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ACRE’s 2018 Annual Retail Forecast Recap

ACRE’s 2018 Annual Retail Forecast Recap

ACRE SoCal hosted its annual Retail Forecast event this past Tuesday, January 16th at the Grand Events Center in Long Beach. The event saw over 100 of Southern California’s top CRE professionals on hand, hungry for insights into retail real estate in the year to come. And for the fourth consecutive year, long-time ACRE board member and CBRE Vice President, Ryan Garcia served as the panel moderator. Mr Garcia ably conducted an esteemed group of CRE experts who collectively spoke to the retail leasing, investment sales, and commercial lending arenas.

Joining Mr. Garcia on the forecast panel was a formidable assembly, which included Geoff Grossman, Centers Business Management’s West LA leasing manager; Ben Terry, Vice President of Coreland Companies; and Trevor Blood, a mortgage broker with Pacific Southwest Realty. Sadly, expected panelist, Sterling Champ, Executive Vice President with CBRE, succumbed to the flu and was unable to participate. He was surely missed, but Mr. Garcia did a yeoman’s work in his stead addressing the current state of CRE capital markets.

Change (in Retail) is Inevitable…

While “fake news” may be touting the “death of retail,” panelists agreed the industry is alive and well, albeit riding the turbulent tides of an enterprise very much in a state of flux. And this speaks directly to the overarching theme of the panelists’ discussion: Change (in retail) is inevitable. The struggle to sustain retail real estate and ensure its longevity, however, hinges upon the industry’s adaption to these inevitable changes. Because while change presents challenges, and prior models governing leasing, sales, development, and lending may no longer apply, change also represents opportunity. And the players who succeed in real estate – despite the market’s ebb and flow – are those primed and ready to act when opportunity knocks.

Was 2017 Yet Another Growth Year in CRE?

Since the depths of the great recession, the CRE market has had nowhere to go but up. And the industry has followed an upward trend with steady year-over-year growth over the past five years. But what of 2017? Coreland’s Ben Terry and CBM’s Geoff Grossman agreed 2017 was flat. Grossman pointed to “fewer vacancies,” which resulted in fewer new listings, and in turn, “fewer deals.” Terry also noted “deal were far more complex and exponentially more difficult to get done,” which is likely to remain a tread in retail real estate deal-making, at least in the near future.

But Grossman heralded recently announced Subway and GameStop closures, along with WalMart and Staples continued downsizing, as clear evidence of opportunity in change.
On the lending side, Pacific Southwest Realty’s Trevor Blood saw 2017 as an improvement upon the prior year, with investors “hungry for equity” and willing to risk more on larger investment opportunities.

And What’s the Prognosis for 2018?

Blood has seen lending demand slow, but anticipates a surge “in advance of probable interest rate hikes.”

The fourth quarter ended strong for Grossman and Terry, which both took as a sign of 2018’s rising tide. Specifically, Grossman noted “new listings are coming in” and “solid call volume,” while Terry referenced a strong “deal rollover from a busy [2017] year-end,” and “renewed interested in ground up and redevelopment opportunities.”
Grossman also pointed to “Trump’s tax policies” as prime driver behind new small business growth and expansion. He also praised landlord’s continued willingness to “invest in capital improvements and property upgrades” as a factor further enticing retail tenants to seek new leases.

What’s Happening with Ground Up Development + Redevelopment?

Projects are definitely in the works, says Terry, pointing to a $250k Torrance strip center rehab and an 18K SQFT ground up development adjacent to UC San Bernardino among the properties in his portfolio. But overall, Grossman feels “development has slowed,” a fact he blames on the overbearing “bureaucracy of municipality” and the exceptional “difficulties [these entities pose] in obtaining approvals and permits.”

Blood sees “the most potential for lending on ground up development,” noting redevelopment financing depends on lenders observing “successful [redevelopment] projects” to provide a more proven track record. Blood further adds that even in redevelopment scenarios, lenders are still looking for “newer, attractive product.”

Has “Big Box” Downsizing “Trickled Down” to Strip Centers?

Terry sees absorbing big box vacancy as part of the retail industries “adaptation game.” Tenants in former big box anchored centers are shifting locations within the properties they already occupy, moving into new, and more prominent locations. Additionally, new tenants atypical to the shopping center format are “far more likely to succeed” thanks to “social media” and other multi-channel marketing efforts driving customers.

Blood confirmed “lender appetite big box-related retail has waned.” But noted “lender demand for grocery anchored centers remain strong,” and the demand for “mixed-use [developments] combining retirement housing and medical tenants” is on the rise.

Is Uber Impacting Retail Deal-Making?

“Uber is definitely a factor,” Grossman says. And he anticipates Uber and access to public transportation’s impact to grow, particularly as “cities fail to adjust [outdated] parking requirements” currently hindering deal-making in many retail properties.

Is Housing Growing Up Around Retail?

“People are moving into previously undesirable areas” Grossman says, citing the gentrification of West Adams (south of the 10 Freeway in Los Angeles) and Northeast LA (which includes Silver Lake, Echo Park, Mount Washington and other formerly depressed areas). “And retailers are following residents into these communities, areas they pointedly avoided in the past” Grossman adds.
“Mixed-use is a fact of life in Orange County” Terry proclaims. And Terry points to new developments in unexpected areas, like the “350-unit mixed use development in Laguna Nigel” and a former department store being converted into a mixed-use development on primary thoroughfare in Stanton as signs of the formats growing footprint.

What Are Some of the Notable Emerging Uses in Retail?

“Fitness is HUGE!” Grossman trumpets, pointing to new and expanding concepts combining things like “yoga and soul cycle” [as annoying as that combo might be]. He also notes medical and niche food uses are continuing to flourish.

“Boba and cafes serving tea and snacks” are concepts Terry sees doing very well. Some of these businesses are “doing $6,000 – $7,000 per day in sales, mostly due to social media” in several centers he represents.

“Shared work space” and “nursing care facilities” are two uses Blood expects to see more of in the coming year.

“We’re seeing many investors searching for properties while interest rates remain low,” Garcia says on the status of capital markets. Garcia adds: “Japanese investors are especially interested in logistics, and infrastructure that cover ‘the last mile’ of distribution.”

What Are the Biggest Disrupters on the Horizon in 2018?

“The merger of LoopNet and CoStar against the backdrop of Xceligent’s collapse has turned LoopNet on its ear, sent subscription prices skyrocketing, and left brokers bewildered” Grossman intoned with a heavy note of frustration, adding “it’s making marketing strip center properties far more difficult, and we have to band together as an industry to meet and overcome this challenge.”
“Limiting the flow of information” Garcia warns, and is likely to “forestall [the leasing and investment sales] process.”

If properties continue to enter the market with income that fails to justify their purchase price, Blood sees “stagnation” as inevitable. “Continued cap rate compression is likely to stymie future lending,” cautions Blood.

Following the main presentation, Garcia opened the floor to attendee questions…

Are Rising Rents in “A” + “B” Properties Pushing Tenants to “C” + “D” sites?

“Millennial launching new businesses are willing to pay higher rents for high profile locations” Grossman says. He also points to a growing number of businesses willing to pay higher rents to obtain distinguished “retail identity”

Terry observes areas not previously associated with “destination retail,” such as “Downtown Anaheim” and “Downtown Santa Ana” are now playing host to new and unique uses. A shift that is essentially minting new “desirable areas” with “affordable rents.”

How Do Developers Better Accommodate Retail in Mixed Use Developments?

“Residents are seeking amenities,” Blood says, and notes “developers should design projects with retail in mind as another amenity.”

The Bottom Line? Retail is Alive and Well!

While “fake news” headlines erroneously proclaim: “retail is dead,” the players in the trenches of the retail industry obviously believe this report is wholy unfounded. But what is clear is that retail is in a state of flux, and the industry’s future success depends upon the ability of developers, landlords, tenants, and brokers to adapt to the inevitability of change, and open the door when opportunity knocks.