks to broaden its reach.

Walmart has thousands of stores that sell hundreds of billions of dollars’ worth of goods. It is particularly strong in suburban and rural areas and among low- and middle-income consumers, but it’s playing catch-up with online sales and affluent urbanites.

read more: NY Times

As If Amazon-Whole Foods Tie-Up Is Not Enough: Here Comes Aldi
A price war between discount grocers Walmart and Aldi is spreading across the U.S.

For years, Walmart watched Aldi stores locate near its own stores and sometimes, as in Roseville, Minnesota earlier this month, right next door.

And last week, Germany-based Aldi said it would spend $5 billion to build 900 new stores and remodel more than 1,300 others as it aims to become the third-largest grocer in the U.S., after Walmart and Kroger. In the Twin Cities, Aldi will spend $34 million to remodel 28 of its 35 stores between now and 2019.

Aldi’s expansion was just part of a newsy week in the U.S. grocery industry. Another German-based discounter, Lidl, began opening its first U.S. stores too. Meanwhile, Kroger forecast an earnings miss that sent its stock plunging to its worst single-day drop in 17 years. And on Friday came the biggest news of the week: Inc.’s $13.7 billion purchase of Whole Foods Markets Inc., the biggest sign yet that the online giant is moving deeply into brick-and-mortar retailing.

Until recently, Walmart didn’t appear to take Aldi’s invasion too seriously, even as Aldi was boasting that its private-label products were about 20 percent less expensive than Walmart’s store-branded items.

But in February, Walmart started going head-to-head with Aldi by cutting prices in markets in 11 states, including Iowa. Walmart intends to undercut Aldi and other rivals by 15 percent and is spending $6 billion to solidify its reputation as the low-price leader.

“We continuously look for ways to drive down costs and deliver those savings to our customers because we believe they shouldn’t have to trade down or sacrifice quality to save money,” said Anne Hatfield, Walmart’s director of communications. “That’s why we’re giving customers in select markets even lower prices on the national and private-label brands.”

Across the country, the expansion of low-price grocers shows no signs of letting up. Discount supermarkets are expected to grow at five times the rate of traditional grocers through 2020, according to Bain & Co., a consulting firm.

In the Twin Cities, the exit three years ago of Roundy’s Inc.’s Rainbow Foods created a competitive opening for chains like Aldi that only had a small presence here. “The Twin Cities became a wide open market after Rainbow closed,” said David Livingston, a grocery industry analyst in Milwaukee.

With the remodels and new stores that have opened this year, Aldi is transitioning from a lower-income customer model to more of a mainstream one. To attract bigger spenders, it has adopted a slightly larger, more colorful store design, doubled the size of the refrigerated produce section and brought in trendier items.

Aldi shoppers can now grab a larger selection of organics, salad greens, gluten-free items and specialties.

The Aldi store in Crystal is newly remodeled, and one in Richfield will be completed by June 29. A store in Shakopee will get a face-lift by year’s end. And 25 others will be remodeled over the next two years.

It’s not just Aldi feeling pressure to raise the stakes. Nearly all of the larger, local supermarkets are renovating and adding locations at a quickened pace. “Supermarket retailers are betting that shoppers will go to newer, nicer, better-lit stores with better assortments and more convenience,” said Burt Flickinger of Strategic Resource Group.

Hy-Vee, Whole Foods and Fresh Thyme have also opened or will open new stores this year. Walmart, Target, Cub, Lunds & Byerlys, Kowalski’s and Coborn’s are in the process of remodeling existing stores.

John Dean, a Twin Cities supermarket consultant, said that each new store and expansion takes another little piece out of the same pie that all the grocers rely on. “The independents will keep getting weeded out,” he said. “At some point some stores will close and things will start to even out.”

read more: StarTribune

Additional In-Line Store Closings to Hit Mall Profits
The retail industry’s children’s apparel segment took a turn for the worse, as The Gymboree Corp. filed for bankruptcy and Ascena Retail Group, parent of tween brand Justice, said it would close stores across its portfolio.

San Francisco-based Gymboree is aiming to reduce its debt load t by more than $900 million, and in a statement said it plans to close more than 350 stores as a result of its restructuring (out of a total of 1,281). Ascena is expected to close between 650 and 667 stores across its 4,878-unit portfolio. It is unclear how many Justice stores will be affected by the move.

Retail real estate professionals often have starkly different views on the current state of malls and shopping centers: Is e-commerce killing traditional retail and threatening shopping centers or not? The answer might not be a simple ‘yes’ or ‘no,’ but Ascena executives minced no words in attributing the loss to fewer brick-and-mortar visits.

In an overview of results from its third quarter, which ended on April 29, Mahwah, N.J.-based Ascena noted that total company net sales had dropped to $1.5 billion, an 8.0 percent decrease from the previous quarter. Store traffic was down to low double digits across all of its major business segments, including premium fashion, value fashion and plus-size fashion, according to a company statement.

Tween-centered Justice is one of several apparel brands in its stable. The brand was once a leader in its segment, a place where every tween girl in America thought she needed to shop, says Jan Kniffen, CEO of J. Rogers Kniffen Worldwide Enterprises, an equity research and financial management consulting firm specializing in retail.

In recent years, however, it has faced competition from Carter’s and The Children’s Place, which moved its stores out of malls and improved fashion, pricing and supply chain management. Discount players like Target and H&M have either improved existing or launched new tween apparel departments as well, taken a huge bite out of Justice’s once- huge slice of the tween pie. Another core issue that all children’s and tween apparel retailers must grapple with is pricing pressure, Kniffen notes.

“It is a tough business. People don’t like to pay up for children’s clothes,” he says. “They don’t last long enough. Children grow out of them. They wreck them. Price has always been extraordinarily important.”

So important, that the average price of an outfit from a children’s or tween apparel retailer has dropped by 40 percent in the last 10 years. Ascena has tried to ease this pricing pressure—across all of its brands—by assembling different retail brands and reducing back-shop costs, Kniffen notes.

“It is a great strategy, but the bad news is the brands haven’t done that well. The reasons are pretty much the same.”

For mall landlords, these latest developments continue a stream of gloomy news that has flowed through the sector all year. The industry has seen about 250 percent more store closures year-to-date than it had for all of 2016, says Kniffen.

Green Street Advisors, a Newport Beach, Calif.-based research firm, reduced its forecasts for non-anchor retail occupancy for 2017 and 2018 by 60 basis points, according to its latest mall sector update. The effect on malls will depend on how strong they were to begin with, according to Green Street analysts.

As expected, the closings will hit lower quality malls hard by adding yet more supply to the already over-saturated market. The firm expects fundamentals at those centers to continue deteriorating. Market rent growth at highly productive class-A malls, on the other hand, should outpace retail sales, according to Green Street.

Given the current retail sector conditions, Green Street Advisors has reduced its same-property net operating income (NOI) expectations for the next two and a half years. Its expectations are as follows:

In 2017, a 2.6 percent same-property NOI is expected, down from 3.3 percent

In 2018, a 2.5 percent same-property NOI is expected, down from 3.2 percent

In 2019, a 2.8 percent same-property NOI is expected, down from 2.9 percent

While Green Streets’ research indicates that losses in same-property NOI might slow down by 2019, retail experts expect the mall sector to continue to feel the effects of changes in retail demand beyond that.

Kniffen predicts that about 400 malls will close by 2030. For the remaining malls, whether they are class-B or class-A centers, a much different future awaits.

read more: NREI

Key Housing Numbers Ahead
Final numbers for the key spring homebuying season begin rolling in this morning. All indications are it’s been a pretty good run for housing and the mortgage markets, but lack of inventory, especially in the less-expensive starter-home category, has hurt the market.

“Prospective sellers of these starter homes are not looking to sell their homes because there’s nothing for them to buy and move up into,” says The Collingwood Group Chairman Tim Rood. “There’s nothing to buy, because nobody is willing to sell. It’s a maddening Catch-22.”

Existing-home sales will be reported today. New-home sales are due Friday.

It all comes as the latest report from the Department of Housing and Urban Development and the Census Bureau shows housing starts sank to an eight-month low. Economists say that drop could intensify in the months ahead as building permits also dropped in May.

“Housing shortages look to intensify and may well turn into a housing emergency if the discrepancy between housing demand and housing supply widens further,” said Lawrence Yun, National Association of Realtors chief economist. “The falling housing starts and housing permits in May are befuddling given the lack of homes for sale and the quick pace of selling a newly constructed homes.”

Here’s the Way this Week shapes up:
Existing-Home Sales 10 a.m. ET
-Collingwood’s Tom Cronin dissects the numbers for Westwood Radio
-Collingwood Group Chairman Tim Rood with his take on it all: FBN’s Cavuto noon ET
FHFA House Price Index 9 a.m. ET
New-Home Sales 10 a.m. ET

Billionaire Buying Fannie Mae, Freddie Mac Shares Big-Time
Bill Ackman, billionaire hedge fund manager, sees a bright future ahead for Fannie Mae and Freddie Mac  stock. In fact, Ackman has purchased 115.6 million and 63.5 million shares, respectively, of the companies.

While it’s entirely possible that Ackman and his investors could make millions if he turns out to be right, it’s important to understand his reasoning for buying the stocks — and why it’s probably not a smart idea for most investors to join him.

Other than the U.S. Government, no investor owns more Fannie Mae and Freddie Mac common stock than Ackman’s Pershing Square hedge fund.

In a nutshell, Ackman (and other hedge fund managers) bought shares in the two companies because he perceives a favorable risk-reward opportunity. In fact, in 2014, Ackman made the case that the stocks would be worth between $23 and $47 per share if they were allowed to recapitalize and return to shareholder control. Currently, Fannie and Freddie are worth $2.38 and $2.29 per share, respectively. So, even on the low end of Ackman’s analysis-based estimates, this would be a tenfold increase in value.

In addition, Ackman argues that if the companies returned to the shareholders, the government’s stake could result in an additional $600 billion in revenue for the Treasury. It would be a win-win scenario and would be in the government’s best interest, as well as that of the shareholders, so Ackman reasons that there is a good chance the government would agree. He also feels that reforming Fannie and Freddie is the only viable solution the government has when it comes to the two companies.

Although it’s taking longer than Ackman presumably had originally hoped it would for the Fannie and Freddie saga to play out, it appears that he is still as optimistic as ever about the investment. In a report earlier in 2017, Ackman said that “we (Pershing) believe the shares of a reformed Fannie and Freddie will be worth a multiple of their current price.”

The Trump administration has also given Ackman renewed hope that reform is coming. During his confirmation hearing, Treasury Secretary Steve Mnuchin said, “What I’ve said and I believe, we need housing finance reform, so we shouldn’t just leave Fannie and Freddie as is for the next four or eight years under government control, without a fix.”

In his 2016 letter to Pershing Square investors, Ackman said, “We believe the new administration has the willingness and ability to make the necessary changes to Fannie and Freddie’s business model to preserve widespread access to the 30-year fixed-rate mortgage market.”

read more: The Motley Fool

Brexit Talks Underway
Brexit talks finally began on Monday, almost a year since Britons voted to leave the European Union and amid confusion over what exactly the U.K. government wants from the divorce.

What U.K. Brexit Secretary David Davis describes as the “most complicated negotiation of all time” began at 11 a.m. in Brussels with Prime Minister Theresa May’s government already on the backfoot. An attempt to strengthen her hand by calling an election backfired and she’s run into further domestic strife since, while the 27 other EU members started out with more leverage anyway.

“We are starting this negotiation in a positive and constructive tone,” Davis said in comments to reporters from the European Commission’s Berlaymont building headquarters. “There is more that unites us than divides us.”

The EU’s chief negotiator, Michel Barnier, told reporters that the talks “must first tackle the uncertainties posed by Brexit,” as he outlined expectations for this opening round of discussions. “I hope that today we can identify priorities and the timetable that would allow me to report to the European Council later this week that we had a constructive opening of negotiations,” Barnier said.

The electoral debacle has put May’s own position in doubt, fueling a new battle within her Conservative Party over the kind of Brexit the U.K. should seek. Some of her ministers want to refashion her strategy toward protecting trade with Britain’s biggest market rather than continue to aim for her original goal of winning control of immigration and law-making.

read more: Bloomberg

Anbang’s Deal Spree Leaves It With These Assets Around Globe
Anbang Insurance Group Co. notched up more than $10 billion of foreign acquisitions during a three-year global takeover binge, a campaign that brought Chairman Wu Xiaohui into the orbit of Wall Street and Washington elites before coming to a halt as Chinese authorities moved to rein in acquisitive insurers.

Wu’s responsibilities have now been handed over to other senior executives, and Chinese authorities have asked banks to suspend some business dealings with the insurer after the chairman was detained. The move makes Wu the latest of several tycoons to run afoul of officials cracking down on financial risk-taking.

None flew higher than Anbang’s Wu, or crashed so precipitously. He burst onto the U.S. scene in October 2014, with the record $1.95-billion agreement to buy New York’s landmark Waldorf Astoria hotel. Five months later, he took on Marriott International Inc. with an 11th-hour rival bid for Starwood Hotels & Resorts Worldwide, before walking away a few weeks later. Wu bought real estate and financial services companies in Asia, Europe and North America, including the purchase of Strategic Hotels & Resorts as well as an office building in midtown Manhattan to house Anbang’s U.S. headquarters.

The list of deals Anbang didn’t complete is about as long. Besides Starwood Hotels, Anbang failed to complete a purchase of Fidelity & Guaranty Life last April and talks for a potential investment in a Manhattan office building co-owned by the family of President Trump’s son-in-law Jared Kushner broke off in March.

In Europe, deals involving Anbang that didn’t go ahead include Portugal’s Novo Banco, Hypo Real Estate AG in Germany and Heron Tower in London. China’s cross-border purchases overall plunged 67 percent during the first four months of this year, according to data compiled by Bloomberg.

Have a prosperous day ahead!