ACRE ANNUAL REAL ESTATE FORECAST RECAP

Nearly 200 hundred of Southern California’s leading commercial real estate professionals gathered this past Tuesday, January 15th at the Grand Events Center in Long Beach for the Association of Commercial Real Estate Executives’ annual Real Estate Forecast.

The Real Estate Forecast Panel, one of ACRE’s most popular events, was moderated for the fifth consecutive year by Ryan Garcia, Vice President of CBRE’s Corporate Capital Markets Group. And joining Ryan on the dais, the esteemed panelists included: Sterling Champ, Executive Vice President of CBRE’s Corporate Capital Markets Group; Carlos Lopez, Executive Vice President of Hanley Investment Group; John Chun, Senior Director of HHF; Michael Pakravan, Senior Vice President of Matthews Real Estate; and Jason Ehrenpreis, Retail Specialist with Centers Business Management (CBM).

Each panelist represented a different segment of the commercial real estate market. Individual specialties ranged from financing to investment sales to landlord and tenant representation retail leasing. From their varying industry focuses, a clear theme arose from the panelist discussion: Retail is Resilient. The market is certainly amid a sea of change, a paradigm shift that’s likely to remake retail as we know it. But far from marching in its death spiral, retail is alive and well!

Mr. Garcia kicked off the discussion by starting at the beginning…

The Past Year in Review: Was 2018 Up, Down, or Flat?

All but one panelist agreed 2018 was yet another banner year! Hanley’s Carlos Lopez indicated “activity was up. And looks to follow suit in 2019.” Matthews’ Michael Pakravan announce a “40% increase in deal volume” over 2017. CBM’s Jason Ehrenpreis echoed similar sentiments, with an “increased deal flow” on the year. And CBRE’s Sterling Champ quoted a “7-8% increase in the capital markets,” and referenced increased activity among “smaller scale investors.” The lone decedent, HHF’s John Chun confessed 2018 was “flat” for his firm, noting “the first two quarters were slow.” But Chun related a bit, stating “there is no storage of capital seeking adequate investment.”

Moving along, Mr. Garcia addressed the 40,000 Square Foot elephant in the room…

Replacing Big Box Tenants: If Sears Exits the Marketplace, What Happens to Adjacent Tenants?

The impact of Sear’s departure is potentially grave for other similar retailers. “JCPenny’s is a common co-anchor with Sears in many malls and shopping centers,” Champ notes, adding “75% of today’s regional malls will be gone in 15 years.” But the overall outlook is far less grave, with doors to new opportunities opening wide.

“What’s the future of department stores?” queries Lopez in reference to a recent purchase of a Kmart store that “developers were eager to get a hold of” with plans to completely repurpose, which led Lopez to add: “redevelopment will be a strong component of Big Box absorption.”

“Macy’s is currently evaluating their site portfolio,” Chun notes, and will likely sell a portion of its holdings. And Chun predicts JCPenny’s will do the same. But Chun also indicates these properties will be purchased and repurposed. He pointed to a Sears location at Puente Hills Mall in which the defunct Auto Care center was converted into a pad that now hosts a group of thriving chain QSR tenants.

Pakravan echoed this statement, noting “new tenants will absorb this space. Dave & Busters, rock climbing gyms, and other entertainment uses will take over.” Office users are also willing takers, Pakravan further notes, pointing to Google’s purchase of West LA’s Westside Pavilion for use as a self-contained office park.

Though not wanting to “get political,” Mr. Garcia couldn’t help but float the question…

The Trump-Effect: A Negative or Positive?

“Consumer confidence is up. And for those in the retail adjacent business, that’s good news!” Lopez proclaims. Trump’s tax policy changes are “a real benefit to business, especially small businesses,” Champ notes. And adds that despite recent stock market volatility: “business fundamentals are solid.”

Chun indicates that the government shutdown has shuttered HUD and slowed processing with Fannie and Freddy. And warns that if the closure continues: “multi-family development could be negatively impacted,” with the possibility of 50 basis point swing.

Echoing Champ’s assertions, Ehrenpreis notes: “Mom and pop tenants have been highly active over the last 18 months.”

Looking toward the future, Mr. Garcia asks…

What Are Some New or Expanding Tenants?

Ehrenpreis points to the “Four Fs – Fun, Family, Fitness, and Fashion Discounters,” as the key players in both new business and expansion. He also notes Aldi’s plans to invest $5 billion in their expansion efforts. And sights AT&T’s plans to open 1,000 additional stores.

“Entertainment and more food,” is what Pakravan sees on the horizon. Adding that “anything that gets people up off the couch and out of the house is a winner.”

Chun sees mixed-use as a highly active segment, sighting North Hollywood’s Laurel Plaza, with “642 apartments and 60 retail units, including a gym, theater, and countless restaurants.” He also sees growth among retailers concerned with the “last mile.” Many of whom are taking larger retail spaces and using the front portion as showrooms while handling fulfillment in the rear.

Chun’s reference to mixed-use reference leads Mr. Garcia to inquire…

Who is Moving into Mixed-Use Developments?

“Millennials,” Pakravan decrees. But for many, it’s a less than satisfying affair. “The units are small. Often less than 400 SQFT. And you wind up also renting a storage space to warehouse all your stuff,” he notes, adding “they keep tacking on ‘amenities,’ but six months after moving in, most residents realize the never use them.”

“Everyone wants to live in a mixed-use building, until you live in a mixed-use building,” Lopez says. But he concedes, “they’re here to stay.” Lopez also stresses the underlying conflict between what makes for good retail versus what constitutes a conformable residential setting: “A popular restaurant brings traffic, crowds, noise. Who wants that outside their house?” Additionally, developers must be extremely discriminating in their tenant selection Lopez says, indicating “7-Eleven” for example, is fundamentally at odds with a “high-end residential development.”

But developers are “growing savvier,” Pakravan notes, pointing to newer developments “subdividing parking, and designating a portion of subterranean parking or surface parking strictly for retail.” Lopez also counsels developers to forgo some of the “cutting-edge” design elements in favor of incorporating grease-receptors and hood-venting into original project designs.

Looking toward the future of commerce, Mr. Garcia asks…

How Are Amazon and Other Online Retailers Impacting Retail?

“Retail is always changing,” Pakravan notes, and those that “adapt and evolve, survive,” while the rest “die out.” Sighting sporting goods as an example, an industry that’s been clobbered by online sales, Pakravan highlights REI’s continued growth and success: “They offer a membership that includes in-store specials and other on-premises discounts. They have a coffee bar. It’s about the experience.” Pakravan also points to QSRs attributing 30% of their business to online delivery services, like Uber Eats and Postmates. A shift that’s led many restaurants to curtail dining room space and expand kitchen footprints.

“A third of Popeyes orders are made on online,” says Ehrenpreis, and Popeyes now requires parking specifically for drivers. This evolution has prompted Popeyes to seek variances in parking permits. Ehrenpreis also predicts online retailers, particularly in the fashion space, will continue to open physical stores. “People want that tactile sense. They want to try things on. They need tailoring. And they crave other customer service support you can only get in a store,” Ehrenpreis adds.

“Restoration Hardware has rebranded as RH,” Lopez notes, and “remade many of their flagship stores to de-emphasize sales and focus on food and beverage service.”

Viewing the saturation from another angle, Champ notes: “Investors are carefully scrutinizing uses (in purchase considerations),” Champ notes. The key question being: “Is this use ‘Amazon-proof?’”

With an eye on coming trends, Mr. Garcia wonders…

What Are 2019’s Hottest Uses?

Pakravan predicts restaurants will continue to be a big player. The “plug-in” nature of one restaurant tenant taking over for another makes them an acceptable risk for many landlords.

Champ sees a lot of potential for banks. Locations in “stable communities” with “good deposits” are an attractive investment. And CBRE has traded a fair number of Citibank outlets in the recent past.

In closing, Mr. Garcia asks…

What’s 2019 Biggest Disruptor?

Chun sights “Trump,” Ehrenpreis warily eyes the “government shutdown,” while Champ Lopez points to a stock market crash, recession or some unexpected external event.

Pakravan, on the other hand, sees speed as the industry’s primary inhibitor. The struggle to negotiate LOIs, secure municipal approvals, and obtain permits, all before leases are even signed is significantly stalling deals. And time, is, of course, money (lost).

In summation, retail, regardless of the headlines, is far from dead. Definitive changes are afoot, as segments of the market contract, while others expand and the entire landscape is recast. Which has retailers, landlords, developers, and investors adapting and evolving in kind? And the results may not look, feel, or function like the retail we know today. Nevertheless, retail will not only survive, but is poised to thrive in a new and different light.

We want to thank our esteemed panelists and moderator, sponsors, and of our attendees for making the Real Forecast, and all ACRE events, such a resounding success! ACRE will be dark in February, in lieu of ICSC Orange County event. But we’re returning in March with our immensely popular “60 Tenants in 60 Minutes” event. And we hope to see you there!

 

No Replies to "ACRE ANNUAL REAL ESTATE FORECAST RECAP"