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Investors Evolve to Meet Challenges Retail Sector Faces

By Dennis Kaiser

The Up, Up, Up? Investment Sales in 2019 and Beyond panel at Connect Retail West explored what’s next for the sector. The conference was held January 22, 2019 at The Resort at Pelican Hill, and drew a crowd of 300 to hear from innovators in the retail space.

Investment pros put the recent market volatility and changing trends into perspective, as the year of consolidation, dispositions, and redevelopment unfolded. Investment sales leaders shared what they see for the future and the next cycle. 

For one, the tenant mix is shifting at properties across the spectrum. CBRE’s Philip D. Voorhees says rent rolls are being transformed and now contain medical, fitness and other service, as owners adapt to factors such as consumer shopping preferences, online options, demographics or convenience. He predicts the better malls will still survive, though the poorly performing ones will “go away” and the deck will get cleared. Still he cautions, the start of 2019 could potentially be a bit bumpy because of the government shutdown, the equity dip and other factors, which could create a trickle down effect on consumer confidence and spending. Voorhees predicts, so long as debt remains attractive, 2019 sets up as a positive year.

NKF’s Glenn Rudy holds an optimistic view of retail. He says, “at the granular level, retail is alive and well. It is here to stay.” Rudy pointed out 90% of sales still occur in stores. E-commerce has not killed brick-n-mortar, rather, he says, “it has enhanced it as online retailers have invested in themselves and their omnichannel experiences.” He cites clear evidence of retail’s health is the record annual sales achieved last year, and high, 45% year over year increase in sales. He notes, the right kind of retail continues to thrive.

Passco’s Alan Clifton agreed that the retail numbers may not reflect what the reality is, and the way markets may be valuing the sector. He says, “We’re America and we’re built on change” and the ability to adapt to change. He expects new visions to be created, as the “next generation” emerges within the retail sector.

Another positive perspective was offered by Marcus & Millichap’s Bill Rose. He says it is not “doom and gloom” for the retail industry, rather the sector is transitioning through an “evolution.” An area of concern for Rose is the market plateaued from 2015 through 2018 though. As a result of that flattening, he advises investors to pay attention to job growth, money supply constraints, and in a low interest rate environment if values plateau.

In terms of the hottest markets, or most in-demand properties, some panelists say there’s not much product available that fits a core investment strategy, as owners are more than likely to hold onto assets.

Donahue Schriber’s Ryan J. Gillard shared that in the desired gateway cities, the market is absorbed. In one instance, there’s just three grocery-anchored centers remaining that are not institutionally-owned. He says they see opportunity in good tertiary markets, especially with open air grocery-anchored centers.

Passco’s Clifton says part of the reason owners are holding on to properties is because there hasn’t been available assets to buy once they sell an existing property. He believes there will be more private ownership come to market this year.

CBRE’s Voorhees says, “I think the differentiation in pricing from a primary to secondary or tertiary markets right now is really very healthy and indicative of the overall opportunity that exists.” He notes that in the better markets where there’s no new construction, institutions, pension funds and advisors are simply not going to sell because they can’t replace it. “Many of those folks are assets under management model, where they get paid in part for the amount of equity they have invested. So if you can’t redeploy, you’re surely not going to sell.”

Gillard says one selling strategy that may gain favor is breaking up larger deals into smaller slices. That means centers that have the ability to sell in pieces may end up doing so, which could result in a $40 million center being sold in $8 million to $12 million pieces. Though, Rudy says, under that “parcelization” scenario and absent an institutional buyer, sellers need to be ready to retain pieces of the project since not all pieces may clear.

Still, 2019 is shaping up positively at the outset. Rudy pointed out that by end of Q1 2019 his NKF team will have been to market or taken to market the same amount of deal volume in terms of dollars as it closed in all of 2018. “It is setting up to be a huge transactional year in ’19, very early in the timeline,” says Rudy, though he believes that is being driven by the fact that many investors had previously remained on the sidelines on the buy side.

Passco’s Clifton summarized, there’s “enough capital out there if you want to buy.” The decision comes down to asking: “What am I risking? What do I want for returns on my investment?” And, ultimately, determine is “this good real estate? Because good real estate is going to do well,” he says.

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About Dennis Kaiser

Dennis Kaiser is Vice President of Content and Public Relations for Connect Commercial Real Estate. Dennis is a communications leader with more than 30 years of experience including as a journalist and in corporate and agency marketing communications roles. He is responsible for Connect’s client content operations and is involved in a range of initiatives ranging from content strategy, message development, copywriting, media relations, social media and content marketing services. In his most recent corporate communications roles, he led a regional public relations effort across Southern California for CBRE, played a key marketing role on JLL’s national retail team, and was responsible for directing the global public relations effort at ValleyCrest, the nation’s largest commercial landscape services company. In addition to his vast commercial real estate experience, Dennis has worked on communications and launch strategies for a number of residential projects such as Disney’s Celebration in Florida, Ritter Ranch in Palmdale California (7,200 homes, 22,000 acres), WaterColor in Florida and PremierGarage in Phoenix. Dennis’s agency background included firms such as Idea Hall and Macy + Associates. He has earned an outstanding reputation with organization leaders as a trusted advisor, strategic program implementer, consensus builder and exceptional collaborator. Dennis has developed and managed national communications programs for Fortune 500 companies to start-ups, both public and private. He’s successfully worked with journalists across the globe representing clients involved in major-breaking news stories, product launches, media tours, and company news announcements. Dennis has been involved in a host of charitable and community organizations including the American Cancer Society, Easter Seals, BoyScouts, Chrysalis Foundation, Freedom For Life, HOLA, L.A.’s BEST, Reach Out and Read, Super Bowl Host Committee, and Thunderbirds Charities.

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