Item 27 - Appeal Application Nos. 2020-03 and 2020-04 - Central Pointe Mixed-Use Development

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Chapter 3: Property Type Outlook Promising Subsectors Certain classes of assets continue to capture interest, most notably class A super -regional centers, grocery -anchored neighborhood centers, and urban high street locations. As a real estate investment analyst noted, malls are a "mixed bag," with the field essentially divided between top class A malls and "everything else." The top assets tend to be better occupied, providing more favorable returns. "The 'flight to qual- ity' continues where 'must -have' assets are becoming stronger." These are the centers where almost all categories perform well, and not only luxury brands. There also are opportunities in owning daily needs —driven neighborhood and community centers. These can be anchored by food -and -beverage or service uses, particularly in walkable neighborhoods and well -located infill projects. Many interview- ees see strong prospects for future growth, especially with grocery anchors that are visibly making investments in their businesses and building an online platform. That platform can help keep centers relevant despite online grocery sales. While online grocery sales currently represent a very low share of total grocery sales in the United States (thought to be only 1 to 2 percent), one real estate services consultant stated, "This is an overlooked risk in the U.S.," suggesting that we not be compla- cent about the potential impact. Said another retailer contact, "This is a thing. It's the future. But, it's almost impossible to make money at it at this point." Most believe that it still will be several years before a meaning- ful proportion of grocery sales move online, and physical stores will continue to play a role in distribution. Grocers in the United States do appear to be approaching it in a disciplined way, and the severe disruption that has occurred that has in other chan- nels seems less likely to occur in grocery. The Clouds As in previous years, retail real estate lies at the bottom in comparison with other property types, both in terms of invest- ment and development prospects (exhibit 3-1). Retail real estate remains challenged as the sector continues through a transfor- mation. Most interviewees concur that reducing the number of physical stores is a "good thing" and alleviates the overabundance of retail space in the United States, which needs to be rationalized or absorbed by future population growth. More closings and a "tough slog" appear to be on the horizon: according to data from Coresight Research as of June 2019, U.S. retailers have announced over 7,000 store closures this year, more than all of 2018 (which saw about 5,900 closings). The net effects are mitigated by store openings (approximately 3,000 so far in 2019, compared with just over 3,200 openings in 2018), but the result is a reduction in the number of physical stores. What's Declining Several conversations discussed an "expanding void in the middle," noting that consumers are trading up to luxury goods and experiences, or down to value and off -price. Said one expert, "The middle is getting smaller. At the lower end is a value play, and higher end a luxury play. The gap between the 'haves' and 'have nots' is growing." Another important factor repeatedly mentioned was a lack of reinvestment by many retailers. Whether brought on by high debt loads after corporate buyouts or a general lack of capital, companies have been unable to reinvest in aging assets and maintain competitiveness. The greatest disruption is in mall -based retail, particularly lower - tier class B and class C assets. Many agree that a good number of regional malls will disappear entirely, and that this is needed: one expert in commercial real estate services suggested that this is not as much a "decline of malls" as a "decline in `super- fluous' malls." Still, suggestions that as many as three -fourths of shopping malls (roughly 900 of today's approximately 1,200 malls) could close seem highly exaggerated. A few experts suggest that department store mainstays are now all but obsolete. Their one-time role as a source for discovery and product research has been replaced by online browsing. Other interviewees still see relevance in the depart- ment store sector; however, it will be much smaller in size and number of units. Similarly, inline apparel shops are weakening as other sectors strengthen. The exhibit on page 72 illustrates a notable shift away from apparel toward other uses: over a 10-year period, apparel's share of gross leasable area (shown along with gen- eral retail, including department stores) has declined from 36 percent in 2007 to less than 29 percent in 2017. These categories' weakness may extend across price points. One retailer interviewee pointed out, "The overabundance of Emerging Trends in Real Estate® 2020 71