Ravid Law Group presents our annual survey of the top real estate brokers throughout the country following the ICSC convention in Las Vegas. We concluded last year’s report with the following thoughts: “The real estate market has not cooled off one bit. And judging by our experts’ views this year, the immediate future of real estate will continue to be strong. But unlike the last several years, some of our experts are a bit more cautious this time around, with predictions that things might start to level off and possibly even cool down in the coming years.” This year, our experts picked up where they left off with a growing number of them expressing cause for concern about where the retail sector is heading. High prices, omni-channel, and the upcoming elections were familiar themes contributing to this uncertainty. Still, several experts remained undeterred and championed continued growth in the immediate future with (four?) more years of retail prosperity.
Jay Luchs, Executive Vice President Newmark Grubb Knight Frank: “Today’s retail market is essentially all over the place given that some markets went too high. Buildings were bought for too high of a price, and now tenants are not able to pay the asking rents needed to cover the landlords’ purchase prices, even when the tenants really want the space. Some examples would be Soho, New York, where deals on Broadway and nearby don’t pencil out for tenants. Eventually, landlords will have no choice but to lower the rents. I think for the next couple of years, it will be a tenant’s market, but the cycle will continue. I do believe when rents go down low enough and the dust settles, it will quickly shift back to a landlords’ market, and tenants will once again be making multiple offers, bidding prices back up. After the current shakeout, however, I’m not sure if prices will go back to where they have been recently anytime soon, but I believe the activity will get much better again. But not until two to three years from now.
Today, we are in a place where we need to be careful no matter what side of the deal we are on. There is no right answer. Tenants need to make money and landlords need to pay their mortgages. Time will tell but one thing for sure to keep in mind: In the future of retail, to get those unique brands back to making multiple offers on locations, landlords must find a way to mix in lifestyle with retail which means having restaurants, gyms, and creating an outdoorsy environment that brings people together within close proximity.
The internet changed the music industry, the book industry, and it is changing retail. When you can buy product online at home for cheaper and it gets to you the next morning in a little box, things are going to change. The only way to keep people coming out to the stores is to create an environment where you integrate restaurants and retailers and provide events that lead to traffic. It’s complicated because restaurants and gyms don’t pay the same rents that retailers pay. And it’s even harder on streets (compared to malls) where landlords don’t control the entire block. So going forward, we need to get creative.”
John Auber, President of the Auber Group: “It was clear this year from the ICSC convention floor that the amount of store growth for most (not all) retailers has slowed, and seems as though strategies have shifted to targeting a consolidation and selective deployment focusing on dense markets to provide retailers with insulation from lower sales performance. Consumer confidence is the driver for the industry and my observations project it will likely continue to ebb and flow as it is an election year and change is certain, which will cause the consumer to debate what is in their best interest when it comes to their finances and may hinder their purchases.
As the re-urbanization of America continues and the densification of an area grows it will lead to further localization and enable retailers to justify a “local” deployment and be less dependent on regionality. The age old question of “how much density is enough” will challenge retailers.
There is a strong sense that retail is changing and there is a tremendous amount of resources that are being dedicated to understanding the consumers, their behaviors and how to connect with them. Technology will continue to be a key initiative for retailers and will accelerate the change in the retail landscape. I believe that strategic deployment of the physical stores, coupled with either on-line or wholesale will continue to gain focus as analytics play a larger role in the decision making.
A dynamic 2016 and 2017 lie ahead.”
Derrick Moore, Principal – Urban Retail Properties at Avison Young: “ICSC RECON 2106 was very well attended and is indicative of the current state of our active marketplace. There continues to be strong capital interest focused on the retail sector in our Downtown LA submarket, and many investors have experienced record returns in a relatively short deal cycle. Pricing levels continue to increase and we see no shortage of interested investors looking to enter this market or expand their holdings. Retailers are suggesting record performance from flagship stores such as the new Whole Foods Market in DTLA – and although we have not received any actual sales numbers, one can see from the customer activity that this must be one of the highest grossing markets in the city. Rumors around a possible Apple Store on Broadway have also ignited the flames for a higher caliber of retail presence in submarkets that once housed a majority of discount retailers. More fashion, tech, and European boutiques may indeed be leading to an expanding presence in DTLA. Overall, expect to see continued expansion of our residential base and mixed-use projects with a growing presence of food, fashion, and credit tenants throughout DTLA. The marketplace will see another year of strength and growth. Lastly, the expansion of the Metro Expo line and the new Bike Share program will increase access to DTLA and expose more of this growing marketplace to Southern California.”
Michael Townsend, President, Townsend & Associates: “It felt to me like Vegas convention was in a hangover for most of the show. With little to no true excitement about new projects (Hudson Yards and Disney Springs being among the rare exceptions) or merchant concepts or big ideas, the industry seems to be a bit in the doldrums. Feels like most folks just going through the motions until the fog parts and they can see where it is all going. Until then more questions than real answers on technologies, labor costs, elections, foreign markets and so on.”
Robin Klein, President/Founder of Fashion Retail Group, Inc.: “The largest area of new development growth in the US remains in the outlet sector. But as the outlet category continues to evolve we will see changes in how these projects are merchandised and therefore, shopped. There are many value options now available to the consumer and if outlet projects do not stay relevant in offering BRANDS AND BARGAINS, instead of being the “go to” place, they may just become another alternative in the mix. This will make a difference to many of the retailers supporting the new projects and we’ve already seen a decrease in the average square footage for many of the planned developments. In all segments of brick and mortar: regional malls, outlet, street and lifestyle and town centers, we will continue to see retailers shrink their footprints as well.
As for store closings, this always creates a dynamic environment both inline and for repositioning of department store space. Savvy retailers will take advantage of any occasion to grow the omni-channel experience for their clients. That being said, there is no margin for error, caution will remain and any decision MUST translate as a return on investment through sales growth and an expanded client base. If occupancy costs are the only thing escalating, it will not be a sustainable plan and retailers will continue to explore other options for growth.”
Houman Mahboubi, Managing Partner, BRC Advisors Commercial Real Estate:
“ICSC was buzzing with plenty of action and excitement about the foreseeable future. In as much as the impending elections and uncertain impact on our economy as a whole, there is still tremendous hunger and demand for inventory and potential opportunities. JLL had over 300 attendees and 2500+ meetings.”
Leslie J. Mayer, Executive Director Retail Services at Cushman & Wakefield: “The robust turnout from last week’s 2016 ICSC Convention, reported to be at a high of 36,000 participants, was indicative of the current optimistic outlook of the commercial real estate sector. Despite the recent consolidation and bankruptcy of several well-known retailers (e.g., Sports Authority, Sport Chalet, Sears Auto Centers, Hancock Fabrics, Office Depot/Max) there is no shortage of tenants and developers eager to buy or lease to back fill these spaces. New ground-up projects that had been on hold for several years have been reconstituted and are rapidly pre-leasing. Developers are even taking prime existing real estate sites to either tear down the old infrastructure and build new state-of-the-art facilities (usually with a residential component) or to create entire neighborhoods where none existed before. Retailers are also cross-pollinating with one another to create synergistic opportunities, especially in the larger backfill locations noted above. Local and national economic drivers are also being taken into consideration in retailers choices of expansion markets and they are also coming out of the traditional malls to seek more accessible street and outlet locations. Examples of “new considerations” are mass transportation nodes, senior demographics, weather conditions, oil prices and even the arrival of the Zika virus.
Given the current environment of favorable interest rates, there is still a healthy appetite for buying well located, credit-secured properties at aggressive cap rates. In order to help off-set the re-assessment costs, many landlords are now promoting a flat CAM fee with set annual adjustments. Retailers are being more thoughtful about the size of their bricks and mortar stores as the influence of internet sales is still a big unknown. Consequently, tenants are designing their stores and restaurants to be more experiential.”
Karen Bellantoni, Vice Chairman, RKF: “This is a year of conquering negative press regarding the retail market, shopping centers and learning how millennials shop. Record leases are getting signed with retailers that bring new excitement to both urban markets and shopping malls. Food and entertainment, athleisure and fitness lead the pack.”