Challenges, Strategies and Cycles: Connect Retail West’s Investment Panel

By Dennis Kaiser

Connect Retail West brought together more than 300 CRE leaders for an information-packed conference on March 16 at LA Live’s Conga Room in Downtown Los Angeles. A panel entitled, “Investing in Retail: Strategies in 2017,” was moderated by Hanley Investment’s Jeremy McChesney. The group of owners and brokers shared factors driving decisions today, the challenges faced and the noteworthy strategies investors are deploying, as the retail sector continues to evolve.

What stage of the cycle is the retail market in now?

• Passco’s Alan Clifton believes we’re at the “Elite Eight stage in the cycle,” in reference to the NCAA college basketball tournament that got underway as the panel began. We’re “close” to the final buzzer, “but the markets are moving well.”
• CBRE’s Alex Kozakov said they noticed a change in the investment market “at the end of 2016. Noting, it takes “longer to sell” and there’s “uncertainty” stemming from interest rate increase inevitability, which is causing investors to “assess how to adjust.”
• Sterling Organization’s Jon Mendis said he believes the market is “far along” with some “dislocation on the tenant side,” which is introducing some “interesting opportunities on the value add side.”
• TH Real Estate’s Scott Trafford said the “core product is gone. It has been cleaned out since mid-2016” in a “flight to quality.” There’s still value-add plays, but he believes we’re in the “latter part of the cycle.”
• Matthews Real Estate Investment Services’ El Warner noted that the numbers for January and February “were down 40% to 50% year-over-year,” partly due to market cycle factors, as well “unsettling” from the election, interest rates, as well as overall economy.

What challenges and factors influence decisions today?

• Since February 2017, Kozakov said, they’ve seen “infinitely more capital come back to SoCal.” Properties are generating multiple offers, there’s aggressive capital in the market, so it is time to “get back to business” since the “economy is still relatively healthy.”
• Warner said, the “Tbill is down because the interest rate hike was priced into” the market. He’s seeing a “pick-up” in February and March, as investors “adjust to interest rates. He’s seeing a widening “gap right now between buyers and sellers as we work to get pricing right. It will continue to pick up because it [SoCal] is historically a strong market.”
• Clifton said a “challenge is getting retailers to think how to retail” today. Many simply are not in touch with how consumers shop today. He cited a survey by MasterCard that showed of the 160 million transactions per hour over the holiday shopping period in Q4 2016, 8.4% were completed online. Small businesses accounted for 34% of the transactions, and 75% of them were completed by women. What that means to him is malls and retailers must adjust their shopping “experiences,” to match shoppers’ expectations and patterns, especially for women making the buying decisions. That includes rethinking selling times and hours to better accommodate that key segment or risk continuing to lose out to online shopping.
• A challenge for landlords is coming to grips with new pricing, said Kozakov. Also, “tenants change quickly” with a property “going from big box to an all in one facility,” he said. Investors must ask “will the tenant be there tomorrow? If not, who will we put there? What’s the plan?”
• One of the current challenges Trafford noted was a “dislocation of pricing to rents.” He cited four sites in San Francisco’s Union Square that are facing leasing difficulties. Investors are now asking can retailers get the sales needed to justify rents?

What is the best strategy to navigate todays’ retail investment market?

• Clifton said, a smart strategy is to “understand” the market, “adjust and go buy good real estate across the U.S.” He notes “that’s how long term holders succeed over time.” That approach led Passco to the Southeast in 2005, at a time when the market was not on the radar of institutional investors. They saw job growth, wage increases, and port activity accelerate as car manufacturers moved operations there, all of which positively impacted coastal markets such as Savannah, GA. That added up to a “compelling” reason to invest in the region.
• Mendis said a way they are approaching investments is to look for opportunities outside of the “hot markets,” which are overcrowded. They believe secondary markets help “protect downside risk.” Also, when big operators leave a market, that often “creates opportunities” for them to take over a poorly managed asset.
• Warner said the shifts transpiring in retail have almost made the “type of product as important as the location, in some cases.” He said, the Internet “takes away from certain product types.” So to counter that, retail owners must be “cognizant of the size of a space” and “ask, what can be done with it in the future?”
• Trafford said examining how people shop now is an indicator of future strategies. Online grocery shopping is projected to reach 28% in 2026, compared to just 8% today. He said, the impact of that change may result in “some expected dislocation.” Owners “might be stuck with an interesting box” in the future, since “everyone is trying to come up with a plan for omnichannel”

If you missed our earlier coverage of Connect Retail West, here are three recaps:

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