Live from ICSC NY/NJ: An Insider’s Look at Current Retail Real Estate Trends
Guest: Glenn Rufrano
Topics: ICSC, retail real estate trends
Transcript:
Chris Ressa 0:00
This is Retail Retold, the story of how that store ended up in your neighborhood. I’m your host, Chris Ressa, and I invite you to join my conversation with some of the retail industry’s biggest influencers. This podcast is brought to you by DLC Management.
First off, thank you everyone for coming. And thank you to the American Dream for hosting this year. This was a tremendous experience, for those who have not been here and for those who have been here. So if you could give a round of applause for American dream, our tour guides were fantastic today.
Thank you ICSC for, you know, making this happen. And all the volunteers who helped do that, there’s a bunch of you here today. Thank you to our sponsors, who helped us pay for this. This is fantastic. And thank you to everyone for coming today.
You know, the New York Region for ICSC has been one of the slowest to come back. This is, we’ve done a lot less events than the other regions in the country. I sit on the marketplace Volunteer Leadership calls. And I’m listening to some of the things that are going on in the other surrounding markets around the country. It’s pretty astonishing.
And so if anyone is interested in volunteering for ICSC to increase the networking exposure for the New York metro area, that goes upstate New York, Long Island, Westchester, New Jersey, Fairfield County, please reach out to me. I would love for anyone to try and participate because we are trying to get New York really humming again with all the events that they once did. So thank you.
Okay, well, today, we have a special guest, Glenn Rufrano. Now, for those who don’t know, Glenn is the chairman of ICSC. And Glenn is a former CEO of REITs. He was, a while back he started founded a company called O’Connor Capital. He’s the president, President CEO, of Cushman, President of Cushman Wakefield, he was the CEO of Central Properties, which was owned by an Australian company. So he is a legend in the industry. And I’m excited that he was willing to do this today. So everybody, please give a round of applause.
And so we’re going to do things a little different today, a different topic. You know, Glenn’s experience is tremendous, right? He’s been the CEO of multiple REITs, a brokerage company, a private group. And he’s been involved in mergers and acquisitions. He’s been involved in many different business cycles.
So we’re going to have this fireside chat from the perspective of a full former CEO of a public REIT, a little bit less as the chair of ICSC to give everyone some, you know, market insights as to what’s going on in the world today. So thank you for being here.
So let’s get started. All right. So, Glenn, the markets today are, you know, I think everyone’s been excited by some of the retail demand. But there’s a lot of noise out there. We have the geopolitical stuff, the capital markets with interest rates. So to get started, give everybody a bit of optimism. If you were, if you were running a retail real estate team today, what would you tell them to give them some optimism today?
Glenn Rufrano 3:46
Well, I think the first first form of optimism I give is that this mall got built, and it looks like it’s leasing. That is unbelievable. Laura, who took us around has done a great job at it. I was involved with capital, as Chris mentioned, and we built Menlo Park Mall.
We rebuilt it, Macy’s there, we knocked it down, put Nordstrom in when we rebuilt it. That was in the early 90s. We had a construction manager who we lost to go to the mills to build this. That was in the early 90s. And Mills already did at least three or four years of spadework before they stole our construction manager.
Rufano 4:30
Can you imagine how long it’s taken to build this wall? So I’m pretty optimistic that it’s here. It was great to run around and it’s terrific. In terms of retail itself. I know, what I knew, the word I hate the most is commercial. I hate that word because I read all the time about how commercial real estate is in trouble.
What is, I don’t know commercial means we’re retail. Now no offense to office, but I think it means office. And it’s not so bad. Not to be at the back of the house, because retail has gotten some big advantages over the last five years.
And it’s not just in my view, anecdotal stuff about the pandemic kick. People wanted to get out. So retail is doing fine. I’m sure that’s helpful, or you mentioned that here, I’m sure that’s been helpful. But there were real reasons why we’re in good shape. I’ll start with the basics, occupancies are high across all, I’ll start with public companies. So they watch the public market closer.
Chris has a better understanding of private, but at ICSC, we are both public and private. It’s, you know, so if I listened to everybody, ICSC occupancies do pretty well, are pretty good and higher than almost they’ve ever been in the last six or eight years. We have pricing power, we can actually get tenants to pay rent. It’s terrific. People are feeling good about operating their shopping centers, and they should feel good. And it’s not just because the pandemic went away.
If you go back in time, and ICSC has a lot of really good data. You know, when from from my standpoint, if someone asked when did retail real estate fall from grace? I know exactly when it started to fall from grace, first quarter of 2017. And if you look at what happened in the first quarter of 2017, we had more store closings in the first quarter of ’17 than we had in all of 2016. And if you look at the second quarter of 2017, those two quarters, we had more store closings than 2015 and 2016.
That’s when everybody thought the tipping point of ecommerce was here. And we really started to have problems. I was in the public market for all our analysts, only there was pounders all day, saying your brick retail is dead. And now what are you going to do next? Well, what happened was the market works. What do we do next? We stopped building. How many square feet do we have in this country? And in the first quarter of 2017? I know, 7.5 billion square feet?
How much square feet do we have in this country starting in 2023? 7.5 billion square feet? Right? That is a very important number. Population is growing at 1% a year, each of yours. Sales, retail sales have grown 30% from 2017 to 2023. And 2021 was 18% of that. But we’ve grown, so if you look at what’s going on in our business, we were in trouble. We did have overbuilding, we did have issues with tenants that did not keep up with ecommerce. But we stopped. Maybe we stopped because the bank stopped.
Whatever the reason is, it’s because we build the bejesus out of everything, right? We do that. But we stopped. And we didn’t build any more square footage. And we grew into the square footage we needed. And, in fact, probably over grew into that. And that’s why when you talk to retailers today who hadn’t opened stores between 2017 and 2020, they’re behind, and they have to have more stores to manufacture their businesses.
And e-commerce, which was a problem, and we will talk a little about this later, has been settled. They know what’s going on. I mean, you think the tenants just sit back? There’s nothing more, I think the retail tenant is the most capitalistic form of business in the United States. Everyday someone votes as to whether or not they buy something in that store. And they change and they change and they change. And tenants are needed to change from 2017 to 2023.
And those that didn’t change, they’re gone. Right? That’s capitalism. It’s a horse system. But that’s what happens. And so we’re in pretty good shape. Today, we should be optimistic, not because people just want to come back, because there was a discipline, however, it happened in our industry, which caused us to go from 23 square foot per person to 21. And when you have 340 main meeting people, that’s a lot of square footage that we don’t have now.
So I feel pretty good because the business is sound from an operating basis. And we will talk a little about the capital markets, which is the down, it’s not the business. It’s the capital markets, but I feel really good about retail.
Ressa 9:21
I love that. So, you know, I wondered that 7.5 billion square foot, one of the things that I talked about a lot is, there’s a lot of retail space that got repurposed into whether it was self storage or industrial. Does that get into, do you know, does that get into those numbers? Because I think there’s a lot of space not only built, but taken offline as well.
Rufano 9:45
It’s a good point because it’s combination, in that 7.5 billion, and let’s just talk about some c-mods. There are going to be some c-mods, which lost some space, but there seems, some seem also still a bit, it’s going to lose space. Some came off, but there’s some in there that is gonna come off. It’s gonna come off limiting supply. It’s fantastic.
Ressa 10:10
All right. So keep going on this concept of the perspective of this former CEO of a REIT, if a retail real estate REIT came to you today, and said, hey, Glenn, given the market conditions today, what are three pieces of advice you would give me? What would you tell them right now, given what’s going on in the world?
Rufano 10:31
Well, yeah, I would take the three pieces and segment them. From a CEO standpoint, you’re always playing offense, but you’re playing defense at times. And whether you like it or not, today, you’re going to play some defense because of the capital markets. So the first thing I would look at is the balance sheet. And when I’m on a couple of boards. And as a board member, I get to talk to a CEO, they asked that question.
And so what I would say is, think about your balance sheet, the left hand side of the balance sheet and the right hand side of the balance sheet, the left hand side of the balance sheet, your assets, your properties, keep your head down, make sure your property stays full, you get the proper, put the appropriate capital in them. And they’re ready and willing to go to the next level, when the market gets better in some period of time, from a capital market standpoint, so make sure your business is being run right.
Now, let’s look at the right hand side of the balance sheet. That’s your debt. Watch that you don’t let get over-leveraged, in any situation where the cap or markets are in disarray as they are right now. Because you can get stuck no matter how well you’re doing on the left hand side, if you don’t run the right hand side correctly, you’re gonna lose left.
So watch your debt levels in public, we call it net debt to EBITDA, which is a ratio, public companies run anywhere from four and a half to five and a half net debt to EBITDA, if you see getting to six, seven and a half percent, you’ve got to do something about it, you’re not going to live well.
And if you’re a private company, and all of a sudden you have debt coming due, and you’re not watching what’s coming through and how to refinance it, maybe you have to sell some assets on the left hand side to take care of the right hand side. So make sure your balance sheet left and right is appropriate for the marketer.
And that’d be my first concept. The second is, when you’re a CEO, you need to understand your constituency, who are your constituencies, and there might be three, if you’re a public company, it’s your shareholders and debt holders. And if you’re a private company, it’s your capital providers. That’s a, that’s a constituency that you better be dealing with. Number two are your tenants. If your tenants are unhappy, you’ve got a problem.
So make sure your tenants are happy, understand what their needs and desires are, and keep them appropriately advised what’s going on. And number three, maybe the most important: employees. If your employees, especially in a difficult market, are always thinking about, am I gonna get paid tomorrow? What’s going on? You know, I read about interest rates, go into seven and a half. I read about political issues, make sure those three constituencies are taken care of.
And you take care of them by making sure you give them the property and information. You don’t hide anything, you become transparent. And you’re disciplined about that. And if all three translate, all three of your constituencies are a little unhappy, that’s okay. But if any one of those constituencies, your shareholders, your tenants, or your employees are very unhappy. As a CEO, you’re in trouble. So I would break it up into those pieces, balance sheet and constituencies in terms of how I would handle discussions.
Ressa 13:39
That’s such a great answer. So you mentioned, you mentioned the capital markets. I think you’re going into there. And I think one of the more interesting things that we’ve had in the capital markets that’s impacted a lot of members of ICSC, as well as just the markets, have been all the mergers and acquisitions we’ve been seeing in the public markets, and you’ve been involved in a merger and acquisition before.
What do you think about this, you know, we’re seeing groups like Kimco, who bought Weingarten and now announced they’re buying RPTE and Regency, and before that Kite and RPI, and Simon and Taubman.
Speaker 2 14:27
First off, I think, why is this all happening right now? There’s so much of this, in the previous decades there weren’t, so why don’t we start there? Why is this all happening?
Rufano 14:35
Well, M&A is a difficult concept at times because it’s a good point, because it’s happening now. It doesn’t happen all the time. And what starts that process, and more importantly, what ends it? I will tell you, if there’s anybody from an investment banking firm here today, because if you would ask an investment banker, in terms of M&A, what’s the most important part of M&A? They say 70% of social, which means 70% is the CEO and the board not wanting to get taken over.
Not a good reason. Not not a good reason at all. But that’s what, if somebody told you the truth, an investment banker would tell you, I think there are a few reasons that M&A occurs. And then there are certain situations where, I’ll start with what I’ve been involved with. I went to a public company to Realty Trust, does anybody remember that company? You know, they, they did a merger in 1999.
In, you know, I maybe call it the worst merger in the history of man, it was just terrible, whose new plan, they merged with a company called Excel. The top echelon didn’t get along all the Excel people, people left and seniors left New Plan, trying to understand a billion or two of real estate, and their stock went from 23 to 12 pretty quickly because they missed guidance. So that was a situation that was the first time where I had a call, I was asked if I wanted to be CEO and certain reasons I said, yes. And so I got involved in a troubled company. It was a troubled company.
We, we turned it around. We had 10,500 apartments, we had 350 shopping centers, we had a bunch of stuff, it’s landing in some office buildings. We cleaned it all up, we sold everything except the shopping centers, we reinvested in shopping centers. And we merged with a company called Centro was actually a purchase Central was anybody here at Central property from Australia. It was a big, large company there had about 22 million square feet there. We were 100 million square feet here at the time.
And so they bought us. And they bought us in April of 2007. And so what, what I learned that a new plan, the reason we sold the plan, even though that was a good time to sell, we weren’t that smart, we sold it because when you start out as an underperforming company, like new plan was, the market takes a very, very long time before it gives you the appropriate valuation. it penalizes you for years and years and years, because you fell from grace because it doesn’t trust you, no matter how much you tell him.
And in 2005, and six, for those of you who are around the markets were going like this. And people were expecting what we would use as an earning index FFR to grow at like eight and 10% there was no way we can grow at eight or 10% to take those risks. We were being we were our multiple was lower than our peer group. So we sold that story I just told you can I can tell you with central because we sold Central, which fell from grace Cushman and Wakefield was having a bunch of problem when I got there in 2010.
We turned it around. But Chrisman was a it was a hard company at the time we needed some to change especially in terms of its portfolio of geographies, and we sold that because it didn’t perform well compared to CBRE JLL, because it didn’t have the magnitude of the presence in Asia, and parts of South America. So there was a real issue there. I think we saw them sold. And the same thing happened with burrito, which is the latest sale that occurred about a year ago, I was at a company called burry net leases.
By the way, we only have a 10,000 square foot net leased and this property I think it’s this really hard profit. So we went with the same thing happened with V read in 2014. The third quarter put out something called an 8k K is a public document that you have to provide to the public, if something important happens to your business, something very important to happen to the business. And then at ATA, they said in the first quarter of 2014, a CFO was overstated. And the second quarter of 2014.
He was intentionally not brought to the public intentionally. But when something like that happens, everything falls apart. The CEO, COO CFO CIO all in the board when the SEC the DOJ sued the company. And we had a class action suit. So I came in in 2015. It’s just another demonstration of coming in to accompany that struggled, we actually did a lot of good work and turn that company around, but we could not get the market to perceive that we were as good as our peer group. And the way that manifests itself.
We had a multiple multiple just means EBIT da times that multiple, we had a multiple of 13. Our peer group was trading at 15 to 17. As a CEO and public life cannot live for long if it’s multiple is trading that lower than its peer group. So we had to merge. So the merge As your concept could come because a company can just not get what it believes is proper valuation in the public market, and someone’s willing to pay you a premium over that, but it’s not gonna get you what you want, but it’s better than you are.
And so you’re forced to think about a merger, because it’s the right thing to do for your shareholders. So that’s one concept and merger, which I have found. Unfortunately, for some of the companies we had to do, I think it was a good comparables with Camco. And Regency, you know, also buying equity one, and it’s the middle, that’s different. Those were all pretty good companies.
I believe that those mergers occurred because it’s a difficult market, it’s hard to grow, weed in the public market, grow, grow, grow, grow, is all you ever hear. If you’re not growing in the public market, you’re, you’re standing still, you will not be there for long, certainly the CEO will period for long. And so in order for retailers, retail retail companies to grow, a way to grow because cost of capital is very difficult, is to merge with another company.
Save GNA, which automatically will help you and perhaps you have some more clout and leasing. Because you have more properties, you have more geography, you have more depth. And I believe that’s what happened with Kymco and Regency, they found ways to grow through merger. Now, they also in every one of those deals I just mentioned, they were stock purchases, right.
So that company didn’t go to the market to sell stock, it didn’t want to do that. Right, because they’re trading below nav, and they’re not going to sell stock at nav. So that form of m&a that I just mentioned in this environment will only happen only happens if it’s currency for currency. And then the last form of merger that I’ve seen occur is when there’s a management team that’s no longer operating well or no longer exists at a company.
And instead of trying to hire the management CEO and the team, they merged with someone else who has good management. They’re in retail that hasn’t happened recently. But there’s a company called HCA Health, Health, Health Trust of America, who merged with HR, healthcare, Realty, healthcare HTA, lost their CEO, they couldn’t find another CEO, they were having difficulties. They brought HR in basically that to take over the company.
And so it’s another reason for merger when management is stronger in one company and not another or maybe that doesn’t exist at all and the other so there are very these various reasons reasons for merger and acquisition. I think we’ll see some more because of the second reason I mentioned it, maybe the first, if that companies in order to grow when you’re not going to issue stock and dilute your shareholders in the public market. They’re going to grow through m&a.
Ressa 23:00
Come on everybody, where are you gonna get insights like this? Come on. So that was fascinating. I feel like I just got my MBA and mergers and acquisitions. And from the former CEO, that’s incredible performance that you had no choice. So is it great to actually have someone who was like leading the charge and doing that here, like for such a small group like this? I think it’s fascinating. So we’re getting into the capital markets. Now that we got it. We got to we talked about mergers and acquisitions.
You know, the other thing on the other side, and the just the buying and selling of property, and the cost of capital right now, like, I can’t go anywhere and not hear about this. So if you were advising someone in a, you know, in a, you know, either an acquisition role or a CEO today about the capital markets. Would you be talking to them about opportunities right now, would you be talking about being cancelled? Would it be both? Give us some insights.
Rufano 24:13
Cameron luck has a pretty rough mean, that’s what’s causing valuation issues, and it’s across the board. It’s not just real estate. The real estate is getting impacted greatly in my view. It just just because I’m a numbers person to give you a sense why I know that’s true. In 2022 REITs, were down 24 25%. Were down 25%. Last year, we were actually up this year five or 8% until about two months ago. We’re down 5%. So that’s a 30%. loss over the last couple of years doesn’t feel good about public real estate.
Now, if you look at the public markets, the s&p 500 The s&p 500 was down 18% Last year, but it’s up 14% this year. And so when you when when you’re an investor and you’re looking at so simple stats, you’re basically saying for your real estate, what’s wrong and real estate is a real issue a real problem, right. And the reason it gets in the public market hits so hard is because it’s still considered a quasi income instrument. Now it doesn’t consider growth. We’re in the s&p 500. You can have ups and downs in the capital markets.
But if you see growth, you see GDP growth, you can take advantage of it. In the public market, the public shareholders don’t think real estate can take advantage of that much growth. And so we get penalized pretty hard. And that those are just facts. I mean, you just is.
So don’t beat your head against the wall and think tomorrow, your cost of capital and real estate is going to get better because it’s not. So what you need to do is think about actually what I said before, husband, your assets, make sure your assets are generating as much income as possible. So you have internal capital, and make sure your balance sheet is in pretty good shape.
And you want it to be in good shape, not only because you don’t want to get hurt with refinancing’s, but opportunities could come. And I do think it retail there will be some opportunities. One thing that did happen in retail, which is different from from other property types, when when the world went to hell in 2017, at least in my world, the cap rates really got beat up. And they never really came back like they did an industrial and multifamily industrial multifamily cap rates were at three and a half at one point.
I mean, that’s just crazy, right? We never got that real estate. So you know, maybe we came from seven down to five and a half, six. And so real estate has never, I think been fully priced because of some of the legacy issues people thought about. Moving forward. Today, I look at the public market, I would tell you, the average public reads the strip shop shops and REITs cap rate is between seven and eight. And in the malls, it’s somewhere between eight and a half a night.
So let’s put the malls over here because that’s just Simon anyway, in this public market, I do believe is over penalizing. strip shopping centers are open air shopping centers.
And so if I if I were running a business like you are, I’d be looking to see who was hurting, who got hurt, who was a refinancing, they can’t deal with it who lost some tenants because they didn’t know how to get good tenants and I would actually be down to the state of Florida, where insurance and real estate taxes and knocking the hell out of a lot of shopping center owners.
If you have two or three shopping centers they are I would just say real quick. I was in Orlando and I was moderating a panel and I on the panel was was Kymco sprouts and Panda Express. And so I said, we’re sitting here in Florida. I’m trying to buy a house in Florida. I can’t afford it. How are you running your businesses in Florida? Well, Panda Express Express says insurance was was the key issue. How are you dealing with insurance? They both said we can’t afford to buy insurance in Florida. We self insure. Yeah.
And I went to Kimco. And I said, What are you doing? They said, Well, we have 500 shopping centers, so we can spread out our insurance growth 500 shopping centers. And I said, and then they looked at me and said, that’s the opportunity to flower, go find go find someone with three stores with three shopping centers who can’t do what I just told you. We do.
So I think there are opportunities in certain states, I think there’s going to be opportunities to go to get is coming due in certain situations, and people are going to have issues trying to pay off that debt. So I’ve been building my assets, watching my balance sheet, keep some dry powder, and I think a Linux way for months, somebody will have some opportunities that they’ll take advantage of.
Ressa 28:50
Excellent. Yeah, we’ve we’ve actually seen some assets that are have been struggling to trade because of rising insurance costs, which is not something we’ve heard about much lately. It’s pretty wild in Florida.
Rufano 29:02
It is really, I will tell you, it’s confiscatory, some of the issues that if I said all I then looked at Kimberly and said how you’re shopping centers do fall and we don’t have enough space. So people are still going there. They’re still shopping, but I have to tell you this, if some issues and I think they’ve ignored more state issues in terms of having to raise taxes, that’s going to cause a shift cause problems and if you’re a large you could absorb them better than interest.
Ressa 29:30
Awesome. So we’re gonna move on from capital markets, but before we do anyone have some questions for Glenn, this is a pretty unique opportunity, a small group to be able to get some counsel from somebody like Glenn so anyone have any questions so far? Don’t be shy. There you go to meet your.
Speaker 3 29:59
Needs Usually 70 If we have been talking about since inception, this project has been approaching at the end. I don’t know if you guys need to get a little bit. Yeah. Awesome that might dovetail with cost of customer acquisition.
Rufrano 30:25
The reverse of that now, there’s, there’s been, you know, we thought it was gonna seem to be like it was. They said, because of the cost of acquisition as well, yeah, you know, if I go back in time, and I think about customer service, and I go back in time, a lot more than most people here. It used to be someone comes into the store, new smile and customer service. That’s really changed dramatically. And I think for the better for a lot of different reasons, like Amazon has been helpful for the retail trade in that respect.
And so now you’re going to talk to retailers who are doing well, they know they want all the data they can have on their, on their clients, they want to know where they come from, when they shop, when they go in the store, when they move around the store. They really want to know everything about them. So they know how to market tool.
They want to have it everybody talks about the word experience, but they want them to have a good experience, if they come in not just have a smile, you know, give them a cup of coffee, say how are you have someone who’s personal with them. But as important as all of that is you have to have the ability. In most cases, not all to have any commerce form of service, you need it, you need to provide that service.
So someone can have something sent to their house and pick up in all of that bundled services, which also includes having a shopping center owners making sure they have parking in front of the store. So you can call up for the grocer. And then they come and you put in the car and you leave.
All those services are important, and ecommerce is an important part of that. Our retailers have learned that, and the ones who have learned it, I’d say and and also had the capital to implement the resources to implement the services necessary to keep the tenants are here.
The ones who could not find who didn’t know that they need to provide those services or didn’t have the resources to do it, they’re gone. So I would say what happened in 2017, where people said it’s a tipping point, they forget the fact that tenants learned it’s not a tipping point, it’s a point of which tenants have to learn how to do their businesses better or not exist. And I think most of our tenants are in relatively good shape relative to e-commerce.
So we chose to use meeting Minneapolis pretty weeks ago, ecommerce doesn’t even come up as as a concept that we have to talk about that is going to hurt their businesses. And it’s different, you know, TJ Maxx, maybe five or 8% of their business is ecommerce and staples is 50%. So what’s happened is the tenants have learned to understand what percentage of their business needs to be commerce for them to provide service to their, to their clientele.
And I think that’s happened. It’s not that ecommerce is going to go away. Or it’s not important, but something’s going to change. I don’t know what’s going to happen. But somebody’s going to change something else. And it’s going to be new. But purely commerce part of the business isn’t isn’t going to strangulate, the tenants as we seen today, at least, at least in my view
Ressa 33:36
I’ll just add to that, Dimitri. So a couple of things, if you and I were to open up a t-shirt shop online, the cost of entry is cheaper than a physical store. But the cost of scale is significant. And so I interviewed this guy, Simeon Siegel, once and he was like, outside of Amazon, name me an e-commerce brand that has $500 million in sales in the United States. And the answer is, there’s very few, because it’s truly hard to scale without stores.
And so any brand that wants to start to scale, will have stores eventually. How long does that take for like every e-commerce app stores? Who knows? There’s obviously going to be some brands that are just going to stay small and stay online.
But I think the moment you want to scale to have distribution everywhere, you’re going to have to have stores, and you know, as Glenn was mentioning, a lot of the retailers are having both what the other thing a lot of the retailers are doing is fulfilling from store I target talks about 95% from stores.
So I think I personally think at least we’re hearing that ecommerce is not the head when it’s the tailwind. And I think that you know, you mentioned customer acquisition cost and all those things are adding to it. But I think that’s gone. I think it’s pretty clear the jury’s settled actually that like ecommerce is in You know, killing retail, it’s just the opposite.
So, I think I think I think, you know, our CEO says all the time, it’s actually physical retail saving ecommerce. I mean, you look at some of the E commerce only brands like, and you know, they are profitable this year, but like last year Wayfarer lost like $1.3 billion.
Ressa 35:21
Feels like a lot to me. I don’t know if it’s a lot of money. Etsy lost like 500 million. There’s got to be a different way in stores. Stores are a big part of it.
Rufano 35:32
Yeah, it’s good point, I make a lot of points on what we’ve said, I was with the head of real estate for Kohl’s. This was maybe a year and a half ago, and I was saying how things going, you know, in terms of e-commerce, because they always asked that question. He said, well, we learned a lesson in the pandemic, we closed a number of stores just after the pandemic. And the lesson that we learned was in those markets, we lost e-commerce sales.
Because the store itself allowed people first of all to pick up and deliver at the store. It’s also advertising the store keeps people buying on the store. So it was important to have both bricks and mortar and E commerce to maximize the margins in the business. The the Marisol exercise I’d go through is where was ecommerce before and after the pandemic.
And actually ICSC has those numbers. Before it was 12 to 14% of sales, it got to 21% of sales in 2020, which is the year no one went out. It’s back down to 12 to 14%. So the numbers kind of tell us, we come back and have a stabilizing condition.
Ressa 36:48
Any other questions so far? We won’t go too much longer. Don’t worry. We won’t bore you. But I think this is fascinating, personally. And what else? So I guess the, you know, the really the good news, you mentioned about what’s going on in the world on the retail real estate side is, you know, the fundamentals at the property level are, you know, they’ve been so strong?
And so, you know, I think, do you think this period of time of retail expansion is, you know, just a flash in the pan or we like fixed the over stored in America enough that it’s now you know, this is a little bit more closer to the normal course of business. Because, you know, I think, you know, a lot of you know, you look at the bed bath bankruptcy, so many stores got bought, bought by retailers, retailers are finally finding it very hard to find space, landlords.
And finally, as you mentioned, got some pricing power back, which is, you know, probably healthy for the real estate and, you know, analyze have grown across the board. So, what can you say about this?
Rufano 38:10
First thing I’d say is, if you’re a real estate person money, they’ll build something, right. And that’s what we have to fear. That’s, that’s what we have to fear. If we if we were in if I take care of analogy, we were in almost a stabilized situation close to a stabilized situation feeling pretty good with tenants and landlords and space.
Rufano 38:45
It will change is a question of how will change this history tells us wherever he goes up, goes down, whatever goes down goes up, and we’re in pretty good spot. Now, the reason I have some confidence that will stay for a period of time is the capital markets. And the cost of building.
It used to be in the olden days, we build a open air shopping center for 150 bucks a foot what is now what a shopping center you’re going to be I can tell you like a free standing Starbucks like 1000 foot shopping center is going to be three 400 bucks a foot now think about three or four bucks a foot and then go to your tenants and say I want to rent so I have a reasonable return on three or four bucks a foot that’s a hard sell. That’s not an easy sell.
And so that’s why that that was everybody wants to buy all the bed baths that you can get because they got it at a lower basis so he could rent it at a higher basis than the alternative but a lower basis than a new shopping center. And so that’s a good thing it will help us recycle space that’s why we’re recycling space because it’s a lower base as you can do to get rented for a lower rent.
I like the fact that the build a senator cautious so much because it will stop building a lot of centers that will help that will help stabilize us for a while and I’m you know I don’t know how long that is but we’ll we’ll have to find out.
So I feel pretty good because supply is is in pretty good shape, then you always have to go to the demand side of the equation. And what everybody’s worried about is recession. Right? Because what could have hurt us? Well, well, some people have stopped spending money tended to go backwards.
So, you know, too much supply will hurt us, bankruptcies will hurt us. Right now, I don’t you know, I don’t know how everybody has a different view on this. And from day to day, it could change. But I don’t see this a slowdown coming, right. The fact the Fed is saying slow downs, I’m gonna raise rates until you slow down, it’s gonna, we’re gonna slow down, the economy is going to slow down. But that doesn’t mean it’s a recession. I personally don’t feel we’ll have a deep recession if we have a recession.
And you’ve heard that I’m sure for some people. And you’ve heard some people who would say we have a deep recession. But I’ll give you some reasons why I don’t think we’re going to go into a deep recession. First, I am old enough to know what a deep recession is.
And most people here don’t. You don’t you have no idea. You probably don’t even know what inflation was before two years ago. So I’m gonna go back to 1983. And I’ve actually researched these numbers trying to understand what’s going on in 1983.
Inflation was about 6%. It was actually higher than that, for those who were around was up 10. But by 83, it got down to six, GDP was growing at negative two, negative two. Unemployment was 10%. The 10 year treasury was 10%. That’s bad, right? That’s recession. That’s stagflation.
That’s really bad. So I say okay, now, where are we today? How do we compare to that? Well, this morning, inflation came out at 3.7, which is not great. It’s a people pose less, but it’s a lot less than it was in 1983. GDP is projected to be about 1%, maybe 2%.
So it’s positive. It’s not terrible. Unemployment is 3.8. And the 10 year Treasury as of this morning was for six, those are in terrible numbers compared to what real recession is. So it seems to me that unless those numbers change dramatically worse, we’re not going to go into a deep recession. So if if it conclaves, I think supply will stay reasonable for a while, and I don’t think we’ll go into a deep recession. Therefore, I think, I think retail will be reasonable reasonably stabilized for a period of time.
Ressa 42:35
I love the direct answer, right? When you get people, you know, Glen’s experience they don’t like they don’t always give you you gotta like really beat around the bush to get a real direct answer. So that’s fascinating.
So you mentioned tenants, and we talked about some of the commerce side, but I think something interesting, from your vantage point, in all your experience, give some insights about what are some things from tenants that you look for and you thought like, this is a tenant that I want to sign a lease with, because I’m sure there were some along the way that you told your leasing teams, we’re not doing a deal with them.
Rufano 43:17
I’m probably at least recently gonna have a different perspective because I was we were in for it was in the Nepalese business Realty income. Does anybody know who Realty income is? It’s pretty big public home as well back to show you how how getting Net Lease companies can grow. We had single tenant net lease, the 70% was retail, we were 17 billion, they were 33 billion, it was a 50. They are a $50 billion company with triple net leases. That’s pretty amazing, isn’t it.
But when you’re in that business, and you’re looking for tenants, which is really, first of all credit is because the net lease businesses really, really equity financing is a credit is somewhat important. So credit was was always a main understanding that we had to have, it could be publicly triple B triple B minus, which is the highest investment grade, but you wouldn’t know what it was. If it wasn’t we’d have to do really good insight, have insight, we would sit down the CFO, the CEO try to understand the financials.
So credit was always number one for with our tenants. What we also cared about was that the tenant understood its business. Now that sounds different and maybe obnoxious because why should an owner tell their tenant what their business is? Well, we’re not going to tell him what the business is.
But we do have a sense that this gets back to E commerce, which was a very important part of it. If if, if the tenants had a business, and it’s going to be competed against it service by E commerce, and it doesn’t recognize that it’s going to be competed against or it doesn’t have the resources because it’s expensive to put an E commerce we would Not by, we would make the or it have to be a very juicy deal where the real estate was so good that if we could replace them, we can replace them pretty quickly.
So understanding that the tenant understood its business and knew how to do business against competitors was a very important part of our underwriting when when we didn’t at least work. Now, if I were in a shopping center, and you would know better, you’re not in the pizza guy is going to be different, right?
But, but you may want someone who makes things in a nice way. And it’s different and people will come to this, because they like it’s so so unique to add in a local tenant that you need, could also be important to also have very good insight.
Ressa 45:38
Obviously. We all like credit tenants, but you have to do some of the local deals. Okay. I’m looking at the clock here. We’re running up a little bit against some time, but I would love to take some questions for Glenn. We tried to cover some general stuff in the beginning, and then the capital markets and a couple of things on tenants who has some questions can’t be just Dimitri, someone’s gonna have questions. I know most of you, I could call on us.
Rufano 46:17
Someone’s gonna someone’s gotta believe. We got a, we got a couple.
Speaker 3 46:22
My question is, what do you feel is the stress today?
Rufano 46:37
I’ll repeat it. There’s some stress in retail now. What could it be next year? And I would tell you that it is some of the stress in retail, we haven’t talked about this is not consumer, the consumer, the consumer seems to be acting pretty well so far. I think you do have to worry about the consumer next year if we go into a deeper recession. And again, if we’re going to have a slowdown, I mean, the fence is going to maybe increase the rate another quarter point, two, five and a half to five and three quarters.
And more importantly, it could keep it there for a year or more at which point, they’re going to beat up this economy. Right. If they beat it up too much the consumer feels it that that’s something that every retail and that’s at ICSC. We have any retailers here. We can meet every retailer is is worrying about that. But they don’t see you know them. It’s not stopping them right now from store openings in the right locations. I think that’s a stress that we should minimize is organized retail crime.
And in you know, right now, you’re reading about it and target just closed nine stores across the country and Walmart closed for stores. And so there are some issues in organized retail crime that we’ll we’ll be thinking about in the next couple of years. ICSC spending a lot of time on this. We know we we were working in DC in through our PAC.
There’s there’s something called the inform act for retail act that you may have read about that passed in Congress that requires anyone who’s selling large volumes over the Internet to be able to prove where they bought them from. So they can hopefully stop stealing and live and having people sell their there’s a bill before Congress called the organized retail crime bill, which is which is intended to try to help localities to work with owners and provide capital for them to help the security purposes.
And we also will working in visit group in Gainesville, that is specifically working on retail crime and ICSC has helped sponsoring that group to work with tenants and owners around the country to work together. So we are in the forefront and ICS in trying to get in front of what’s a it’s a federal issue. In some respects.
It’s really a local issue. It’s the local police and the local community, and the owners and attendants all working together. So there is some stress there. I think we’re making some progress, and I think that progress will continue. But that’s something we think about.
Ressa 49:36
Thank you, Rudy. John, talked about several different points that I would say proceed with caution was was large or small, whether it’s a game that we didn’t have 10 years ago or when a younger generation shop something that you you see going on, it’s maybe early on you.
Rufano 50:04
You’re citing, hopefully, the part about the younger group office on iPhones all the time and all that stuff, you know, I have four grandkids, I, they are way smarter than I am on any of the machines that I have. I mean, they really, it’s unbelievable how you give an iPhone and they go. They’re not afraid of it. It’s their friend is their pal. And so you we it’s really the retailer and we have to walk past to make sure as those clients come through, they’re servicing those clients.
I think that’s that’s, that’s a plus and exciting as long as you to have a service and right. And that’s it’s inevitable. I mean that that’s inevitable. I also think the configuration of shopping centers is changing a bit, trying to make it more user friendly. I’m sure your shopping centers, Chris, you you have for the grocer and maybe for some of the food vendors, places that that people can drive in, drive out. Sure.
And that you know, that that convenience will keep people coming to as long as you provide it. So I you know, I don’t think there’s anything extraordinary I can tell you, I other than you better asking a retail, because if you were to ask Lori Maho, who is the head of real estate for target, she probably gave you a 30 minute expos day on everything they’re excited about, and how they’re servicing their clientele.
And so from all from the we house them, right, well, we do all we do in life is how’s retail? So that’s what we did. They didn’t do their business. Right. And so I think watching how they do their businesses most interesting thing. Anyone else? The lone retailer.
Ressa 51:58
Entertainment retailer.
Rufano 52:04
Very important, right? Holy moly. It’s, it’s been it’s been a big change there. It’s a really good point. You know, entertainment. Now just look at this. I mean, the stuff they have here is just astronomical. Now this is not usual. I don’t think but but entertainment as part of the mix. In your shopping centers, you’ll different type of different type of entertainment.
But yes, I mean, it’s gonna be food, it’s going to be food, we’ll have a theater we have, you know, there’s the newer type of entertainments, whether it’s we just signed our first pickleball Lisa, you know, trampoline, parks, things like that. So I think, you know, we we’re not at the scale of Water, Parks and Nickelodeon, and everything is ski slopes. But clearly, you know, the shopping dining, playing is merging more than it ever has.
Rufano 53:09
I remember a time when, in an opening a shopping center new plan that many of those grocery anchored, we wouldn’t want a health club. Last thing we wanted was a helpline, because they took up too much space, you know, that people would come. Now. I mean, health club is an important part of all forms of retail, but I was in Minneapolis, and I’m sorry, yeah, Minneapolis.
DIX has a new prototype. 100,000 square foot. It’s a May. And it is it is entertainment. You’re climbing walls, you’re going on fields, to hit soccer balls and hit softballs. And so entertainment, keeping people excited about coming, whether it’s sports oriented, movie oriented, or food oriented. I think he’s here to stay. And I think it’s a very, very positive part of how we’re independent people.
Ressa 54:02
Anyone else? Raising capital today chasing you?
Rufano 54:22
You know, the first thing I would answer, you said, What was the question? His question was, if Glenn was chasing retail property today, and he was raising capital for that, what would he be chasing? And what? The first way I think about it is I have an infrastructure in place that really knew that product. Because when you’re going to an institutional investor, you’re probably today going for an opportunistic form of acquisition.
And you want to be able to prove to that institution that you have the capability the infrastructure was how to manage lease, redevelop that shopping center and take it because by its very nature, there’s something wrong with it. Why are you better than the prior owner? Why can you do something with it? Because unless you can prove that to me, Why should I give you a nickel?
So I think having an infrastructure in place that knows how to create value is the most important part. Now, it may be for a grocery anchored center, it may be for or more power and center. If you had an infrastructure for both that would that would be terrific. So to me, it wouldn’t necessarily be any one of those two or three, it would be what can I do to make it better and have a track record? That’s really, really great answer.
These ecommerce brands in general, is that possible dries out? Well, I think I think we could repeat the question. The question is, first of all, so ecommerce, pickup and delivery trucks, and it’s very expensive, to your point. And with high interest rates, and some in some cases, it makes it not affordable. So whether it’s the companies you talked about, that were only ecommerce on it, recognize they had to have bricks and mortar, or it was in some other form that ecommerce company has to change, right?
Because me for years, we always wondered, how can Amazon do what they’re doing, because it was a loss leader, they were losing money on their retail division and making money on their computer division.
And so it’s a very good point, you’re not gonna have ecommerce, especially if the cost of ecommerce is higher, unless it makes profits and it’s either going to go away, or it’s going to come back to figure out a way to have a lower cost of capital or to buy a bricks and mortar so that the combination creates a margin. But by itself, an E commerce company that is not making money cannot exist alone.
In my view, I in the long run, one of the things I think on that is there’s going to be two groups, there’s going to be ecommerce that has stores, or E commerce that is serving the higher end only. Because I mean, if I DoorDash like a cup of coffee to my house today, you know, it’s $25 for a cup of coffee raise, there’s only so many people that can afford that. And so I think over time, at the moment, they you know, the whole plan has been to get to scale to bring that cost down.
And that was under lower interest rates, lower oil prices, and all those things are rising. And it’s really it’s it’s hard to fathom a place where those costs come down. And a lot of the lot of the groups have said, we’re not even going to try anymore, we’re going to fulfill it from the store, or we’re going to open stores.
You have a group like Amazon, who’s decided to get in other businesses to subsidize it. But I think one of the challenges it may have is it might be, you might start to see that convenience comes at a real premium and cost because they’re not gonna be able to take losses and it’s gonna serve a really specific demographic.
Rufano 58:16
And I ended up, I think, we’re going into a downturn, people are going to pull in their belts a little bit. And they’re going to cut back somewhat on what they’re spending. And so whether it’s e-commerce or retail, and I think you need to recognize that. Anyone else? We will take two more. Dimitri.
Speaker 3 58:43
Is anything new? Is anything being done about Vegas, and now especially for landlords? Retailers have 63 days at ICSC as a group.
Rufano 59:05
Oh, five, six places. Well, you know, it’s actually less fragmented than it was, but it still has some fragmentation and then we, what are the books you just mentioned? You know, it’s Simon. It’s Brookfield. It’s Mesarch. Brookfield, who else, Westfield, Westfield, which was going to exist. So there’s three or four. Right? We can’t do anything about it. What we have done is we’ve stopped everybody else. Two years ago, Tenges was off the floor. It’s now on the floor.
So what what ICSC does is, it blocks. It blocks every hotel from allowing anybody to put their position in that hotel during ICSC, except for those four because they were grandfathered in and we couldn’t do anything about it. So if you, if some owner wanted to go off the floor, and no hotel, you could do it. We also, any hotel that had, that owns a restaurant, we don’t allow any vendor to go into that restaurant to pitch their wares off the floor.
So we’ve put real strict provisions on the future. It’s impossible, but we couldn’t deal with the four that are out there right now. But we sympathize with that. And I’ll tell you what, what the honor, is anybody here from signing restrictions, but we tell the tenants, go tell him that you’re not gonna go get on the floor? Or else we’re not gonna go see you? I’m not sure that’s gonna work.
Speaker 3 1:00:54
With artificial intelligence, whether it was insights you might add, how it’s gonna affect how you manage your portfolios. Where do you see that impacting discovery for your tenants?
Rufano 1:01:16
Well, I would say, I don’t know if anybody isn’t interested in it, because it’s, it’s there, it’s the future. When you read it, it’s going to destroy mankind and things like that, you know, so you just got to even know about yours. But as a business person you can’t ignore it. So my sense is, most tenants are thinking about it. The one thing I’d say is in real estate, in technology, we’ve been behind other businesses for a very long time.
And we, we even have problems doing projections, you know, trying to get your information from your P&L and your financials into a projection model, which is silly, a prop tech is what I think a lot of people have talked about to try to bring us into the 21st century. And so we’re still we’re still catching up. Obviously, most companies are thinking about artificial intelligence, I can tell you, I’m a director of a company called FairPoint.
And they are, at ICSC, they’ve heard of FairPoint. They own industrial, well, last mile industry, and very bright, very bright people. It’s an Israeli company. And they’re hurting a bit now because of what’s happening. But it’s very bright people and they are working hard on it, on AI. And what they’re doing is, they’re trying to look at regions around the country, because they’re dealing with 50 to 100,000, square foot, industrial, and sometimes you don’t have enough comparable.
So they’re trying to find comparable regions around the country which could provide comparable information for rents and occupancies. And they’re actually doing it all with AI. And AI is nothing more than taking huge amounts of information, and processing it better and quicker than we can on online design. So, think about it. Companies will try to find ways to have advantages.
And I will tell you that if you’re a real estate company, and you’re probably gonna go into an institutional investor, or public shareholders, I’d say in the next three years, you better have an answer for that. Because every one of them is gonna say, Well, I just went with this person over here. And they told me they are putting an AI system in place, which is going to make them better than everybody in the world.
Doesn’t matter whether it’s true, and you better have an answer. So I ran analysis, comp analysis for different geographies. Immense data is being put into place to try to figure out how to have intelligence, that it’s better than just going along with the company. Yeah, yeah. So it’s very important. I don’t know how to open that specific, which is, it’s actually going right now. I’m sure everybody’s trying to do something.
Speaker 2 1:04:09
And then on our side, at what I would say, is, we were clearly paying attention. And I think, with some new tech stuff like this, you know, we tend to lean more on efficiency and focus on what I would call the back end of the business first, versus something at the real estate level, right? We’ve got heavy CapEx dollars, and that’s what you’re trying to put into that.
And so by example, simple one, we did purchase the Microsoft ChatGPT integration, which will be in all your team’s meetings, it’ll record everything for you. So you don’t have to take notes, and it’ll provide a transcript immediately and things like that. So for efficiency internally. We’re certainly looking at it something that’s like, actually physically doing something to the real estate. We’re not there yet. Okay, Glenn, last question. You have grandkids, would you recommend they get into this business?
Rufano 1:05:23
Depends. The answer is, I would recommend, I mean, I love this business. I’ve been in this business for 50 years. I felt like, I went to Rutgers. There were a couple of people from Rutgers, and fell into the business after school and never fell out of it. And I highly recommend, I think it is a great business. I think it is a great future. It’s always changing. It’s a people business. It is terrific. So the answer is, absolutely yes.
Ressa 1:05:49
Awesome. Everybody, thank you so much for your insights. Thank you everybody for coming, and enjoy some drinks and networking.
Thank you for listening to Retail Retold. If you want to share a story about a retail real estate deal that you were a part of on our show, please reach out to us at retailretold@dlcmgmt.com This show highlights the stories behind the deals from all perspectives. So it doesn’t matter if you are a retailer, broker, entrepreneur, architect or an attorney Also don’t forget to subscribe to Retail Retold so you don’t miss out on next Thursday’s episode.