For the past several years, the hotter-than-hot housing market has given an enormous boost to home improvement and home fashion retailers. Fixing up and furnishing a home is big business, and in an effort to capture the bulk of home-related dollars, developers are building retail centers that exclusively sell home furnishings and décor.
Home fashion retailers are expanding aggressively because of the home-buying boom, says Larry Ortega, a retail specialist with Colliers International. Housing starts are expected to reach 1.8 million in 2006, and new and existing home sales should rocket to nearly 7 million, according to the National Association of Homebuilders. “People are spending more time at home, and home décor is a way for people to be creative and create their own environment,” he explains.
But these home fashion centers rely solely on the housing sector for their success, and are largely unproven. Moreover, they are being built amid dire projections that the nation's overheated housing market is headed for a meltdown. This year alone, house prices have increased 12.5 percent, according to The Economist.
Indeed, housing experts contend that household debt has reached all-time highs, and that many homebuyers have overextended themselves with risky mortgages such as no down-payment loans and interest-only loans, where after a specific period — usually three to five years — payments increase because borrowers have to start paying on their principal.
These new loans lull consumers into a false sense of financial well-being, experts say. But the loans actually put homebuyers in a tenuous and vulnerable position of relying on the continued appreciation of home prices in order to refinance or sell at a profit.
If (or when) the housing bubble bursts — and economists are convinced it will — these homeowners may find themselves struggling to pay their mortgages rather than spending lavishly on home décor. And homeowners probably won't be the only ones in trouble. Lenders could see defaults and foreclosures increase dramatically, experts say, creating stricter lending policies and making it more difficult for the average Joe to buy a home.
Nevertheless, one developer, Brandon Birtcher, president of Laguna Niguel, Calif.-based Birtcher Development & Investments, believes that consumer demand for home fashion will continue to be strong, regardless of the housing market.
Birtcher Development is currently working on South Coast Home Furnishings Centre, a 295,000-square-foot, nine-building project that fronts the San Diego Freeway in Costa Mesa, Calif. With a $90 million price tag, the center is being developed to house a variety of home fashion retailers.
“This industry has benefited greatly from the very strong homebuilding activity,” Birtcher says. “But the demand isn't necessarily proportional to home building, because most homeowners will spend a lot of their income furnishing and decorating their homes many years after they've bought it.”
As it stands today, retail sales for household furnishings are expected to grow a meager 1.5 percent annually for the next eight years, down from nearly 3 percent last year, according to Business Trend Analysts, a Commack, N.Y.-based research firm that specializes in the furniture industry.
Moreover, household furnishings sales are expected to fall well below the collective retail sales forecasts of 3 percent to 5 percent, according to the National Retail Federation. Retail sales are expected to reach $45.9 billion this year and $88 billion by 2013, per Business Trend Analysts.
No Empty Rooms
Beyond concern about the housing bubble, home fashion centers fly directly in the face of commonly accepted methods of establishing a tenant mix in retail real estate. Historically, landlords shied away from having a large concentration of similar retailers in the same center because it was considered too risky. And yet, that is exactly what home fashion center developers are doing — eschewing diversification. Instead, they prefer to bring together a mix of offerings ranging from furniture stores like Thomasville to home accessories and accent retailers like Kirkland's and Pier 1.
“We thought, ‘Wouldn't it be great to pull together a bunch of retailers that would help these new homeowners furnish and decorate their homes?’” says T.A. Shover of Phoenix-based SunCor Development Co., which is currently pre-leasing its At-Home District, a 53-acre project that will feature 450,000 square feet of retail and restaurant space.
Located in Goodyear, a fast-growing suburb of Phoenix, At-Home District will serve the residents of Palm Valley, one of the largest master-planned communities in Arizona. SunCor, which expects to break ground on the project in early 2007, is pursuing retailers ranging from Pottery Barn to Bed, Bath & Beyond.
“The idea is that if consumers want to shop for something home-related, they can find it all in one place,” Birtcher says. “It's all there in one center. This game of having to drive around trying to find this store and that store is over.”
Birtcher points out that the centers aren't just about furniture. “We're looking at outdoor garden-type retailers, fireplace specialists, barbeque stores and patio furniture retailers…” At press time, the firm had not yet nailed down any tenants for South Coast Home Furnishings Centre.
Yet even the developers tackling these projects see roadblocks. “We thought our project was a little risky,” Shover admits. “It's like putting all your eggs in one basket.”
Tom Dossenbach, managing director of Dossenbach Associates LLC, a High Point, N.C.-based consulting firm, agrees: “There is some risk that the center would not perform well when home furnishing and home décor sales take a dive.”
Regardless, developers such as SunCor and Birtcher are willing to take that risk, presuming that both consumers and retailers would favor home fashion centers over “Furniture Row” — areas within towns and cities where furniture and home décor retailers cluster and consumers can find a variety of home furnishings retailers at a range of price points.
Phoenix, Dallas and Atlanta boast Furniture Rows. While the retailers enjoy the synergy created by nearby competition (but rarely in the same shopping center), consumers have found it less than convenient to traipse from one store to the next.
“There's been a tendency for some furniture stores to group together, but not in a cohesive manner and certainly not in a pedestrian-oriented lifestyle center,” notes David Moore, director of retail design for DFD CornoyerHedrick. The Phoenix-based firm is in charge of designing SunCor's At-Home District, which is modeled after a lifestyle center. Home fashion centers, he says, take shopping for home furnishings and décor beyond Furniture Row.
At-Home District, for example, will emphasize home furnishings, but will not exclude other types of home-related retailers, says Moore. “The stores can be furniture, tile, carpeting, lighting — anything to do with the home,” he says. “We think it's important that the center have a life at night so we want to include retailers like Pier 1 and Crate & Barrel, too.” He also expects small boutique shops of 1,500 square feet to 60,000-square-foot anchor retailers such as Rooms To Go. Additionally, the center will boast several high-end, destination-driven restaurants such as PF Chang's and Flemings.
“I do believe a large number of consumers would prefer this type of retail center,” says Gregg Palazzolo, a senior market research analyst with Business Trend Analysts. “Given people's busy lifestyles nowadays, it would make it a lot easier to shop for home furnishings, instead of traveling all around town from store to store.”
Scottsdale, Ariz., is one market where home fashion centers have found success. Earlier this year, Zocallo Furniture Plaza was sold to GDA Real Estate Services Inc. for $19.2 million. The center, which consists of two buildings totaling 51,195 square feet, is situated right in the middle of the North Scottsdale home furnishings corridor near high-end furniture retailer Robb & Stuckey. Since its 1999 opening, the center has been occupied by such retailers as Expressions Custom Furniture, Exotic Home, Pacific Green, Nevada Leather Furniture and Elegance Preserved.
“Home fashion retailers want to be in emerging areas, so we look for better income demographics where a lot of new homes are being built,” Ortega explains. “We think there's a better chance of success with these areas.” He points to Arizona, California, Florida, Nevada and Texas as ideal locations.
“I think it's a great idea for a lot of places,” Moore says. His group at designer DFD CornoyerHedrick is also working on two other home-fashion oriented centers. One project is Vacaville Pavilions in Vacaville, Calif., which is being developed by Los Angeles-based Kornwasser Properties. Another, Crown Point in Parker, Colo., is currently in the planning stages. Dallas-based Quorum Equities Group LLC is behind the project, part of a 220-acre, mixed-use development.
And, DFD CornoyerHedrick may soon be involved in a similar project in Boston, Moore adds. “We certainly would love to see more developers get involved in this type of center because it's something that has a lot of appeal to both consumers and retailers,” he says.
In fact, Birtcher believes that projects like South Coast Home Furnishings Centre would find success in many different markets across the nation. In particular, he points, to areas with explosive population and housing growth would be ideal. And, an above average household income area with strong demographics is key, he says.
The U.S. is undeniably growing. By 2010, the nation will boast nearly 115 million households, according to the U.S. Census Bureau. And, with the expanding number of households, the average size home size is increasing and more bedrooms are being added.
In fact, more than 50 percent of new single-family homes have three bedrooms, and the share of homes with four bedrooms or more has been rising at a fairly steady rate since 1990, according to Business Trend Analysts. This trend is expected to bode well for home furnishings retailers, especially those that focus on bedroom furniture. In fact, sales of wood bedroom furniture are projected to reach $10.8 billion in 2005.
Birtcher also points out that demand for home goods is driven by life stages. Consumers in the 35 to 44 age category are the biggest spenders on household furniture, reports Business Trend Analysts. But, their contribution is gradually being minimized as more Generation X consumers are buying and furnishing homes.
To meet the demand, the number of home furnishing stores is expected to increase over the next few years. By the end of this year, 30,450 home goods-related retail stores will be open. In fact, some furniture manufacturers such as Furniture Brands International and Ashley Furniture Industries are opening their own stores rather than go through middlemen like Haverty's and Rooms To Go.
“Historically, the home furnishings industry has been very protective of its turf, so there is an element of resistance to [home furnishing centers],” Dossenbach says. “It's going to take some savvy entrepreneurs to make them work.”
Ortega, who is handling the pre-leasing for SunCor's At-Home District, agrees: “It's a daunting task (to persuade retailers to come to the center). It's true that these retailers want to locate in a particular part of town, but that doesn't mean they're OK with the same shopping center.”
Indeed, the competition among the home furnishings industry is intense. “They're thinking about No. 1 so I am not sure the synergies outweigh the fact that consumers could go next door and buy something there instead,” says Mike Pierce, a director with the National Home Furnishings Association.
Nonetheless, Dossenbach believes that home furnishings centers will emerge as the chosen venue for furniture manufacturers and home décor retailers. “If you look at the long-term, global trends, the globalization of the furniture industry will impact the way these goods are sold,” he says, referring to the trend for foreign imports.
“These manufacturers are going to start targeting the consumers. And what is the best way to do it — with little stores or part of a bigger center like this? I believe that it's very possible that in 10 years we will see these types of centers with all of the brands being offshore.” In fact, he says he wouldn't be surprised to see a consortium of manufacturers from Brazil or Italy come together and develop their own center.
TOP MARKETS FOR HOME FASHION CENTERS*
Las Vegas, NV
Dallas-Fort Worth, TX
* Based on employment rates, home affordability and new home permits
Source: Larry Ortega, Colliers International