Retail is Dead? Hardly. Hear what innovators in the retail space say is drawing today’s consumers into spaces, how to shake up norms, and stay ahead of the curve at Connect Retail West. Top players will discuss innovation in experiential retail, neighborhood centers, and in retail investment on January 25th at Hurley Surf Club Pacific City in Huntington Beach, CA.

In Connect Media’s latest 3 CRE Q&A, CBRE’s Philip Voorhees, a panelist at the conference, shares what he sees as the big trends shaping the retail sector, how retailers are adjusting, and examples of how that’s shaped today’s shopping center’s rent rolls.

Q: What are the overarching trends driving the retail industry in 2018?

A: Of course, the overarching trend is retail’s continued evolution relative to internet retail. Coming out of the 2016 Holiday season, it was Retail vs. The Internet. This year, with apparently strong 2017 retail Holiday sales, we expect more Retail AND The Internet conversations. Omni-channel retail is here, from ordering a latte online for pickup, to returning Christmas gifts ordered online at the store. And, retailers continue using technology to better identify with customers, providing better selection and pricing. These are exciting times for retail; the most interesting in my 20 years in the business.

We also expect a very active year for private investors in retail. With the DOW up 25% in 2017, and the S&P up 20%, private investors are feeling flush. Lower loan-to-value (LTV) financing is abundant, and at historically favorable rates. The “barbell” market we’ve seen over the past several years with investors seeking “best/core” assets at record prices or “distressed” assets priced for opportunistic yields persists. Consequently, demand for “average” projects – most of the market – lessened, and pricing is adjusting creating fantastic acquisition opportunities. Conditions are ripe for a record transaction volume year in 2018.

Q: What are the ways the retail sector is adjusting to those trends?

A: Concerning investment properties, 2016 was the year where it felt like pricing was changing with respect to the impact of the internet and the failure of many box/commodity retailers to adapt. 2017 confirmed the change, with cap rates adjusting up 25-75 basis points on non-core assets, and 100-200+ basis points on larger power centers, particularly in secondary and tertiary markets. With pricing discovered, we expect 2018 could be the year where buyers and sellers come together.

Q: Can you cite some examples of shopping centers that are adopting strategies that work or retail investors that are successfully navigating the changes?

A: We recently underwrote a portfolio of properties that we’ve followed for many years. The changes in the rent roll are marked. Ten years ago, perhaps 50% of a strip center rent roll consisted of tenants selling “stuff.” Today, the rent rolls of successful strip centers contain primarily food, beverage, service, dental, light medical, health, beauty and fitness uses, and specialty retailers like Nothing Bundt Cakes or Susie Cakes. These tenant categories should be durable against internet competition as you cannot do these things online; at least not comparably to a traditional retail experience. Addressing this trend, Dallas-based Crow Holdings is now on its second strip center fund and on track to acquire about $2 billion in strip centers across the funds. Returns thus far reportedly exceed expectations in terms of the rents achieved and rental growth since acquisition. Clearly, “pad” and “strip” retail centers abound nationally. These projects, where the location is the anchor, should gain favor with institutional and private capital investors alike.

For comments, questions or concerns, please contact Dennis Kaiser