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Connect Retail West 2023: Retail is Still Alive, But It’s Transitioning

The annual Connect Retail West conference kicked off a full afternoon of panel conversations with a discussion among retail investors, owners, and developers surrounding the key trends driving the industry today. Panelists covered a wide menu of themes and issues ranging from the current state of the retail sector, the hottest property types and markets to the headwinds facing retail today, leasing activity and the most active retail tenant categories.

Shopoff Realty Investments’ Stephan Logan opened the conference on Thursday, Nov. 16 with a compelling positive statement that “retail is not dead, it is transforming.” That perspective generated unanimous head nods across the panelist stage that was moderated by Greenberg Glusker’s Barry Edwards.

In fact, Marcus & Millichap’s Daniel Taub echoed and expanded upon that theme. He noted that “retail is one more dynamic asset classes that’s just evolving. And quite frankly, while COVID was horrific on the human side for our business, it probably turned out to be one of the best days for [retail] from an owner, landlord and operations perspective.”

Although Logan did concede that 2023 has been challenging, as the last six months has been “more challenging than ever.” Still Taub pointed out that 2023 is a juxtaposition of a tale of two cities.” On one hand, operationally, from an ownership perspective, retail fundamentals may have been the strongest they have been over the last 15 to 20 years.

Taub shared that while 2023 was challenging, it was more so from the transactional capital markets. “The problem is we have this massive dislocation and disruption in the capital markets, which is counterbalancing our retail economy and overshadowing how well we perform,” he said. That is causing challenges to transactional volumes – both in terms of speed and quantity – because the market can’t move as fast as interest rates have risen.

“Hopefully the fundamentals will remain as solid as they are on the go forward basis. So, the bursting can come in balance because then you’ve got a perfect storm for a really robust transactional environment where you’ve got fundamentals operating on all cylinders and a functioning capital markets,” said Taub, who noted the market doesn’t need to return to a zero-interest rate environment for it to “function very efficiently, even at higher rates.”

The market is still standing at historical low rates, though the industry grew accustomed to “10 years of free money” and now must adjust their business accordingly, Taub noted. He predicted the “market will return and recover as it always does, which is kind of the beauty of real estate.”

CenterCal Properties’ Paul Kurzawa weighed in on the impact of the Pandemic on the retail sector. He indicated while it was true many consumers who were stuck at home purchased goods online. “What we realized coming out of [the pandemic period] is we just missed going out shopping,” he said. Consumers actually missed the experience of trying on clothing, shoes or touching computers and going out to dinner or watching a movie.

“A lot of that resurgence has been fueled by the fact that as human beings and social creatures, we want to get back out there.” Kurzawa added, “We went into the pandemic in a strong position and that kind of continued.” The focus for CenterCal Properties in 2023 has been around not just filling space, because the firm doesn’t have that problem, but he says it has been about “finding the right merchandise, to attract the right guests to our projects.” The result is a merchandising plan “that really differentiates our project from others in the market.”

Paragon Commercial Group’s Jim Dillavou says he’s “more bullish on what we do than I was when I started the company in 2009.” The reasons for that are the lack of competition since few new companies have entered the sector the past decade because they perceived retail as a “bad” word. Capital has not flowed into the sector, either. But Dillavou believes “all of that is shifting right now,” making it a good time to acquire, despite interest rates being higher than they were.

He pointed out rates “are below historical averages and the market can function just fine. It has for a long time with the 10-year right where it is, and it can go up another 50 basis points and it’s just fine. We’re just in a hangover from the cheap money.”

Dillavou noted that companies must work to solve for “different spreads based on what the new rates are.” It will also require putting negative mindsets behind them and an expectation that the “Fed has to fix our business, then there’s great opportunity today,” he said.

Turning to a discussion of the geographic locations and types of retail properties panelists see as performing well in 2023, as well as future leasing expectations, Logan noted small format retail is a smart strategy to create thriving centers, especially when anchored by restaurants and destination retail. “Big isn’t better. The right retail is better,” he said.

Taub noted that “retail is a highly evolutionary business” and the investment thesis should drive the “where” in retail. Successful strategies can vary “depending on the capital” when considering grocery versus power versus lifestyle versus other formats.

“They all can be successful,” he said, but “first and foremost: location, location, location. Real estate matters. Knowing your market, your demographic, your consumers.”

Kurzawa believes the right retail comes back to what the shopper wants, thus what retail moves forward is being driven directly by changing consumer demands. “We’re faced with a different consumer today than what we were 10 to 15 years ago. With the advent of technology, everyone’s got a smartphone,” he said.

That presents issues for developers and owners to ensure the right retailers are attracted to centers that can move at an accelerated pace of technology. Savvy retailers with large amounts of space are looking to owners and developers to help them redevelop to meet those changing consumer behaviors, noted Kurzawa. They are looking to create spaces built around convenience and those that introduce experiential environments.

Achieving success in the coming months requires landlords to “kind of zoom out and think about what niches need to be filled and how can I position myself when you go to the market because there are transactions happening,” said Dillavou, who noted that Paragon closed four loans in the past 90 days involving refinancings, as well as ground up construction.

On the leasing front, Logan sees strong activity in the smaller format boxes and grocery categories – though Shopoff Realty Investments’ is still experiencing leasing from big box players. He says the transformation is being driven by finding the right retailer that drives traffic. “The athletic industry with Nike and Alo Yoga and Lululemon and Jordan, they’re really driving centralized thinking. And I think after the pandemic, everybody’s become more casual,” said Logan. “Casual Fridays are casual every day now.”

CenterCal’s Kurzawa indicated one category in which they are not seeing much deal activity is apparel. That could be in part due to the category being over-retailed, he surmised. He pointed out that it’s also giving way to “green shoots” that might take off, as well as convenience, food – both restaurants and quick serve – as well as alternative uses like medical, financial services, and entertainment brands like golf or the plethora of pickleball facilities popping up across the country.

The emergence of experiential retailers and users is interesting to Kurzawa because some of “these operators are really fantastic. So, we’re kind of leaning into that because we find again, that content brings something different. And it is a strong point of differentiation for us, which has actually been a very successful part of our DNA. It’s not just about shopping anymore. It’s about coming, hanging out with friends, doing something fun, like an escape room, then going out to dinner.”

Dillavou summed up the opening panel discussion, noting that creating a successful strategy in the retail sector isn’t difficult or mysterious, it just takes time and effort. Success tends to follow those who “grind,” he says. “It’s a little bit of a grind and then you get lucky every once in a while. I just encourage people to kind of grind, especially in markets like this one. It’s easy to get this.”

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