News How Valuable Are Entertainment Users to Your Center’s Health?

Entertainment Experience Evolution Conference Wrap-Up

In the rapidly evolving retail real estate world, entertainment and experience concepts have emerged as major players absorbing available space left behind by failed legacy retailers. These companies are competing for consumers’ leisure dollars (and time) with various concepts including virtual reality, unique dining, pet-centric venues, and variety entertainment that can not only be experienced but also be shared. 

These trends and more were recently discussed at the 6th annual Entertainment Experience Evolution conference in Los Angeles. Brian Roache and Tom Godino, Jr. from our Boston and West Palm Beach offices attended to gain insight into how these concepts are helping redefine and revitalize retail centers. As agents for more than 300 properties nationwide, Atlantic Retail is committed to staying ahead of market trends to better inform our clients. What follows are a few of the takeaways from this conference:

Thinking about an “Entertainment” user for your center? Here are three questions you need to answer first.

Your center recently experienced a large vacancy. It’s still anchored, well-positioned, with good access and parking, but the market just isn’t on the radar for the handful of junior anchors who are still opening new stores. Your broker calls you, and XYZ Super Fun World is interested. The rent is reasonable, they want a bunch of TI, and this is their first location for a rapidly-growing franchise. Their marketing materials make it seem like a mini, indoor Disney World, a guaranteed crowd-pleaser for kids and parents alike. They talk about all the new customers who will be flocking to your center. What do you need to know before you finalize a deal to determine if this tenant has staying power?

  • Who is the operator?  Unlike in retail, where the shopping experience is peripheral to the main goal of acquiring a product, with these concepts, experience is the goal, and customer experience is a direct reflection of operations. In addition to money, the customer is spending their time. Consider whether the operator has previous experience in running a business that is heavy on customer service. Passive investors aren’t ideal for long term success: operators need to be hands-on and involved in the day to day. They should be passionate about the concept and able to deliver the promised experience. Social media and the “sharing” generation amplifies the effect of customer experience in both directions. Great experiences lead to great Instagram posts and more cars in the parking lot. Bad experiences lead to Yelp reviews and For Lease signs in the windows.
  • Is the concept competitive in the market? Just because they are the only trampoline park operator in a 15 minute drive doesn’t mean they are without competition. Leisure time is a finite resource which can be spent numerous ways, often without spending money. Concepts that offer entertainment for the whole family will reach a larger audience and have more staying power than those built for kids who will eventually age out. A high-quality food offering is a must, and the ability to serve alcohol can lead to longer guest stays. Other differentiators, such as regular and unique programming that add variety, will keep them at the top of the list when families are deciding to “go out.” Factors influencing this type of purchase decision are far less about convenience and more about the destination.
  • Are they future-proof? One alarming customer preference trend that should keep operators up at night is the “been there, done that” mentality that limits return visits and sends customers to the next venue. Operators need to continually find ways to vary their offering and give customers new experiences in the same venue. If the concept is heavy on fixed equipment or rides, then the operators’ ability to adjust to the market or add the latest technology will be limited by cost or space. Single-experience concepts are far more susceptible to consumer whims compared to those that offer a variety of options. Content-based experiences such as virtual reality have the ability to quickly change their concept to provide customers a new story or game with each visit.

If the last decade of retail deals has taught us anything, it’s that the relationship between landlords and tenants has become more transparent and less adversarial than ever before. Landlords need to view tenants as partners in the health of their shopping centers while tenants need to view landlords as invested (if not financially so) in their success. Large-format entertainment venues are more than just space-fillers: they draw customers in complementary day parts, help expand trade areas, and support neighboring tenants. The tenants themselves need landlords who will give them terms to be flexible with their concept and give the operation enough runway for long-term success. 

Demographic trends point to challenges ahead.

Randy White of White-Hutchinson consultants gave the keynote opening presentation, which, if we’re being honest, set the conference off with a somewhat ominous tone. As a consultant to the entertainment industry, W-H studies market trends to help advise their clients on growth strategies. For those of us in the real estate business who are involved in these growth programs, there are two key trends to be aware of.

Demographic Changes: Since the “Great Recession” significant changes in the nation’s demographic make-up have been influencing overall consumer behavior. For example:

  • Since 2008, the live birth rate in the US has plummeted more than 12%, reversing a previous growth trend and resulting in 5.8M foregone births
  • In 2007, 68% of households had no children under the age of 18. In 2018, that number had risen to 73% and there were 2.3M fewer households with children.
  • In 2018, the largest age group was 27 years old (4.8M) and the largest generational group was, not surprisingly, Millennials (age 22-37)
  • By 2035, it is projected there will be 5.6M fewer adults age 22-37 (current Gen Z) 
  • Both men and women are waiting longer to get married and start families. For the first time, in 2018, the largest group of adults aged 25-44 were single w/o children (37%), up 10% since 2001

So in the United States, families are starting later and having fewer kids. This is a trend that owners of real estate should watch carefully as they decide on a tenant mix. Landlords should focus on concepts that appeal to a broad range of age groups in order to protect their centers for the long-term.

Consumer Behavior: White gives us three ways to measure trends for what he calls “Out of Home Entertainment”: time, spending, and participation. Below are a few key facts to consider when evaluating if your trade area can support an entertainment user. 

  • The population 25+ with a bachelor’s degree or higher has 33% less leisure time than those without a high school degree. However, they spend the highest portion of that leisure time on entertainment and are the only group who actually increased their annual visit rate over the last 5 years.
  • Those with bachelor’s degrees are the dominant group across all subcategories, representing 73% of the total spending on Out of Home Entertainment and arts. Additionally, households earning more than $100k annually represent roughly 25% of all households in the US but make up 56% of the spending on all Out of Home Entertainment.
  • Across all demographic groups participation is down 11% in the last decade, although the trend has ticked up in the last couple of years. Traditional categories (movies, bowling, billiards) have seen even more dramatic decreases, ranging from 23%-48%

Education and income are the strongest indicators of demand in a trade area as the more affluent and better educated represent the largest share of both participation and spending. Out of Home Entertainment is a zero-sum game for both time and money, and operators find themselves in increasing competition with evolving in-home entertainment options. Just like retailers need to provide customers with an experience they cannot get online, entertainment users need to provide an experience that people cannot get from the comfort of their living room.

Entertainment concepts are a great new addition, but they are not going to solve every retail real estate problem.

If we have a criticism of the conference it was that there was a bit of a “brass ring” vibe to many of the presentations. Yes, there were plenty of new and trendy concepts on display, such as restaurants, virtual reality, and new entertainment districts focused on waterfronts and in urban centers. However, part of what makes these projects and concepts so appealing is their uniqueness and the fact that they are not prototypes sprawling across the country. Many of these concepts may only open a single location in a MSA. Even the most successful chef-driven restaurant concepts can count on two hands the number of units they can operate efficiently.

For experience operators, growth is important, but the ability to develop and disseminate new digital content (such a new VR storyline) makes it easier to grow across large geographies without a critical mass of locations. For example, content-based experiences can locate in New York, Dallas, and Los Angeles and update their offering digitally without heavy re-investment in infrastructure.  Additionally, due to consumer behavior and desire for new experiences, operators need to maintain scarcity in a market and serve larger trade areas from a single location. For restaurant concepts, almost the reverse dynamic is in play. In order to maintain quality and flexibility, chef/entrepreneurs need to remain small and nimble. The best operators are hands-on, in their restaurants regularly, ensuring the quality of their various brands. This limits both the number of units they can manage as well as the geographic territory they can locate in.

For real estate owners, these dynamics in entertainment/leisure concepts present a new reality. In the preceding 15+ years, retail real estate was driven by growth-oriented, prototype-focused concepts stamping out ever-increasing footprints across the country. These companies had strong balance sheets and were stable, if not predictable, tenants. Today’s successful concepts, driven by a fickle consumer base, will be smaller and somewhat untested, with financial strength that will vary greatly.

Landlords need to be comfortable with the increased risk that comes with some of these concepts in exchange for the reward of healthier centers positioned to meet today’s customers needs. 

Are entertainment concepts here to stay?

In a word…maybe. As noted above, much depends on the individual concept, the operation, and the trade area. With so much of the business technology-driven and changing every day, it’s very difficult to predict what new idea will influence consumer choices. In some markets we are starting to see a tipping point where some single-experience concepts have reached saturation, and there will be some closures. As we have discussed, landlords need to be particularly wary on that front. Fortunately, the industry is staying out ahead of themselves, and operators are working hard to create the kinds of varied experiences that will keep up with consumer preferences and lead to stable, long term tenancies.  

Posted by

Brian Roache

Managing Director | Boston
[email protected]

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