Who doesn’t want loyalty from Gen Z and Generation Alpha?

Ulta Beauty sure does, and to that end, it announced this morning that it will open 200 more stores in the next three years, bringing it to more than 1,800 locations. 

Young folk are becoming a bigger part of the retail market. They are expected to make up 70% of global luxury spending by 2030, according to Bain & Co. — and a recent survey by Piper Sandler says teen spending is up 4% year-over-year.

And they love their beauty products. Spending on beauty is at its highest level since 2018 for this segment of the population. Elf Beauty, Sephora and Ulta are the brands of choice for teens. 

Sephora has also been expanding, but lately, that hasn’t been through standalone stores: It has focused on opening in Kohl’s and Tanger Outlets. That has been a major boost for Kohl’s, which is spending $500M this year to add 140 small-format Sephora locations in its stores, on top of the 860 large-format Sephoras it already has. The discounter expects Sephora purchases to make up 10% of its net sales this year and said every Kohl’s will have a Sephora by the end of next year.

Retailers have their eyes on the younger generations’ e-commerce habits. A survey by e-commerce marketing company Omnisend found that 73% of Gen Zers have shopped at online Chinese stores like Temu and Shein in the last year, and 24% buy from those stores once a week. Gen Z buys from Shein at twice the rate of older generations. 

That trend could spell trouble for brick-and-mortar down the road. 

— Catie Dixon, Mark F. Bonner, Kayla Carmicheal and Jay Rickey

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On Our Radar

• U.S. banks rebounded in Q3, but CRE is not out of the woods. Goldman Sachs, Bank of America and Citigroup all reported gains, with Goldman’s investment banking fees up 20% and Citigroup’s trading revenue at its highest in over a decade. Optimism is growing, but banks are also preparing for potential downturns by increasing cash reserves to cover bad loans, especially in CRE. 

• Holiday sales are set to grow by 3.5% — the slowest rate in six years. That’s according to the National Retail Federation's 2024 holiday shopping forecast. Sales are expected to reach about $989B, with consumers becoming more frugal due to inflation and high interest rates. Online sales are projected to rise to 9% of total sales. That said, the U.S. retail sector continues to outshine other CRE segments, with vacancy rates remaining below 5% for what is now 11 consecutive quarters, according to Marcus & Millichap’s Q4 retail report.

• Florida has built 77,000 new properties in high-risk flood zones since 2019. This trend has heightened tensions between real estate developers, insurers and lenders as the frequency and severity of natural disasters intensify across the U.S. Many properties are being constructed just outside official flood zones, bypassing stricter building codes and flood insurance requirements. The new construction is one reason the combined insurance tab for Milton and Helene could reach $75B. Across the U.S., 290,000 new properties were built in high-risk flood zones from 2019 to 2023 — or nearly 20% of the 1.6 million properties constructed during that period.

• How big can data centers get? We’re about to find out. Microsoft Azure Chief Technology Officer Mark Russinovich said U.S. data centers powering AI like ChatGPT will soon reach size limits due to power consumption and infrastructure constraints. To address this, Microsoft is exploring connecting multiple data centers — although technical challenges remain. “I think it’s inevitable, especially when you get to the kind of scale that these things are getting to,” he said. 

• It’s National Department Store Day. Kmart, once one of best-known discount department stores in the U.S. and a progenitor of big-box suburban shopping — a consumer format that deeply influenced the retail sector and became a touchstone of American culture — has receded to just one big-box location in Bridgehampton, New York. On Oct. 20 it will shutter forever. Pour one out for the Blue Light Specials.

This Morning’s News

HOTELS — Service Properties Trust Selling 114 Hotels (Service Properties Trust): Service Properties Trust says it will offload 114 Sonesta-managed focused service hotels this year in a move designed to boost liquidity and reduce its debt. SVC currently owns 187 hotels managed by Sonesta under five brands. Combined, the hotels are worth $850M.

REITs — Empire State Realty Trust Reveals Accounting Weaknesses (Crain's): The REIT that owns the Empire State Building, known as ESRT, disclosed a "material weakness" in its accounting practices. The issue was identified during an audit by accounting firm Ernst & Young. Dig into the state of the Empire State Building owner's balance sheet.

Today’s Deep Dive: Dry Powder Pivots Amid Growing Consensus That Valuations Have Bottomed Out

Sorry, bargain hunters — you’ve missed the boat. 

The drop in interest rates in September has unlocked investment sales, and the market is moving again. But increasingly that means more competition and higher price points.

“There is a lot of dry powder on the sidelines, and they were waiting and waiting and waiting,” said Ermengarde Jabir, a senior economist at Moody’s focused on commercial real estate. “Now, some of that dry powder is starting to be deployed because they're realizing that the deep distress is much less likely to happen.” 

Office is still seeing sharp price cuts, but even that has moved “out of the distressed bucket and sort of into the discount sale bucket,” Jabir said. 

Bisnow spoke to investors and brokers about how fund strategies are pivoting as their dreams of snapping up properties at rock-bottom prices look more unrealistic. 

Read the full story here.

DATA CENTERS — Amazon Goes Nuclear (CNBC): Amazon is teaming up with Dominion Energy to explore the development of small modular nuclear reactors (SMRs). AWS' announcement follows yesterday's from Google.

OFFICE — The Struggling Office Land Opportunity (Green Street): Listings pitching office buildings for their land reflect a new stage for the office sector: valuations have fallen to a level that alternative-use cases pencil even after factoring in the high cost of demolition. Read more here.

SUSTAINABILITY — NFL Stadiums Face $11B In Losses (Climate X): A new report estimates that climate-related risks could cause cumulative losses of up to $11B for NFL stadiums by 2050. MetLife Stadium in New Jersey and SoFi Stadium in California are set to incur the highest losses. Lumen Field in Seattle and Lambeau Field in Green Bay are projected to have much lower relative loss rates. See the stadiums most at risk.

DATA CENTERS — Inside Blackstone's $13B UK Data Center Megascheme (Bisnow): Blackstone’s spend on one data center campus in England is larger than the entire AUM of some of the country’s biggest REITs. How is it spending that much? Bisnow got the details. Read more.

HOTELS — Park Hotels Hit Hard By Strikes (UNITE HERE): UNITE HERE union reports that more than 30% of Park Hotels & Resorts' operating profit has been impacted by ongoing strikes across its properties. Park is the biggest private-sector owner of Hilton hotels.

LEGAL — Crypto 'REIT' Misled Investors? (Coin Desk): Tangible, a real estate-backed crypto project, had an undisclosed business relationship with the CEO's brother, according to a CoinDesk investigation. The brother's company would buy properties and flip them to Tangible with markups as high as 21%. Read the allegations.

HOTELS — Dalata Wants To Almost Double Portfolio As Part Of 2030 Expansion Plan (Bisnow): The hotel operator wants to boost its footprint to 21,000 rooms by 2030. As part of its 2030 Vision plan, it aims to become the largest four-star hotel operator in all major Irish and UK cities. Read more about Dalata's plans.

FINANCE — Foreclosure Filings Drop 13% (MBA): Attom's Q3 2024 U.S. Foreclosure Market Report found 87,108 U.S. properties with foreclosure filings in Q3, a 13% year-over-year decrease. Get the latest numbers on last quarter's foreclosure activity.

DATA CENTERS — DataBank Raises $2B To Accelerate Data Center Expansion (Bisnow): The data center developer’s equity raise was led by pension fund AustralianSuper, who shelled out $1.5B. The funds will be used to build-out over 850 megawatts of data center capacity in the U.S. With the largest pension fund in Australia on board, the pension fund will become a minority owner and join DataBank’s board. Here's what you need to know about the equity raise.

HOUSING — Loosening Building Code Could Spur 100,000 New Units (Bisnow): A new report from Harvard’s Joint Center for Housing Studies says if a Massachusetts building code is altered to allow larger buildings with a single staircase instead of two would spur development in tightly packed cities like Boston and Cambridge. Get more details about the study.

INDUSTRIAL — Wolfspeed Secures Chips Act Financing (Bloomberg): Wolfspeed, which primarily manufactures chips used for electric vehicles, is set to secure $750M in U.S. government grants and $750M in financing led by Apollo Global to support its factory expansion plans. The sites are in North Carolina and New York.

MULTIFAMILY — Trilogy Real Estate Puts $500M Portfolio Up For Sale (CoStar): Trilogy Real Estate is seeking buyers for a 10-property multifamily portfolio valued at $500M. Companies in the multifamily space, including Equity Residential, Waterton, AvalonBay and RMR Group, have signaled readiness to go on acquisition sprees. Trilogy's portfolio is 94% leased.

FINANCE — NYCB Rebrands As Flagstar Financial (Seeking Alpha): New York Community Bancorp is set to rebrand as Flagstar Financial, continuing its evolution after merging with Flagstar Bancorp in 2022. The bank has been working to get on firmer footing amid a bumpy 2024. Here's the rundown of the change.

LEGAL — Search For Missing Realtor Intensifies (KSAT-San Antonio): Authorities issued a statement saying they are close to locating missing San Antonio Realtor Suzanne Simpson. Brad Simpson, husband of the missing real estate agent and an investor in numerous real estate and construction partnerships, was arrested last week and remains in jail. He formerly worked as a property manager in San Antonio. Read more here.

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The First Draft is produced by Director of Newsletters Jay Rickey, Managing Editor Catie Dixon, Editor-in-Chief Mark F. Bonner and Deputy Newsletter Editor Kayla Carmicheal, with an assist from ChatGPT. We’d love your feedback! Email us at firstdraft@bisnow.com.