ACRE Inland Empire Tenant Showcase + Market Update Recap
The Inland Empire has remained one of Southern California’s most consistent growth markets. Population, housing and retail development have all steadily risen over the last 30+ years. Which is why it should come as no surprise that ACRE’s IE event is one of our most well-attended of the year. And 2017 was no different! Over 150of SoCal’s top commercial real estate professionals gathered to meet multiple tenants currently expanding in the Inland Empire. Along with the tenant interaction, attendees heard an insightful Inland Empire real estate market update from Brad Umasky, President of Progressive Real Estate Partners, and Ken Hira, Vice President of Kosmont Properties.
In his keynote presentation, “5 Things That Worry Me & 5 Things That Don’t About the Inland Empire Retail Market,” Brad Umasky shared his outlook on the current state of the IE. “California Vs. Washington” is one of Brad’s current primary concerns. And not just for the Inland Empire, but for Southern California as a whole. The now Republican controlled national senate is well aware their actions will garner zero votes, up or down, from California, a firmly Blue State. As such, congress is likely to have zero qualms over drafting legislation that negatively impacts California. Conversely, the coming increases in mandatory minimum wage do not worry Brad. This is largely due to technological advancements and streamlined processes that will increasingly allow retailers, even strictly services-based businesses, like restaurants, to minimize their workforce and reduce labor costs.
“Amazon is the Walmart of our generation” Brad proclaims, and it’s got him worried. Amazon currently occupies more space (in distribution and infrastructure facilities) in the IE than all retail space combined. Brad see’s Amazon as the “elephant in the room” that retail must acknowledge and adapt to. The housing marketing, however, does not worry Brad. Absorption has caught up with oversupply, and new home starts are on the rise.
“Retailer and owner incompetence” in the IE marketplace is a growing issue that bothers Brad. “At the height of the recession, smart people worked at [places like] Starbucks. And they knew how to provide excellent service,” Brad notes. But as the economy has recovered, and those skilled workers have moved on to higher-end employment, leaving services-based business to suffer. Additionally, property owners have failed to reinvest in their properties. This may net a short-term benefit, but the long-term effects are likely detrimental. Rising interest rates, on the other hand, don’t concern Brad. As long as short-term rates exceed long-term rates, the economy is destined for smooth sailing.
“Business likes predictability,” Brad says “And technology is unpredictable.” Self-driving cars, online ordering, virtual reality, GPS tracking and big data are all technological-based “disruptions” that have and will continue to impact society and in turn the economy.. “Overbuilding” is not an issue that worries Brad. “We’ve spent the last 10 years absorbing [retail] space built in the 2000s,” Brad says. “Vacancy rates (empty space) and availability rates (“we’re looking for a better tenant”) are nearly at the same level,” Brad notes, which both increases lease rates and ensures greater stability.
The “business cycle,” and where exactly we are in the cycle at this moment, worries Brad. His key concern? In the middle of a cycle, it’s nearly impossible to see the forest for the trees. But in the past, whenever people say “but it’s different this time,” you know the economy’s headed for trouble. But despite the potential for economic uncertainty on the horizon, Brad is confident “California’s entrepreneurial culture” can weather the storm. “The highly active California marketplace” is capable of absorbing vacancy and fostering continued growth.
Following Brad’s address, Ken Hira of Kosmont Properties delivered his presentation, entitled “E-tail.” Over the past four years, we’ve seen big box contraction, greater personalization in retail, surging mixed-use development, and the rise of “experiential retail.” These changes, according to Hira, are driven by “the three Ts.” Time – We’re busier than ever, with more tasks and responsibilities, and less time to address them. Technology – Which is steadily changing the face of our society. And Transition – The transition from Baby Boomer societal domination to Millennial societal domination.
“Restaurant sales exceeded grocery store sales for the first time ever in 2016,” Hira says. Additionally, he notes “80% of Americans don’t know what they’re having for dinner by 4pm,” resulting in “a stack of [quick serve restaurant] menus becoming the new ‘meal plan.’” This in turn has given rise to mixed use or, as Hira terms it, “blended use” retail projects, including “groceryraunts” (think Wholefoods with a wine bar, brew pub and café all under one roof). All of these factors are clear evidence of American’s compressed time schedule, which has led to a desire for greater convenience and streamlined efficiency in the retail market.
“E-commerce accounted for 10% of all retail sales in 2016,” Hira says, “but only 3% of those sales were by purely online retailers.” Amazon, however, netted 37% of holiday sales, proving “Cyber Monday ‘Trumps’ Black Friday,” Hira quips. These shifts point to the overall impact of technology on the retail market, and strongly indicate omnichannel marketing is critical to retailers’ long-term survival.
In terms of the generational transition, purchasing power and population statistics tell the tale… Millennials account for “$600 billion in consumer buying power (and likely higher). And a population base of 80 million,” Hira says. This places Millennials firmly in the economy’s driver seat.
But despite these ongoing tectonic shifts, “traditional retailers,” including grocery and “off-price” stores are not only still doing deals, but remain highly active. “TJ Maxx has increased same-store sales [year over year] for the past 23 years,” Hira says. Grocery, fitness and health related tenants are “back-filling former big box vacancies,” Hira also notes. Additionally, Starbucks, who has overtaken McDonalds as the “most ubiquitous” retailer, plans to open another 12,000 stores, with the ultimate goal of reaching 37,000 stores.
Retail development in general is also still thriving, according to Hira, through the implementation of what he calls a “blended” approach. As Hira sees it, the “three Ds” are the key to successful retail development. Demand – Is there a strong enough consumer desire in an area? Design – The look and feel of a retail establishment now plays a bigger role than ever before in engaging and sustaining consumer interest. And Density – Is there a large enough population in an area to support the enterprise?
Additionally, “Digital community outreach” is a key component of successful future development, Hira says. “There will always be naysayers who attend city council meetings and oppose every development,” Hira points out. But leveraging digital marketing tools to connect with and educate the community, better reaches the masses and paves the way for smoother, more productive growth and development.
Overall, both overviews showed positive signs for the retail sector with continued growth and absorption in the Inland Empire for 2017.