Guest: Adam Ifshin
Topics: Retail real estate, real estate fundamentals, supply and demand, value retail

In this week’s episode, Chris sits down with DLC CEO, Adam Ifshin for an episode that is simply too good to ignore. Coming to you live from Vegas, Adam and Chris are breaking down DLC’s newest white paper that features data and insights from CBRE, Co-Star, Placer AI, and many more into what smart investors need to know about the best investment asset in CRE.

What You’ll Learn:

1. What are the four metrics that define investment performance for retail real estate?
2. What accounts for the current volatility in the capital markets?
3. What is more important? Favorable capital markets or solid asset level fundamentals?
4. Will rates come down, or cap rates rise up first?
5. What are the long-term implications in the retail real estate industry given current supply-demand dynamics?
6. What has contributed to the success of value retailers in recent years?

About Retail Retold:

The Retail Retold Podcast highlights community retailer stories from across the country and gives a behind-the-scenes perspective from business leaders in both retail and real estate industries. The show’s episodes contain valuable insights that help solve the needs of entrepreneurs and real estate pros. Join host Chris Ressa and new guests weekly for amazing insights and thought-provoking stories.

Transcript:

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.

Chris Ressa  00:24

Welcome to retail retold everyone. Today I’m here with you with Adam if Shin the CEO of DLC and we are live from Vegas. Welcome to the show, Adam.

Chris Ressa  00:33

Welcome to Las Vegas, Chris.

Adam Ifshin  00:34

Yes. got in yesterday night. Feels pretty lively here. Haven’t seen too many people from ICSC yet. Have you seen a lot of people industry people yet?

Adam Ifshin  00:45

I really haven’t. There were a handful of industry people. And as you know, I am a longtime member of the Board of Trustees of ICSC. Former executive board member. So I did actually have some friends who came in yesterday because our board meeting is today. And you got to get in in time for the board meeting. So actually two of us went and grabbed a drink and went to dinner last night, but it was definitely the full on ICSC Vegas experience hasn’t started. But I would say by tonight it’ll be full bore. I would think

Chris Ressa  01:16

I would think by tonight as well. Got some good dinner plans. You got any good plans tonight?

Adam Ifshin  01:20

I have the ICSC Board of Trustees cocktails and dinner which is at Cipriani here at the you know, the headquarters hotel, and we’re we’re pretty, we’re pretty, it’s a great event, great event.

Chris Ressa  01:33

A little tip to everyone out there. So, what I’ve been doing the past few years is going to some of the best restaurants off the strip. And what we’ve been doing is probably in like March, booking four or five reservations, and deciding where we want to go based on how many people come, what the, what the people want to go to. So a little tip for everyone out there. Okay,

Adam Ifshin  01:57

I wonder which one of your mentors you learned that tip from?

Chris Ressa  01:59

All right so, we just put out a white paper called Too Good to Ignore. And it’s really about our take on the industry right now, in particular the space that we’re in, open-air retail in suburban markets, and some secondary and tertiary markets. And it’s our third white paper, this is a thing we’re doing now is, each Vegas, we’re putting out a white paper going into the show about a state of the industry from our take of actually operating in the business. Overall, where are we today in the business? What’s your take of what’s going on?

Adam Ifshin  02:42

So you know, for many people, they take stock at the end of a calendar year. In our industry, because ICSC Las Vegas is such an important milestone every every year for the industry. I think it’s an appropriate time to take stock on the eve of Las Vegas on where is the industry at. And as you mentioned, this is our third white paper, the first one we did in COVID, because we had nothing to do. We had been in business for 30 years but it was our first research piece ever, its called The Store Won.

Our second piece last year on the eve of Vegas was called A Breath of Open-Air, and it got some really nice response and feedback in the industry. And now we’re here with Too Good to Ignore. I think the arc of what has gone on in our industry, particularly post the pandemic, is about all and upward to the right trajectory. We have seen every metric, first rebound off of the COVID lows, and then blow past the 2019 highs. So what are those metrics that we call out? Traffic, sales, occupancy, and rent. And all four, if you chart all four, and we do, in the report, it is all about up into the right on every graph. And it’s it’s that simple. And on some level, that’s all you need to know.

The reality is is that open air, as we have said for years was the solution to not the victim of E commerce. That was the beginning. It became the most important component of the last mile, during the pandemic. And then coupled with the post pandemic supply chain issues and construction cost rise that we have seen plus the incredible rebound of value oriented tenants in the open air space all combined to shrink supply of GLA in most markets and increase demand. So what happened? We saw increased traffic, increased occupancy, increased sales, and increased rent.

Chris Ressa  04:51

There is no doubt that fundamentals at the shopping center are better today, and you outlined it really, you know, really eloquently there. But I’d be remiss to say that the capital markets right now are pretty topsy turvy right now. And normally, when the fundamentals at the property level are so strong, the capital markets are typically a little more, they’re either going up, they’re usually correlated, or they’re a little more imbalanced. Right now, there’s a lot of imbalance and volatility going on. What do you think of that?

Adam Ifshin  05:29

So I don’t think they are, in fact, you’re 100% Correct. They are not correlated, and they are more likely to be correlated than not historically. So what’s going on there, we have to look a little bit at the root cause of what’s driving the financial market, and in particular, the banking part of the financial markets. And then we have to look at what is that mean or not mean, and how does that impact the fundamentals on the ground, which are on a very different trajectory than the financial markets. Look, pre-COVID. And through COVID, we had a Six Sigma move in the capital markets to zero interest rates, massive liquidity, not only were rates extremely low, but the Fed and other Feds globally, right, other central banks globally, flooded the zone with cash, which is exactly what they should have done, given the stresses that the pandemic placed on the financial markets, there is an aftermath and there is a cost to that.

And that is what we are going through now, that has been exacerbated by a not unexpected blip up in inflation, which I think is well on its way to moderating, but the cost of getting it to moderate was expensive, which is essentially you’ve had a four or five sigma move back, in the form of an increase in interest rates largely by the US Fed and to a lesser extent, some other central banks, coupled with the need on the part of the Fed to reduce its balance sheet and therefore shrink the availability of cash in the system. I view that both of them are equally important because the QT, the qualititative tightening, the quantitative tightening, excuse me, that the Fed has employed that has continued long after they stopped raising rates to the tune of like $95 billion a month of cash that they are draining from the system, has placed significant stress on the availability of credit, largely from regulated banks in the United States.

And what that has done is it has made it much more difficult to get financing. Now, there are other product types, unlike retail, that had irrational exuberant run ups in pricing, particularly in multifamily, and in industrial. And of course, we’re seeing some real structural challenges in the office sector, that has all conspired to exacerbate the financial capital market resettling, I don’t want to call it a restructuring that is going on, and is coursing and is complicating the banks cleaning up their balance sheets on the asset side.

The combination of all of that has caused A. Rates to be higher for longer. And two, it’s causing a fairly significant reduction in the availability of capital. So that is injecting discipline on the pricing side in. And I think in the long run, it’s going to be just fine for open-air retail real estate here’s why. I think we have a fairly long runway in the fundamentals.

And as those credit markets heal themselves, and they always do, it just takes out sometimes it takes more time than any of us want. We’re impatient, right, than any of us want to allow for. But as it heals itself, and credit does come back into the market in a more robust way. Hopefully at a lower cost. I think we’re going to see that help accelerate price appreciation, in addition to the price appreciation that we’ll see from fundamentals.

Chris Ressa  09:04

Got it. Super interesting. All that said. You’ve been in markets where we had low interest rates, and everyone was buying. We have markets where you know, you’ve been in the industry when interest rates were higher. Would you rather be in a market where the fundamentals on the ground are stronger? Or be in a market where the financial markets are low interest in you can buy up everything?

Adam Ifshin  09:32

It’s a great question, Chris. And before I answer it, first of all, I’m going to translate the behind the scenes of Chris’s question. What Chris is really saying is Adam is old. That’s what Chris is  saying, Adam is old, because I’ve been doing this forever. I started at what was once upon a time a young age. And I’ve seen a lot of cycles, for better or worse and regrettably, my memory is fully intact, so I remember them and the pain of each and every one of them intimately. But to answer your question, 10 out of 10, maybe 11 out of 10, I would always rather be in a market with better fundamentals and more demanding, challenging, financial capital markets than in a market where money is easy, but the fundamentals are weak.

So the answer is why? And selfishly, it’s because we have spent 30 years building a best-in-class team, at DLC, and an operational platform that is as good as anybody’s in the entire industry, certainly domestically in the United States. And when financial markets are tight, it tends to wring the pretenders out, and it favors the professionals. And as a result, when there’s a limited amount of capital, that capital wants to flow to the best operators. And as a result, we’re seeing really huge influxes in availability, particularly of equity capital, right. And we, we’ve formed three new joint ventures.

Since January 1, we formed a new joint venture late last year, three more new ones this year. And we probably have half a dozen groups where we have unmet demand for them, in terms of doing deals with them. So I’m not, we’re fortunate, right, we’re getting the benefit of those fundamentals. But more importantly, we’re getting the benefit of the fact that we have spent years and years and years decades really, as well as millions upon millions of dollars building a best-in-class platform that enables us to maximize the opportunity set that the fundamentals create.

And at the same time, I think that over time, the path to an easier outcome in retail, which was to buy at a fairly wide cap rate to historical norms and finance it at a historically low rate of interest. That game is not available, at least right now. Yeah. And as a result, a lot of people who were playing in our space, because of that specific arbitrage, if you will spread arbitrage opportunity are largely on the sidelines. And as a result, we’re all in.

Chris Ressa  12:12

The counter to that, though, is doesn’t the yield in retail, comparative to other platform or other sectors of commercial real estate, doesn’t that create the opportunity for some multifamily developer to go, you know what, I need some yield, and, you know, three caps, I can’t make money on anymore. And wow, you can buy a seven-and-ahlf eight cap and retail, let me go deploy capital in that increasing competition?

Adam Ifshin  12:43

There is no question that some groups from other sectors already have or are seeking to enter the space. That said, many of those groups have significant challenges in their existing books of business that they need to attend to. And that’s probably limiting how much time and how much capital they can apply to our space. But more importantly, I think, larger, more sophisticated pools of LP capital.

They want to do business with groups that have a long track record, a great operating platform and the best relationships with the tenants. And let’s face it, that all lines up for DLC and a handful of other companies that have that. Not a lot of companies that are simultaneously in multifamily or in industrial or in office have either the ability to access capital right now at all, or the bes-in-class platform they need to actually execute.

Chris Ressa  13:49

Can they get it on the debt side, like if you’re a multifamily group and you have a billion dollars under management and you your large developer, you got a ton of equity in multi and you go and you want to buy, you know, a 400,000 square foot shopping center is your preferred lender gonna go hey, give everyone some context of how banks think is preferred lender gonna go hey, listen, I get it. You’re a commercial real estate you don’t multifamily, but this is different guys or they’re gonna go, Okay, we trust you.

Adam Ifshin  14:18

So the answer is if you’re, you know, Heinz, Brookfield, Starwood Blackstone, of course they are right. But for many others, I’m not quite sure that that answer would be yes. In fact, I’m fairly certain right now, given that banks are fundamentally constrained. That answer is more likely to be no than yes. Honestly, I think also, you can’t lose sight of the fact that our product type at the moment is the only place across the larger product types, not the Nishi kind of stuff, where you can get positive leverage, right where you can buy at a cap rate that’s higher than the face interest Straight on a 60 65% mortgage.

And that’s pretty important metrics right now, because particularly institutional capital has a need for current cashflow. And once you cannot borrow it positive leverage in multifamily or industrial, those become a drag on current cash in their multi strat portfolios. And they need current cash yield, because most of them are paying out to retirees and they need current cash. And they really there are not there are far fewer options for them to get it in real estate than there were three, four or five years ago.

Chris Ressa  15:41

So last question on this capital markets front. And because it’s it’s not the driver of our our presentation, but I think it is important to hit on what happens first. rates come down, or cap rates rise up?

Adam Ifshin  16:00

It’s it’s incredibly hard to predict. And to some degree, I’m agnostic. Again, I my view is now is the right time to acquire. And we are, we’ve got 210 million in the pipeline. Now we have a shadow pipeline, that’s probably two to 3x that we are absolutely have the belief that the fundamentals drive when the right time to buy is. And historically if you’ve bought in times when capital is constrained, and fundamentals were good, you get a double tail wind when you come out of that.

So I sort of am a little bit agnostic. I think cap rates are moderating already not for all of the product in our space. We’ve seen some very aggressive pricing for certain select buyers from certain select buyers. But by and large cap rates are moderating some from say their late 21. Early, early to mid 2022 lows. So clearly there’s been moderation there, there seems to be a narrowing of bid ask spread as certain groups really need to sell now their loans are coming due, their funds are ending etc.

I do expect interest rates will moderate here. I don’t think they will moderate as far as many people are wishfully thinking they will. And I think it will take longer than most people’s loan maturities afford them the flexibility to wait for loan maturities and fund life are really the two key drivers right now in in the sales market of getting a seller to be willing to execute on a sale at a market price.

Chris Ressa  17:43

Got it? Okay. Let’s go back to the fundamentals. And one of the things, I feel like we were one of the first ones really echoing the supply and demand that was going on for space and open air retail. And now it’s everywhere. Everyone’s talking about how there’s no space available, retailers can’t find space. And which is so ironic, given we thought we were gonna get this plethora of space back from all these stores that would close from a global pandemic. But I don’t think what’s talked about enough is what does that really mean long term? The fact that there’s no supply, and there’s all this demand, what does that really mean long term, especially that it doesn’t feel like we’re going to be in a place to build new construction anytime soon. What

Adam Ifshin  18:35

it means to turn a phrase from a famous gadfly in New York City, it means the rent is too damn low, Chris. That’s what it means. Rents are going in only one direction here over the next number of years in our space and that top. It’s not that there’s just been no more new construction in the last couple of years because construction prices rose so much coming out of the pandemic. We have under built for 15 years in our space. since the global financial crisis.

We have built less and less and less new retail GLA and guess what we needed to because between oh two, and oh eight, we built way too much. But now what’s happened we’ve under built really since Oh 909 10 Somewhere in there. We have produced less than we needed to just replace what was getting either demolished or undergoing a change in use away from retail to some other use medical apartments, industrial etc. So we have seen shrinking supply of GLA for 15 years, but during the cycle of when everyone thought that Amazon was going to put us in our retail partners out of business memo to file they didn’t along the way to that false narrative.

Right, we underdeveloped and underdeveloped and underdeveloped the financial markets inserted discipline. But we still had a lot of space coming back from over levered and obsolete retail concepts, once that got flushed out, and then we went to zero new construction as a result of the supply chain, and the increase in construction costs post pandemic, people woke up and goes, you know, if you under build for 15 years, you’re going to create a supply and demand imbalance. It’s just not the one that everyone thought Jeff Bezos was going to give us. It’s the inverse. So what does that mean? Notwithstanding all of that, under development, and all of that supply that was removed from the system, think about it, we’re closing on a $90 million acquisition in suburban Boston next week.

In that one sub market, where we are buying the best in class, in a power village, we saw 160,000 feet of former GLA get demolished and 300 apartments get built in that space. We saw a 70,000 square foot supermarket close and not get replaced by another retailer, it’s been turned into a self storage facility. And we saw 100,000 feet of big box space, a former department former one level discount department store get turned into a health of a large scale healthcare facility. So careful

Chris Ressa  21:33

health care’s retail healthcare. People know what I mean by that,

Adam Ifshin  21:39

But when but when it becomes a double A credit hospital system. That means that that space is not available for a value add retail on your retailer anymore, or retailers plural. So all this supply came out of the market. That’s just one example in one place where we’re buying an asset right now. But you could talk about that scenario across the country, as you well know.

So now you come to the scenario. And you look at where construction costs have moved so far, so fast. And as my former econ 101 Professor, who was a Marxist once told me, he said, Adam, prices are sticky downward, don’t assume they’re going to go down. And nobody should assume that construction prices are going to fall materially, because labor is the biggest component of it. And there’s still a shortage of fundamental shortage of construction labor in America. And it’s only getting worse, as many people age out and retire.

So that same deal we’re buying outside of Boston, we’re buying it like 40% of replacement cost in 2018, or 2019, it might have been 70, or 80% of replacement cost. So the gap that has to close to incentivize new construction and retail is actually still growing, not shrinking. And that gives me a lot of conviction that we’re going to be in a scenario where space is going to be very hard to come by and new development is not going to come charging back real fast.

Chris Ressa  23:16

Yeah, if we were once over stored we are certainly not I have been public on LinkedIn. I think we have too many digital stores actually and we’re over stored digitally and I think you’re going to see a I think you’ll see that come to roost at some point as well. They’re the

Adam Ifshin  23:32

Number the number of digitally native brands that are that have either basically run out of money or will run out of money is huge. I mean you look at even the big ones this is not about the little guys you look at somebody like you just look at they reported quarterly I guess a week or 10 days ago you look at what’s going on at peloton and the value destruction that’s gone on there and the real possibility that they could run out of cash in the not too distant future. is I think an example of what you’re talking

Chris Ressa  24:04

About one of the funny lines that hurt on peloton and not giving financial advice at all. Just thought it was a funny line was someone said peloton love to bike not the stock.

Adam Ifshin  24:18

If you’ve been if you’ve held the peloton stock it has not been I gather it has not been a pretty ride full disclosure I am not an owner nor have I ever been of peloton stock for exactly that reason. But if you look at it right, and we talked about this all the time. If you wanted to go build a new conventional 300,000 square foot power center or large grocery anchored center with some other large box anchors, and you are just looking at the site work soft costs vertical construction.

You’re in the 350 to $400 a foot range without material off sites and without much for the land. And if you look at that, and you say, Okay, I got a bill to interest rates, permanent, fixed rate mortgage on the other side is six and a half or seven, maybe I can sell it for seven or seven and a half Caf because it’s brand shiny new one, it’s finished. Gotta build that to a nine.

I mean, I don’t think that most of our box tenants are in a position to pay 32 to $36 in rent, and there’s only so much space, you can rent at 1000 or 2000 square feet at a clip in some multi tenant pads at the front where you might get 5060 $70. So I think we’re a long way away from the rents that are going to be required to justify a constraint capital markets, as you pointed out earlier, from incentivizing new construction and new development.

Chris Ressa  25:56

Very, very interesting. I want to move toward the next part, that’s really we hit home on this in our white paper. But it’s something that you’ve been investing in since your first property, which is you’re very, very, very open about the you focus on value retailers, and retailers that provide a value. And so can you talk a little bit about that thought process, because I would say value retailers now are very much in vogue, whether that’s Walmart, Target, TJ Maxx, Home Goods, Five Below whomever you might Ulta, but you’ve been very focused on value since before it was in vogue. And so can you talk about that?

Adam Ifshin  26:44

Sure. So it’s, you know, I like to say it’s not new for the moment of time, when I’ve said forever value is always in fashion. The American consumer is extraordinarily resilient. They love to consume, they love to shop, in all of its formats, or in person, online, you name it. But they always love a bargain.

And I think that’s more true than ever. I mean, you look at influencers on places like Instagram, YouTube, other forms of social media, and you look at fashion, you know, fashion influencers, and they may be highlighting that, you know, four figure five figure bag purse, or that, you know, very expensive fancy leather jacket or some, you know, specialty piece. And then at the same time that white t shirt they’re wearing is from Zara, h&m, Old Navy target.

And I think that there’s no stigma to value anymore. And you need to, you need to look absolutely no further than Doug McMillan’s comments on Walmart’s quarterly conference call this past week. For those of you who weren’t who didn’t catch it. WalMart reported a killer quarter. And there is no harder needle to move in retail than moving Walmart’s numbers. When you’re that big. It’s hard to move the numbers. But Walmart moved the numbers again last quarter.

And Doug pointed out, I thought, really interestingly, that where Walmart is gaining share of wallet is with the wealthiest consumers with the upper middle class and the highest end consumers in the markets that they serve, which is essentially every market in America. If you think about it, most people going into the quarter looking at Walmart’s numbers are like oh, the low end consumer is under pressure. Walmart’s gonna have a mediocre quarter. Well guess what? Why didn’t they have it? They had a great quarter. Not a good quarter. They had a great quarter. Why did they have a great quarter

Chris Ressa  28:56

I’m starting to see Walmart bags in my house. That’s why

Adam Ifshin  28:59

By the way, by the way, as you know I have three grandchildren including one that’s two weeks old. And guess what? Target Carter’s these are these are the places that you know these are the places that people shop. Like you know, the only thing that you know for sure in America is that if a small child is a to t now, they will not be a to t for long for sure.

And guess what? You don’t have you know, you don’t have to pay full price all the time and our value retailers in really good. They’re getting really good. Whether it’s a whether it’s a five below whether it’s Dollar General coming with pop shelf, whether it’s Dollar Tree, redoing redoing the Family Dollar brand, right, or it’s Target’s fashion offerings, Walmart appealing to a higher end customer. Look at TJ look at TJ

Chris Ressa  29:58

About how they brought, TJ brought an online retailer and Sierra to offline and they’ve exploded it.

Adam Ifshin  30:05

I think I think that what you’re seeing whether it’s the numbers that Walmart is putting up, whether it’s what Brian is doing a target, what the leadership team, the C suite is doing a TJ, one of the things that I don’t think retail real estate people think about enough is the quality of the merchant matters. And we are very, very fortunate right now, that for many of the value retailers, they are they really have top notch leadership teams that are deep, that are passionate, that are committed to providing value to the American consumer. And they’re good, they just keep doing a better and better job of it. i The Sierra thing. Look, TJ, TJ in the past has bought some concepts that didn’t work out. Right? We were big AJ, right, landlord, they bought AJ right, and they couldn’t make it work. Sierra, I think is going to be, you know, clearly, the the biggest driver right now of growth at TJ is HomeSense. But I think Sierra is going to ultimately, there could ultimately be more Sierra stores than HomeSense stores in America. It’s a great, great, great shop, the store is compelling. It’s a little bit smaller than its its competitors. And it’s a little less high end Nishi than its biggest competitors in the outdoor space. And that’s very on brand with TJ as a business. And I think they’ve I think they have the tiger by the tail there. As you know, you’ve done you did I guess you did their first store in a couple of different states. And we’ve recently bought a center that they just went in, and I can’t say enough about I think that Dell ultimately move sales per square foot there materially from where they are today.

Chris Ressa  32:00

One of the the times, you probably won’t even remember this, that I I realized how passionate and how core, the value retail component was to your investment thesis was. You might not even remember this, but we were talking about the Donald Trump Joe Biden election.

And I said to you like, aren’t you a bit concerned? From a personal financial perspective, if Joe Biden gets elected? And you said to me, and I don’t know if remember this, and you said, Chris, Joe Biden is going to put trillions of dollars in middle class Americans hands, I think that’s pretty good for my business. And I was really like, taken aback by that comment. And it really made me think about this whole value retail component of our business and glad to be a part of it,

Adam Ifshin  33:00

by the way, and we’re not going to turn this into a political podcast, we don’t have enough time, and I’m not sure we can take the heat. when good things happen to the American consumer, because the economy’s good, because the government is doing the right things to create an opportunity for every American to live a better life.

I believe that that benefits our business, our business, ultimately, a little bit indirectly. But ultimately, it’s about serving the American consumer. And if the American consumer is having a hard time that is ultimately going to negatively impact our business, if the American consumer is doing well, then if we run our business well, and we bet our merchants run their businesses, well, then we should benefit.

Chris Ressa  33:49

All right. So I guess the the other piece of this that we talk about is the suburban trend. Again, this is something we kind of caught the tailwind of because we have always focused on suburban, tertiary, secondary, and, you know, everyone has a different definition of what these words mean. And, you know, I, one of the lines I like is your friend Dan Hurwitz, when he says you don’t have to stand on the roof of a shopping center and see the ocean to make money.

And we have, you know, and a lot of a lot of people have focused on, you know, the top 25 MSAA is which is primarily coastal markets, Chicago, Texas, right, like essentially, and so, but we own in some places like Carbondale, Illinois, Ithaca, New York key New Hampshire, and there’s some markets we’ve done exceedingly well in right of Fayetteville, Arkansas, which maybe now is boom, it’s boomtown. So maybe that’s moving toward his absolutely Boomtown high growth areas.

But, you know, when we actually did the math that we saw how much over the century bonus, how much we’ve grown the NOI in those markets, you know, there’s this, there’s this thought by institutional capital that those markets are really challenging to get growth in from, and because they look at some population metrics. But we’ve seen real growth in these markets from an investment perspective. And we’re believer in the suburbs, secondary, tertiary, and we always have been since the early 90s. And now, some of that is the suburbs, maybe maybe not secondary, tertiary, as much we make a compelling argument why it should be, are very much in vogue now. And do you suspect that’s cyclical structural,

Adam Ifshin  35:56

What do you think? So there’s, there’s a lot to unpack here. So bear with me a little bit. But I think that, first of all, it starts with, you know, we went to these places with a value band. So we acquired, we acquired real estate at a fairly low dollar cost per square foot, because the rents were fairly low. But there’s a lot going on here. And I think the first the first part of that story is demographics.

The second part of that story is cost of living. And then the third part of the story is why that area has such a bright future. So, and a lot of this starts with millennials. So it’s well documented that many millennials, unlike prior generations, Gen X baby boomers delayed having children, household formation was delayed in America for roughly 15 or 20 years. household formation is a is a dump demographers term for getting married and having kids.

And historically, those two things were the driver of people moving from urban settings, to suburban settings. So that was delayed and millennials were very, very desirous of holding on to the lifestyle of the urban lifestyle,

Chris Ressa  37:10

walk to the restaurant and walk to

Adam Ifshin  37:13

The restaurant, you know, ease of convenience, have 42 different flavors of ethnic food delivered to your house without getting off of your couch. But long story short, in the last 25 years, if you look at the average two bedroom apartment in a major New York, Metro major American Metro, New York, Miami, Atlanta, Dallas, Chicago, San Francisco, Los Angeles, the average size of a two bedroom has shrunk from about 1000 or 1100 square feet to about 650 square feet. It’s a staggering reduction. So what does that mean?

That means that those millennials who are hanging out, stayed in the city, they had one baby put the baby in the second bedroom, it was okay. Now that baby is a toddler, maybe it’s getting ready to go to kindergarten, along comes a second baby, right. And all of a sudden, it’s really hard to have two small humans and two large humans in 650 square feet. And there was still a lot of millennials who are like, I’m a city dweller, I’m not moving. And then COVID came. And now you have two adults working, trying to balance their laptops on a bassinet, where there’s no place to put the bassinet on a floor.

And they’re taking turns. And there’s 4000 conversations and a crying baby and you’re in 650,650 feet. Guess what? Every all of a sudden was like, whoa, hey, maybe she’s I’m never gonna tell my parents, but maybe they were right. Maybe they were right. Like, what is this thing about a backyard, like, wait a minute, I can go in the garage and shut the door and do a conference call. That sounded awful a minute ago, but maybe not so much anymore. So what happened?

They raced to the suburbs, they flood the suburbs. And all of this pent up migration is released because of the pandemic. But unlike other migratory periods and household formation, there was a unique differentiator here, historic, which is if you move from that to bedroom in San Francisco or Manhattan to the suburbs, and you got a three or a two and a half percent mortgage, your household cost of living as a percentage of your disposable income may very well have gone down by moving to the suburbs. T

his has never happened before. Ever, ever, ever in America as far as I can tell. And I wrote my thesis in economic demography in migration. So all of the sudden, people move, they need all this stuff. That’s where all your pent up demand for furniture, Home Goods, appliances all came out of. But on top of it all, they get to the suburbs and go I’m not paying $7,000 a month for 650 feet. And lo and behold, the suburbs became really, really viable again. And we saw in migration to so many of these, these these suburban markets that we were already in or that we historically buy in. Now, then we get to more benefits that nobody, nobody saw, we saw coming a little bit, but I can’t take full credit for this, when they all moved, and they got those 3% mortgages, and then the Fed raised interest rates, guess what they liked, that their household cost of living is a smaller percentage of their disposable income.

So are they going to give up that 3% mortgage, that’s an asset? No, they’re holding on to that 3% mortgage, or that two and a half percent mortgage. So what happens? Now people want to move out, remote work comes, you don’t have to commute every day. But I can’t move to those first tier suburbs, because housing prices have gone way up, there’s no housing stock on the market, because everyone’s holding on to that house, because they have a 3% mortgage. So all the sudden, those people move another layer out to get to a lower cost house. But because I don’t have to commute 90 minutes every day to downtown San Francisco, downtown Washington, DC, downtown Chicago, I can be 90 minutes out if I only have to go to the office a couple of days a week or not at all.

So all of the sudden, that opened up all of these x urban markets. And we’re in a lot of those x urban markets right are where the Hudson Valley of New York, the far western suburbs of Chicago, Far North Dallas, you know, along the 121, and North, it opened up all of those markets, and people came into those markets, income levels rose dramatically.

And population grew in those markets. And then those markets had one more thing that we saw. Those are the markets where the B and C malls are the weakest. And on top of all of his new emigration, we were able to take tenants out of those malls, and bring box tenants who were in in those markets, to those markets, you’ve done it you and your team have done 122 box deals in the last five years.

How many of those were in those smaller markets where 10 years ago those retailers that I’m not going there, right, but it was the last whitespace and they’re like, Wow, I can make money here. You know, a market and X urban market that may have had a $65,000 average household income 10 years ago has 85 90,000 $100,000 average household incomes now, it’s a totally different world. And that same consumer, that the value retailers we just talked about are doing so well with that who’s moving there. And it’s been a home run, and it’s going to continue to be a home run.

Chris Ressa  42:57

Wow. All right. So we covered a lot we covered the financial market piece, we got into our presentation on the fundamentals of the property level, a specific on value retail, and the suburbs. What should people expect it to show here, Adam?

Adam Ifshin  43:19

I think that you’re going to see have a small err than sort of the old days. I think this is a show for professionals. And the 2526 27,000 people who are going to be here early this week, are here to do business, largely around those fundamentals. Obviously, there’s going to be less about financing, there’s going to be less about buying and selling than say in some of the frothiest years. But it’s going to be about fundamentals. Now, around those fundamentals. Here are some things I think, to watch out for.

I think smart tenants will come prepared to put rent numbers on the table to take space off the market. That’s number one. Because if you’re used to paying $15 A foot for your box space, and the market is saying you need to pay 17 or 18. Now, the smart tenants are going to say 17 and 18 to landlords like us because the next time we meet that number may be 20 or 22. And I think the smart tenants are going to move to secure pipeline for 2025 and 2026. Now, because the supply demand thing is not changing in two years, there’s no new construction.

You could drive tons of markets and see no dirt getting moved for single story retail. With a very small handful of someone could always come up with an exception. But the reality is, is that if you open the site today, you’re not delivering till 2026 Maybe 2027 depending on blackout dates. In all the other stuff. So if you think about that, if you’re a retailer, and you’re doing well, and the value retailers are all doing well, and you look at their stated plans, their announced plans of how many stores they want to add a year, I think the smart ones are going to come to the table and go, let’s take that space off the table right now. I think that’s the first thing. I think you’re going to continue to see clever and smart retailers go to smaller markets where their whitespace is, and figure it out.

Maybe the store is a little smaller. Maybe they’re they’re taking a little bit different piece of space. I think smart retailers, to me have always been ones who’ve been flexible, about footprint, and haven’t said everything’s got to be the prototype. And I think the smart retailers are going to be a little more aggressive about rent, maybe a lot more aggressive about rent, they are going to be more flexible about things like front edge and box shape and box size. And they are going to move fast that that would be my take. Awesome.

Chris Ressa  45:59

Well, everyone, I hope you got the chance to listen to this on your flight out or in the morning before the show starts. Really appreciate you tuning in. And Adam. Thanks for joining me this morning. Thanks for having me, Chris.

Adam Ifshin  46:13

Let’s go kill it.

Chris Ressa  46:14

All right, will do

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