If you’ve listened to our other podcasts on retail real estate, you probably don’t believe that retail is dead, despite what the media headlines purport. In this week’s episode, Bob Fraser and Ben Fraser interview returning guest, Parker Webb, of FTW Investments. They revisit the retail real estate sector and discuss what’s been happening in today’s market, if the positive trends are continuing and ultimately, how these types of assets may perform if our economy goes into recession.
Watch the Episode here
—
Revisiting Neighborhood Retail Real Estate – feat. Parker Webb
In this episode, we have a returning guest, Parker Webb, the CEO of FTW Investments, talking again about retail real estate.When there’s a lot to not like about real estate in the environment nowadays, this is an area you want to pay attention to.We hit all the big topics. One, what’s driving this growth in retail in the sector? What does it look like from an investment standpoint? How could it potentially perform in a recession? We talk about all that and more in this episode. We hope you enjoy it.
—
We have a returning guest, Parker Webb of FTW Investments. We wanted to bring Parker back on. We had him earlier in 2022, talking a lot about retail real estate. This is something we’ve talked about off and on this whole 2022, and finding opportunities in this asset class. It’s something that is a little bit contrarian against some of the headline narratives that you may see from time to time of, “Retail is dead,” but the data is contrary to that. We want to bring you back on because this is something we’re still paying attention to and still tracking.
You’re obviously in the nitty-gritty of this asset class, finding the deals and underwriting them all the time. This is your background. We want to bring you back on to share again what’s going on in retail. Why is it still a good place to be looking relative to other asset classes? Looking at a potential recession looming in 2023, how does this impact the asset class? Let’s start at the beginning for those who maybe didn’t read the first episode with you of what makes retail real estate attractive.
Before we jump in, tell us your background a little bit because you’re a retail expert. You’ve done quite a bit of retail.
At FTW Investments, we are across all major property types and invest across the spectrum. Prior to this, for the majority of my career, I spent in the retail space doing both retail investment sales and leasing, as well as working on the private equity side with another group here in Missouri out of St. Louis, where we were buying Walmart Shadow Anchored Shopping Centers. A lot of time I spent on developing, redeveloping and every gamut of the retail side I’ve been on, largely surrounding neighborhood centers, shadow-anchored, meaning that we are buying a strip center that is adjacent to a big box, but we’re not buying the big box. It could be a grocery shadow. We’re next to the grocery, but we’re not buying the grocery. I have a lot of experience across the board there.
Those areas that we talked about are the areas that have shown to be resilient throughout COVID and prior recessions. The areas that we’re interested in the retail space now are in the same vein. We’re talking about unanchored neighborhood centers and grocery-anchored in some instances. We like grocery shadow-anchored, so grocery’s going to drive traffic and people, but we don’t have to pay for the grocery credit or that cap rate. It’s the same. We’re looking at neighborhood centers, strip centers, and shadow-anchored type of properties.
To simplify, if you’re anchored by a grocery store, you’re buying a grocery store with a strip mall, and your cap rates are lower, meaning your returns are lower because you’re paying for this grocery store. What you like is to buy next door to the grocery store. You’re not paying the low cap rates for the grocery store. You’re getting a higher cap rate or higher cash-on-cash returns, and you get the traffic of the grocery store without having to pay for the grocery store.
We don’t have to pay for the grocery store or their credit, but their credit is still enhancing the property that’s ultimately driving traffic.
You mentioned this through COVID, which we covered last time. It is a shocker. Especially the stuff that we’re looking at. When you think retail, it is a very big class. It about could be grocery stores or Walmart. You’re talking about the shadow anchor or the neighborhood center. These are the very small little strip malls that have nail salons, dog groomers, bars, and those kinds of things, and they did super well through COVID. How did they do through the 2008 or 2009 recession?
We’ve seen over the last many years that when you look at the data across the board, your large regional malls, power centers, and those large anchored were the ones that were the worst affected. They got creamed because those tenants that were made by these large corporations couldn’t keep up with the eCommerce and some of the recessionary stuff. Ultimately, at the end of the day, there’s a lot of competition in that space.
[bctt tweet=”At the end of the day, there’s just a lot of competition in the e-commerce space.” via=”no”]
The stuff that we’re talking about is the stuff that has done well. Liquor stores often in these neighborhood centers perform well regardless of whether or not we’re in a recession. Those liquor stores still produce sales at a pretty high rate and often higher during a recession. What we’ve seen is that these are resilient places. No matter how bad the economy’s going, you’re still getting haircuts, swinging through the liquor store and having meetings at a coffee shop or a bar and all those places.
Those are the places that have shown the data that they are resilient. They’re the places that, frankly, a lot of us frequent and don’t think of it. It’s almost like more neighborhood commercial, too, because you get this office component to it. You get the insurance person, tax preparer, attorney and all kinds of different folks that might fall under more of a typical office type of use but want that kind of retail orientation and retail approach to their consumer.
This is hyperlocal. No one’s going to drive further than 2 miles or something to get their haircut or to the liquor store. That’s the way you want to go. You want the six-pack. You need to get your hair cut. You’re going to go on the way home. It’s stuff that people do, no matter what their pocketbook is saying.
In the data, we’ve seen that during the onset of COVID, the stay-at-home order impacted everybody regardless. That was an impact. What we saw was about a 17% drop in sales during that initial period when we had a full lockdown, which immediately rebounded. We’re now showing a 13% to almost 14% peak above pre-COVID levels coming out of the brick and mortar world.
These are neighborhood centers. We see them get impacted, but it wasn’t that deep.
It was people not being able to leave their houses. There was a government order that didn’t allow them. As soon as that was lifted, people were able to shop and get back to business.
The more we look at this, the more we love this space, especially the small neighborhood centers. We love it. It’s not obvious. The cap rates are high. Meaning your cash-on-cash returns are high. These things cashflow like crazy as opposed to a lot of real estates now. For example, multifamily is the gold standard for commercial real estate because everyone needs a place to live. On the other thing, the cap rates have been driven to the floor.
The place is super expensive, and cashflow is super low. We’re still seeing now cap rates below debt rates, which means leverage is a negative thing. Who wants to buy that stuff? You still have the recession risk, but it is pricey. On the other hand, if you look at the spectrum of real estate, we love retail. It’s still easy to be bullish because we’re seeing 8% to 9% cap rates, meaning cash-on-cash returns at 8% to 9%. That’s nuts. That’s a great return. That’s apart from appreciation value.
Let’s talk about market trends prior. Self-storage and mobile home parks were largely mom-and-pop operations. Those have been institutionalized over the years. Now, these neighborhood centers are still about 3% to 5% institutionally owned. We’re talking about largely a hugely unsophisticated base. What that means is a lot of different things. 1) We can typically get better cap rates. We’re talking about cap rates in the 7% to 9%. 2) Because of that level of unsophistication, the fact that a lot of the ownership isn’t what we would call professional operators, we have the ability to immediately go in and do things like improve rental rates, lease rates, etc. We’re talking about buying into something that’s 7% to 9% that within 2 to 3 is a cap rate of 10% to 15%. That’s where there’s a lot of opportunity.
What have we seen historically with cap rates? It’s still a little befuddling to me why this stuff is on sale. It must be super hated. Here’s something that is shown a lot of resilience through various economic times. It is pretty boring. Maybe that’s why, but why this incredible discount?
What we’re benefiting from as a buyer of this product is a dislocation between the property and capital markets. What I mean by that is that the property market’s performing high. Vacancies are super low in this product, 6%, etc., rate rental rates are increasing rapidly at this type of product, but we’re still seeing these high cap rates. Why? There’s a disconnect between capital markets and the property market. The property market’s performing well, but the capital market is still discounting on price. Why? What they’re doing is they’re looking at retail data as a macro. If you look at retail data as a macro or on an average, you see this decline, but the issue is all that decline happens to be in those sub-segments. It happens to be regional malls and power centers.
If you look at the niche of small neighborhood centers, they kill it. It’s their niche, but they’re getting painted with the broad brush of global retail.
If you put one foot in a bucket of ice and the other foot in a bucket of boiling water, on average, you’re about 100 degrees, but your feet are frozen and burning.
If you look at this meta-narrative of brick and mortar retail is dead because of eCommerce, the trend for the past years is that eCommerce has been the biggest growth in the whole of the retail sector. What we’re seeing is a slowdown. We saw an initial peak at the beginning of COVID. It normalizes now. It’s seeming to plateau. One of the stats I’ve seen that was shared either by Marcus & Millichap was that the year-over-year growth in a brick and mortar eclipsed eCommerce growth for the first time in a while.
Sales growth is growing faster in brick and mortar retail sales in the consumer level.
That’s correct on a dollar-per-dollar basis. Web penetration’s declining, meaning that in dollar-per-dollar of sales, you see a change. For the record, we’re still bullish on the eCommerce growth. We still think eCommerce is going to continue to grow. Even if you extrapolate that out, and even if eCommerce got a majority of the retail sales growth, that doesn’t stop retail sales on bricks and mortar. It’s still growing by something like 6% annually. It’s continuing to increase.
We saw this huge spike in eCommerce through COVID, and now it’s been going down. I’d like to see the data. It depends on what timeframe you look at. eCommerce is not dead, but it’s normalizing back to historical patterns. Let’s talk about the eCommerce risk of these neighborhood centers because that’s the other thing I love about it. You’re not going to send your dog to get groomed in Amazon. You’re not going to buy your six-pack at Amazon. We’re not seeing that. You’re not going to get your nails done at Amazon.
There are not a lot of risks. There are a lot of things that can’t be eCommerce. You can’t get your haircut at Amazon. They’re probably trying to figure out a way to do that. Those things don’t happen. There are a lot of these hyperlocal services that are going to be done by human beings forever. There are no eCommerce risks there. The eCommerce risk that there is has already been done. It’s post-risk.
The level of disruption that we’re going to see from eCommerce on a go-forward basis is minimal compared to what it was. It’s easy to go on and buy something online that you’re getting a book or something like that, that you don’t need to go to a physical store for. You can’t get a haircut, get your dog groomed or get your liquor online. There are some apps that do that, but often those apps that are doing that, someone’s driving to a neighborhood center and buying that liquor, and they’re taking it to the house.
It’s still fairly resilient to a lot of that. Even where you’re seeing the changes happen, what’s been interesting is even the power centers and such have benefited from this kind of resurgence of the brick and mortar. What we’re seeing is people want to, myself included, because I’m 6’3-foot, 250 pounds, and I have to try on 6 different kinds of clothes to figure out what fits me, I don’t want to order that stuff online. I want to walk into a store and figure it out. I’m a size 13 shoe, but sometimes that’s a size 12 or a 14, depending on the manufacturer. We’re seeing a lot of that happen where a lot of people are wanting to go into a physical location and try that stuff on.
Retail as a whole is going to continue to grow in person. The other big piece that we’re seeing is a lot of this omnichannel stuff that we’re seeing is that the retailers need a physical location for returns more than anything else because that customer service and that return program is a huge component of their entire logistics atmosphere. While we’re still focused on the neighborhood centers, and that’s the stuff that we like because it is the most eCommerce resistant, even those that have been disrupted by eCommerce are going to see more of a resurgence of sales and activity in their physical locations.
It’s a great case in point, Amazon, the biggest eCommerce retailer, bought Whole Foods, a brick and mortar grocery. That was a key part of their strategy to have this omnichannel, this hybrid approach, which we’re seeing a lot of other bigger eCommerce in brick and mortar that are having this hybrid where you want to have a brick and mortar presence because you still need that for a lot of things like logistics, but now optimizing to the eCommerce as well. That’s almost been like a conversion back to the mean that seemed like the sweet spot was somewhere in that hybrid.
Warby Parker is an example of that as well. They were originally a full online retailer, and they now have 178 locations. They said, “No, we’re an online business.” They’re like, “For brand presence, logistics, and we’re losing money on not being able to do eye exams.” For all those reasons, they said, “We got to open stores.”
It’s the beginning of December 2022, going into 2023 and a lot of recession fears and turbulence in the markets. The stock market is down to 25%. A lot of fear that we have high inflation and that the Feds are having high-interest rates. We’re seeing some potential slowdown in the economy. How does retail fare through that? We saw a recession through COVID, but that was pretty unique. What’s your perspective? What’s your thesis on why retail makes sense even in a potential recession scenario?
It comes back to what it is, the service they’re providing more than anything. The sales across neighborhood retail, if you look at the sales, maybe you lose some on some amenities, but liquor might pick up, etc., sales across the board on neighborhood centers. We would expect them to be impacted if people have us walking around money. The things that we’re talking about are things that they’re going to have to do. They’re going to have to file their taxes. None of us want to do it. We all got to go do it. These places are still going to get a clientele to walk through and file their taxes. They’re still going to come through. We drink when we’re happy and sad. Usually, we’re 1 of those 2 things.
Liquor stores continue to have that going. Maybe we’ll let our hair grow a little bit out in COVID, but we’re all getting haircuts. Even when the market declines, maybe we’re getting them every 6 weeks instead of every 4 weeks, but we’re still going to get haircuts. We still have business conduct. We still have to be members of society. There are certain things that we have to do. What we’re seeing across the board is a lot of activity amongst tenants in the retail space. Retailers are expanding pretty rapidly. We’re seeing a lot fewer retractions on square footage and foot plates. We’re seeing a lot of expansions in terms of both the floor plate as well as new store locations. For the first time in a long time, since about 1994, we’re seeing more stores open than closed.
Despite the coming potential headwinds if there is a recession that we’re expecting, we’re seeing folks be more bullish on expanding this piece of their entire distribution network, their company and making sure that they are getting being front of mind. The other thing is even in a recession, regardless of whether or not people have less walking around money, you still need to have a brand presence and be top of mind. You need to be in a location where people are going to see you and think about you.
These locations that are incredibly convenient and visible are going to fare much better than locations that may not be. Unless you’re doing a Google search, you’re not going to get a whole lot of exposure online without paying for a lot of advertising. Someone can always try to buy a piece of property and see your sign.
If we look at a snapshot, vacancy is very low relative to history. We’re still seeing a strong consumer. We have Black Friday, and it was a lot stronger than expected. There have been recent reports of a lot of retailers who are ramping up for the holiday season to prepare for what they expect to be a strong consumer. Maybe that slows down a little bit as you go to 2023. If we’re looking at now, there’s not a whole lot of vacancy. There’s not a whole lot of available space anyway. That’s driving up lease rates, but it’s also a good place to be going into recession where there aren’t going to be already a lot of vacancies out there.
Think about it from the demand standpoint. The couple of things that we like to look at to see how the demand for space is occupancy or vacancy. We want to look at rental growth and sales growth. Rental rates, as an example, if you look across retail, in Kansas City, neighborhood centers were about 6% according to CoStar and are projected from CoStar methodology to have the highest percent year over year rental growth of any of the subcategories of retail. Kansas City projected about 4.5% to 5%. Neighborhood centers, globe or nation nationwide is about 6%, the highest amongst the year forward forecasts in CoStar.
Six percent rent growth is what they’re expecting. Getting back to how bad a recession is going to affect these, intuitively, people are going to keep buying their six-pack and haircut. The killer thing that you got to think about here is price. Price is king when it comes to making money. If you want to make money, it matters how much you pay for getting in. When you have a cap rate of 8%, that means cash-on-cash yielding 8%. That is a very low-priced asset relative to the income it produces. It’s hard to imagine. The only way you lose money is if cap rates go up from there, and that’s inconceivable. It seems price is the killer here. It’s attractive because they’re cheap.
When you’re comparing this to the big boom value add multifamily, deep value add, or repositioning where there’s no cashflow or negative cashflow for a period of time, there are certain times when that risk makes sense, but you’re taking a pretty big risk when you’re not having cashflow, and you go into recession versus having very strong cashflow. When you have that strong cashflow, you have that low basis. Your break-even occupancy number goes way down. You can sustain pretty high but has still cashflow. Cashflow is king. Even if values go down a little bit in the near term because demand from an investment standpoint decreases further, you still got cash coming in. You’re cashflowing at 15%. It creates a lot of margins and flexibility when you have that cash.
When it comes to price, another piece that we always like to consider is replacement cost. For us, it’s a huge factor, “What would it cost to rebuild this thing?” If you can get it for a great basis, especially vis-a-vis or whatever the replacement cost is, it’s much more difficult for people to come in and compete with you in a particular submarket. We’re talking about buying things between $80 to $140 afoot which would cost $200 to $300 afoot.
It is a no-brainer. Back up the truck on these things and to your point, cashflow too. If you build your entire life around surviving a recession, you’re going to be poor. You’ve got to plan on growth. You’ve got to be bulletproof enough that if a recession comes, you can weather it. To me, the big macroeconomic 800-pound gorilla is inflation. Inflation is going to continue to raise those rents. That’s going to continue to raise the value of that property. You have to be able to ride the wave long enough and not get blown out because you can’t service your debt. People get craned when you overpay, you don’t have cashflow, you can’t service the debt, and the bank ends up taking the property.
As long as you can hold onto the property, you can ride the inflation wave. You got to not be shaken out. Investors make a mistake if they’re building their entire portfolio around this idea, “Let me build an entire portfolio around a recession.” We don’t know what’s going to happen or how deep or shallow it might be. What we need to do is build a great portfolio at a good price that has a lot of growth and can weather a recession.
This is not financial advice. When it comes to anybody’s individual portfolio, it comes down to an allocation scheme decision. There are certain property types or strategies that, in a great time, might make a 15% to 20% return, but in a bad time, might lose 15% to 20%. There are others that in a bad time might make 8%, and in good time might make 18%. You’ve got to look at it from a risk-adjusted basis, “My downside is 8%. My upside is 18%,” versus, “My upside is 20%. My downside is negative 20%.”
There might be parts of your portfolio where you want to allocate towards something that’s going to be a little bit riskier to try to drive some additional yield to your overall portfolio. You want to make sure that you’re doing the right blocking and tackling and filling your property with assets that are going to be able to be resilient and provide cashflow throughout the period that maybe some of your other portfolio properties are struggling.
I want to go back to a point you made earlier about the prior property values versus the property market versus the capital market. There’s a huge inefficiency here. This is what creates opportunity. Warren Buffet said, “If markets were efficient, I would be broke.” Markets are not efficient. Anytime there are inefficiencies, that’s when you make money. These neighborhood centers are small. Most of these things are sub $5 million and even $3 million. These are super tiny. If you’ve got to read, you’ve got $1 billion to deploy, and you’ve got to buy 1,000 to impact the bottom line slightly.
It’s a whole lot easier to buy a $100 million apartment complex class A or whatever. This is an asset that is too small for the big players, but it’s perfect for the smaller investors. It’s a great consolidation play. The mobile home park is the same thing. Those were the same class, very small, not pricey, very mom-and-pop, very fragmented market. It’s a great opportunity to look for cap rate compression. We don’t know when cap rate compression could happen, but if they become institutionalized, cap rates are going to go down.
If they don’t, you cashflow like crazy forever. It seems like a great investment to play this inefficiency to the capital market. We all know anybody who’s tried to borrow money. It’s easy to borrow $10 million. It’s hard to borrow $1 million. No one wants to own $1 million. $10 million and $100 million are now easy. The markets are very inefficient at these low million-dollar price points.
Here are some data. On Kansas City retail, you look across the board from 2010 to 2022, we’ve gone from 9.2% to 4.5% vacancy in the market. Our vacancy is incredibly low. If you look at that same time period, you saw cap rates go from 8.2% for neighborhood retail centers to 7.6%. Hardly any cap rate impression despite a much better-performing property type. If you look at it, what’s interesting is power centers, malls, etc., are all trading at much lower cap rates than neighborhood centers, despite the fact that we’re performing much worse.
Despite the greater risks.
The riches are in the niches. This is one of those where we can find that niche that says, “All of the data shows that these are doing well, but people are underpaying for them. Let’s go underpay for them as well.”
[bctt tweet=”The riches are in the niches.” via=”no”]
That’s an extraordinary opportunity. There’s always a buffet table that’s full and empty. You got to know what time it is. It’s always buying season on something. Whatever is hated and out of favor, that’s when you want to be buying. Cashflow is king. Even if the market does it and cap rates don’t compress further, great. Let’s keep putting the money in our pockets.
The other point in this pre-institutionalization is aside from cap rates potentially compressing down the road, it’s mostly mom-and-pop operators. We’re talking about 7%, 8% and 9% cap rates when you’re purchasing these assets that are likely being run pretty inefficiently. Talk a little bit at the property level about what you’re doing to drive value. It doesn’t take a lot compared to a big redevelopment project, and multifamily or conversion from office to storage or something like that was a big capital outlay. A larger risk is taken to achieve higher rents. What do we see at the property level when you’re driving value? What are some of the strategies there to make us more efficient and more professionally run?
More than anything, you have to know how to cut a deal. If you’re not professionally in the business of doing these negotiations, understanding the marketplace, etc., and you’ve got a property at a particular basis because you’re a mom-and-pop, you put some money in, and you did 1031, you aren’t cutting deals the way the professional operators are doing. What you’re doing is you’re cutting gross leases. We walk into shopping centers that have gross leases at $10 afoot, meaning they’re not paying anything additional over their rent for taxes, insurance, or common area maintenance.
[bctt tweet=”If you’re in real estate, you have to know how to cut a deal more than anything.” via=”no”]
The landlord is paying for all those things.
They might be making a net $5 afoot on that tenant, even though the market is 15 to 20 triple net, meaning that the tenant’s paying $20 to $25. Immediately you got an opportunity to go in there and double revenue on a particular tenant. Sometimes you have to say, “We’re going to lose this tenant because they were not a good fit for the shopping center and striking a bad deal isn’t a good reason to keep them here.”
Immediately what we can do is go in and cut those deals and find ways to do that. How do you end up being able to retain those tenants? You do things to make the property better. You make sure the lighting, asphalts, concrete, or paint better. There are simple things that make these things more attractive and bring them into the 21st century in terms of their makeup that aren’t incredibly expensive to the property that adds a whole lot of value.
When you add all that value, make the shopping center more appealing, look safer, and more desirable to go into and sometimes easier to park or find with signage, now you’re going to drive more sales. Our goal when we own these properties is to make sure that we’re putting the property in the best position to drive the most sales for our tenants because the more sales they can get, the more they can pay in rent. That’s where it is. It’s a mutually beneficial relationship for us to make that property look and feel as best as it can so they can be the most successful in their businesses and ultimately provide us the most rent.
Ultimately, if you’re driving more foot or car traffic to the center, that’s driving more revenue to those tenants and the owner. It makes a lot of sense. We talked about this in the last episode we did about some of these ancillary strategies. You can’t do this every time, but if you have a big parking lot, for example, and you have some extra space, you carve out a land lease or sell off a parcel and get a scooter’s coffee or some small-footprint retailer or coffee shop. You’ve done this before on a project. You sell off this piece of land to another tenant, and they build a freestanding building. You pretty much were able to recapitalize all the equity in the deal from selling off that piece. Talk a little bit about some of these unique strategies when you’re looking for opportunity and driving more value.
The easy ones are with the rent and making sure that you’re getting collections on that stuff, on the tax insurance. You have other things, maybe signage. Sometimes you can charge for signage. The markets will let you do that. Sometimes you can put billboard signage up. There are other things like that you can do. Pad site sales is a huge option or pad site leases. What you’re referring to is we had a project where we went in and had an old QSR pad site that was dated with a tenant in it. We were able to negotiate to move that tenant in line. This is a property we paid $2.74 million and had about 450,000 in equity in the deal. Once we were able to get that tenant out of that and had a free use, we put a plan together where we were going to build out a pad site there.
A group came to us and wanted to put a new financial institution on that site. They paid us $750,000, whereas we had $450,000 for the whole site. We were able to take not only our money off the table but make another $350,000 and still own the shopping center. We ended up plugging some of that money back into some renovations and taking some off the table. That’s a great strategy to be able to use. There are lots of different ways you could do that. Sometimes depending on where you are and if it makes sense, there are ATMs, ice and water, and there are other items that you can think about as how we make use of what might be dead space or if we’re overparked or something like that. It’s how we make use of that space and monetize it.
I’m thinking about a little strip mall that’s in my neighborhood that I’ve suddenly started going to. It was a real old dated. It’s probably made in the ’70s or something. They went and added patios, a bunch of restaurants and bars. They did the parking lot, added some facade work, and it’s nice. It’s appealing. During that whole period, malls have become dead. I can’t remember the last time I went to a mall. Who wants to go to a mall? The neighborhood centers have been able to reinvent themselves. I don’t know how expensive that kind of thing is, but it’s packed now with these hip little restaurants and outdoor seating that’s very appealing. Talk about that and the consumer trends. Are we seeing these neighbor centers gain appeal relative to some of the old form factors?
One of the biggest things we’re seeing is there’s a trend towards renovation. A lot of these strip centers were built a long time ago. When we’re talking about buying something for $80 to $140 a foot vis-a-vis costing $200,000 something plus to build these things, we’re not seeing new buildings. There’s almost no new construction of retail. It’s far cheaper to find something that’s defunct and redevelop that site than it is to do something. We either see declining or almost no increase in supply. We’re seeing improving occupancies down from 9% to 4.5%. Positive demand against stagnant or declining supply is strong. Where we’re seeing people move from one location to another or find different spots is access, visibility, and signage, which are huge.
Make sure that you have some more of contemporary architectural design. If it looks old and dated, it’s not going to feel something attractive. If it looks nice and new, I don’t care who you are. All I can think about more than anything else, and this is one of my guiding philosophies on design, is my wife when she’s running around with our kids, “Where is she going to want to stop and get a cup of coffee or have an ice cream or do something? Where is she going to feel comfortable and safe? What does that place need to look like that is going to make her say, ‘That’s a spot that I should go into?'” My wife is pretty discerning. If it’s going to meet her criteria, then it’s going to meet a lot of people’s criteria.
You design for your more specific. You don’t design a handle for an average hand. You design it for a weak hand because then people who have weak hands can use it, and everybody else can too. It’s the same thing here. We design for who will be our most discerning clientele and how we make sure this is a place they’re going to come to by making sure that it’s well-lit, safe, clean, and easy to get in and out.
From there, when you look at some additional trends that we’re seeing and things that we’re seeing come up. Drive-throughs are a huge need. There are fewer drive-throughs than we need to support places. We’re seeing opportunities even in retail strip centers where you can take an end cap at a drive-through with wraparound traffic, and that drives huge value. You might be able to get 20% to 40% more rent in a space if you can accommodate a drive-through. That’s one thing that we look at if we can accommodate that.
Drive-throughs are a huge component of what the tenants are demanding. Your average tenant is looking for something that, for these shopping centers, 2,000 to 4,000 square feet on average is what we’re talking about. One of the ways that we’re able to drive value and make spaces easier is if we have spaces that are 500, 900, 1,200 or 10,000 square feet. You got to find ways to make those spaces meet consumer demand. We can demise those spaces and walls, etc., to make spaces easier.
No matter who you are or what you’re doing, we find that it’s difficult for people to see what something’s going to look like when it’s done. If you can go in there and spend a little bit of that time, energy, effort, and capital to get the end result, this one is 2,000 feet, and you have two 1,000 square foot spaces next to each other, blow out the wall so they can see it. Put a white coat of paint on the wall so they can see what it looks like. Open and drop some lighting in there to show it. You have to think about merchandising the space like a retailer does to its clientele. We have to merchandise space to the retailer to make sure that space is appealing to them and easy for them to want to be there.
Parker, thank you much for coming on and sharing these insights. It is something we wanted to let our readers read again and talk through what asset class is looking like.
Thank you very much.
Important Links
- FTW Investments
- Is Retail Real Estate the Next Hot Asset Class? – Past Episode
