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‘What’s in Store?’-Top 5 Reasons Retail Real Estate is More Valuable Than You Think

Karly Iacono Headshot
Episode #: 243
'What's in Store?'-Top 5 Reasons Retail Real Estate is More Valuable Than You Think

Guest: Karly Iacono
Topics: ICSC, retail real estate trend


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.

Iacono 0:18
Welcome, everyone, to ‘What’s In Store?’ with Karly and Chris. We are coming to you live from the Philadelphia Convention Center as part of the ICSC PA, NJ and Delaware conference. We are so pleased to be here and appreciate all of you in the studio audience.

Thanks for being a part of the show today. We have, we think, an incredible session today covering the top five reasons that retail real estate is more valuable than you think. So I think we should kick it off. Are you ready? Chris? How are you feeling?

Ressa 0:53
I’m doing great. How are you?

Iacono 0:54
Alright, I’m fired up, want to start a little dance or just get loose? Okay, all right, we’re gonna, we’ll save that for later. So we’re gonna go in reverse order, get excited. Number five reason retail real estate is more valuable than you think is flexibility. So I’ve already put this down into really three buckets when we’re talking about flexibility.

The first thing is that similar concept with similar concept, maybe an Arby’s becoming a Taco Bell. The second would be a new use, but very similar footprint, a bank becoming a QSR restaurant, for example. And then the third way retail real estate is flexible is a completely different use on the same site. So retail becoming self storage. So that was the the framework. What are your thoughts, Chris?

Ressa 1:45
Yeah, I think when people are looking like to invest in commercial real estate they are, you know, I think flexibility is not something people think about all too often. But as we’re going through these transitions with the office market right now, and other asset classes, I think flexibility is really important.

And, you know, retail, has proven time and time again, that it’s a super flexible asset class, we see retail properties all over the country that have been converted to self storage that have, you know, there’s been some that have converted to distribution facilities, there’s some that are been converted to, you know, I saw one that was demolished, and they put up a Life Science Center.

So I think the flexibility aspect is an intrinsic value that, you know, if you’re looking right now in office, everyone’s trying to figure out how to convert some of these, you know, ghost office buildings across the country, and they’re struggling from an investment perspective to figure out, you know, how to make it pencil, and retail has proven time and time again, that it can be converted in 10.

Pencil, not to mention the other buckets that he talked about, which are, you know, just, you know, when you’re releasing a space, you know, typically, it can take like an industrial building, you’re putting in another, you know, industrial flex potential flex tenant in, whereas retails, you know, you know, we have a lot of spaces in our own portfolio that have gone from retail to healthcare to a restaurant.

And I think that flexibility gets overlooked significantly and provides immense value if you’re trying to invest in retail real estate.

Iacono 3:24
And a lot of the reasons people invest in real estate, as opposed to other asset classes is security. So if you have sort of a backstop plan, if your current tenant doesn’t work out, or they use changes, it’s great to have that security to know that you can reuse that space with relative ease, right?

Again, think of that bang to QSR model completely different tenants. And who would have thought 10 years ago that bank branches would be disappearing like they are now with few exceptions. But those landlords are not in as tough a position as they wouldn’t be if it was a different asset class because it can easily be transitioned and repurpose. So, again, flexibility. I agree, our number five reason retail real estate is more valuable. We’ve got more.

Ressa 4:10
I’ve got one,

Iacono 4:11
I always has one.

Ressa 4:12
I think that, you know, when you’re running a performance, if you’re buying an asset, like there, you know, there’s no like flexibility score in Argus or something like that. But I think as markets are transitioning as fast as they are today, I think it’s something that has to be considered and is gonna start to be considered more in, you know, investment decisions going forward. So, flexibility is definitely one of the reasons I think retail is undervalued today.

Iacono 4:44
I think all of the office owners have learned that lesson and we’ll be considering it.

Ressa 4:48
Yeah, for sure.

Iacono 4:49
Right. Anything else a painful, painful lesson to learn for sure.

Ressa 4:53

Iacono 4:54
Our number four reason that retail real estate is more valuable than people realized is replacement costs. So CBRE put out some research showing that retail trades about 30 to 40% below replacement costs for grocery anchored center, that means you’re looking at a trade in 175 to 275 square feet per square foot range.

But it cost 300 to $500 a square foot to build new. I mean, those numbers are just speak for themselves. So very difficult to replace, and you have intrinsic value because of your structure, which you may not see to quite the same level and other asset classes. What have you seen in your own business? Chris?

Ressa 5:38
Yeah, I think, you know, we bought a center this year that, you know, depending, you know, I think, is somewhere in the 240 or $250 per square foot, we’re looking at other assets that are less than that today. And obviously, you know, we’re building, we’re building some things, you know, we’re developing, not entire shopping centers, but we’re developing some out parcels and pads, and they would be a lot easier to get done, if they were coming in at, you know, 200 $225 a foot to build these.

You know, development is getting harder than it’s been in a long time. And it’s cyclical, it’ll come back. But in the moment right now, the reality is that you’re able to buy properties significantly under replacement costs. And we’re, we’re all struggling right now. Because, you know, of the the reverse of interest rates and the reverse of cap rates, and trying to make deals work.

But the reality is, when you think about, you know, from a replacement cost perspective, you know, there’s a lot of deals that you might pass on it, if you look at it from a per pound basis of the replacement cost basis, it’s probably still a good deal. Tough to finance right now, but still probably a good deal. So I think it’s, you know, we talk about replacement costs a lot in the industry, everyone always talks about it. I don’t know that it’s driving.

It’s the driver in any decision. Right. But I think it’s, it’s a note today, because of the disparity in, in, in those replacement costs, and how much construction costs have risen. And I think when you start comparing it to other asset class, it starts to get really interesting. You know, I don’t know what the, it would cost to build a class A office building today from a per square foot basis.

And, you know, in suburban Philly, but, you know, it’s not cheap, right. And so I think with these rising construction costs, the reality is that we’re missing that these replaced, were able to buy below replacement costs.

And at the end of the day, there’s not a lot of places to develop either way, especially in these markets, right, you call it from, you know, DC to New York, there’s not a lot of development to be had. And if you’re able to buy below replacement costs, you know, you’re setting yourself up in a pretty good spot.

Iacono 8:05
And I’ll highlight one thing you said that, obviously, properties are extremely different, difficult to finance right now. So we are not tone deaf to what’s going on in capital markets. Of course, that’s my world day in and day out. So that’s a big challenge. What we’re talking about today is why the retail assets themselves have more value.

Not that the markets easy from a transactional perspective, but just that the underlying assets really have more value than most investors realize. And there’s multiple ways to look at it aside from just cap rate and cash flow, because of these things that we’re talking about that really all tie back to security and long term value of the investment, which is what people are looking for, with all the instability in the world, for sure.

All right, let’s move on to our number three reason that retail real estate is more valuable than you think. And this one you have probably guessed or heard before, and that is location. So Location, location, location, right? If you’re in real estate, you’ve probably said this or heard this 1000 times, but it is very, very much true.

And it is not true to the same level in any other asset class like it is in retail real estate, we have the visibility, we have the access, and we have sites that are the closest to the consumer, of any other type of property. So let’s walk through Chris, how your tenants are looking at these different pieces and why having a core location leads to longer stability of the asset.

Ressa 9:37
So what I think one of the things that I hold my, you know, hat on as relates to retail is the proximity to the consumer. Because not just businesses but industries have decided that they want to be closer to the consumer and think about the healthcare industry as an example. You know, 15 years ago healthcare made a decision they wanted to be closer to the consumer and Now, there’s an urgent care in every shopping center in America.

So I would say the health care industry executed flawlessly, on moving closer to the consumer, right, they wanted the very expensive route to get out of there very expensive real estate that was overnight stays and anything that wasn’t an overnight day they tried to get out of the hospital, and close to the consumers possible. I think the healthcare industry execute flawlessly.

There’s other industries that are trying to execute on this, I think fulfillment is one of them. And we’ve seen that from, you know, fulfill from store perspective, there’s also micro fulfillments that are happening. But I think the proximity to the consumer is something that, you know, retail, and retail landlords hadn’t really thought about nearly as much, you know, pre great financial crisis.

And now it’s, it’s a driver of industry. And I think, you know, that is the biggest one, obviously, retail locations are historically more visible and have better access than other asset classes. And there’s inherent value because of that, but I think the proximity of the consumer is, you know, pretty unbelievable, because it’s not going anywhere, you drive down the street, anywhere you’re driving, what you’re seeing is retail real estate, primarily.

And, you know, it’s typically, you know, it’s typically the closest real estate to the homes where people live. And that’s where businesses are trying to get to.

Iacono 11:26
So the stuff that I love that we just put out is that 83% of all grocery online order fulfillment is coming from a bricks and mortar retail store. So of course, you have the perishable element of grocery, but I think that that shows you how important that proximity really is, from a cost perspective to the tenants, you can build industrial, or you can ship things, but those are all additional time and cost factors.

So the physical store locations are handling a lot of these order fulfillment, and they’ve become a very important piece of the puzzle because of where they’re located within local communities. And that to your point is, is not going anywhere. Right. That’s irreplaceable. From a proximity perspective.

Ressa 12:14
Yeah, I think, you know, we’ve talked about in real estate all time, location, location, location. But, you know, when you look at all the asset classes, generally speaking, it’s hard to argue that as a high level retails, not a better location than any other asset class.

Iacono 12:32
Now, maybe if drones come in and start doing all the deliveries, in a few years, we’ll have a different answer to this question.

Ressa 12:38
I don’t know if that’ll be the case, because the second door that would be from some industrial place somewhere further away,

Iacono 12:45
The shorter drone flight,

Ressa 12:46
There’s a shorter drone flight.

Iacono 12:48
Either way, you win. All right. Either way, retail for the wind, there we go. That’s the name of this session, we’re renaming it. Alright, let’s move on to our number two reason that retail is more valuable than you think. And that is weighted average lease terms or waltz and credit. So let’s break these down a little bit. Retail is one of the only asset classes that offers such a wide selection of investment grade credit tenants.

And our lease terms are obviously completely different than what you’d be looking at in multifamily. And oftentimes, in industrial where you have a lot of owner users, it’s a different landscape as well, not to say there aren’t credit tenants there. But overall, the scale of the industry, and the number of credit tenants that we have on our properties is unmatched. So I think that gets overlooked from a stability perspective.

And I’ll just throw out one, one more little nugget one stat for you, before I turn it over to Chris, s&p came out with updated research like they do every month, August 14, so just a few weeks ago, and the median default risk for all retailers tracked by SNP decreased to 2.3%. So from July to August, it went from 2.4 to 2.3%, median default risk that is incredibly low, especially given all of these economic pressures that we have going on elsewhere.

So if you take that, just take a minute, right and think about how stable and strong these companies are. I think that really puts a different slant on retail. Now we’re not talking about the the mom and pop dress shops, right. That’s a slightly different story. But I think as a whole as a category, we have a tremendous number of very, very strong tightening credit.

Ressa 14:44
Yeah, I mean, you would, you know, even if you took like Office and take like an office building and you know, you’ve got 30,000 feet to some, let’s call it high profile law firm that’s credit worthy. but it’s not the same as some public entity, you know, like a Starbucks, right? That you’re getting in a when you’re buying a retail asset. So I think the credit worthiness gets, you know, it gets, you know, it gets overlooked because of the past.

And the durability of the casual gets overlooked from all the ecommerce headwinds that we once face that I think are now the tailwinds no longer the headwinds, I think, for a long time, retail was, you know, everyone was flocking to retail in the, you know, the 80s and 90s, because of that credit and the stability of those cash flows. And then that got put under pressure from ecommerce.

And that narrative is now shifted. And, but I don’t think it’s been recognized nearly enough. And the valuations are properties that that the narrative has shifted. And then when it comes to Walt, I think, you know, if you went, if we went through our portfolio, we if we wanted to, you know, lower the rent a little bit and, you know, do a bunch of Glendon extends and extend lease term from anchors, we can do that tomorrow, there are certain cases that we might do that.

But you know, when you do that, obviously, you’re lowering cash flow, and you’re, you’re missing out on upside. And so there’s a little bit of risk in what will be in five years, but retailers are believing there’s, you know, that they’re better off making, fixing their occupancy costs today, and extending longer. Because they don’t know where the next location will be.

Because, you know, we’ll talk about in our number one, but you know, the supply constraint, and they don’t know if their next location is available, if it’ll be, they’ll be able to build out a store for that. So they need to preserve their locations. I’ve never seen a place where retailers are fighting so hard to preserve their existing locations. You know, and I mentioned this in past episodes, but in Vegas, you know, every year I’m like, sitting there at the ICSC.

And like, It’s undoubtedly someone comes to the booth is like, Hey, Chris, you know, we haven’t announced yet, but we’re closing 100 stores, and your landlord and 10 locations, we’re probably going to close four. But if you keep our rent debt, you know, $0, for the next 20 years, will will stay. And I got zero, those retailers coming to our booth this year. And so I think that’s pretty. One I think that’s historic.

And two, I think it’s pretty indicative of the market we’re in today and the strength of retail properties. In fact, it’s just the opposite. Retailers are doing whatever they can to extend term. You know, this year, I’ve never had more retailers come to us and say, you know, would you be interested, you know, in extending our term longer, and, you know, you know, trying to do a blend and extend or cut or break on the rent.

Which is, it’s, it’s not about that they can’t afford the rent today, it’s about they’re trying to lock up the location for as long as time as possible. And I think it’s so interesting when it comes to walk, because the narrative in COVID, was that retail leases, were going to be so much more flexible towards the tenant. And we were going to have all these short term leases.

And what’s come out is, in general, right, and there’s gonna be all these percentage rent deals, and what’s come out of it is really, the really strong retailers are like, I don’t want to give landlords the upside, I’d rather unblocking as long of term as possible for as fixed rates and possibly can, I don’t want a percentage deal where I have to give the landlord all my upside.

And so while there’s, uh, there could be a tough negotiation on what the economics of a deal might be. I think it’s, you know, really, you know, it’s really good for the real estate that these retailers want to sign up for as long a term as they actually do. And so I think when

Iacono 19:11
That happens, I have a follow up question there. Are you seeing these longer terms on the initial leases or just tenants not coming and saying, we’re not going to renew, we’re going to exercise our option, or using the initial lease terms for new tenants coming into centers being longer than they were pre COVID. Let’s throw COVID out. That was a weird few years.

Ressa 19:30
So I think in our portfolio, I think in general, you know, majority of the new deals that you’re doing are in the tenure world. However, if you’re doing like, if you’re investing a lot of capital, retailers are certainly willing to go longer. You know, we’ve done some anchor deals where they’re 15 and 20 year deals, whether they’re grocery or some others, where they might have tried to push for a 10 year return them previously, now they’re offering up more term for that.

Iacono 20:06
And that was a stark reversal of,

Ressa 20:08
I think so

Iacono 20:09
We talked about frequently, right? new projects coming out of the dirt with 10 year terms instead of 15, or 20. And I’ve seen that reverse,

Ressa 20:18
I’m actually seeing a lot of landlords and peers who were like, trying not to give as much term as they could, because they’re trying to capture the upside. So they don’t want to be locked into a fixed rent for longer than they, because they don’t know what market rent will be. But there’s an assumption it’s going to be higher in the future.

Iacono 20:37
You almost want some of those tenants to come to you during ICSC the booths and say, you know, well, okay, great conversations will buy or buy out your leases? No, probably not. But if there’s a really good space, you might, you might, one more thing I want to touch on before we move toward number one is this look at credit. So we started with this, and we were talking about the s&p rated companies.

But a layer below that, in terms of the credit spectrum, we’re seeing a lot of consolidation, which I think improves typically the credit of your tenant. So in the fast food world, the large franchisees are buying up whatever small franchisees still exist with lightning speed, right? So you might own an investment property that had a five unit guarantee. And now it was just bought by Carol’s and you have 1000 unit guarantee right?

Huge, huge shift. So we’re seeing a consolidation in the retail world of tenants in the main categories, which is improving the credit, although not publicly rated credit, but improving the strength of the tenants, as well. And I think that’s an important trend.

We have the the whole all D merger that was just announced. I mean, that’s a that’s a big shift, or, I guess, acquisition that will improve the credit of those centers in the southeast as well. So I think it’s not just that we have publicly rated companies that we’re tracking, but that the movement is going to stronger and stronger companies and away from smaller business, like it or not, across investments. Would you agree that

Ressa 22:14
I’ll touch on this on the last one. Okay.

Iacono 22:17
Hold that thought he’s really excited to get to number one. Okay, here we go. The number one reason that retail real estate is more valuable than we all think, is supply and demand in balance. Now, there are a lot of ways that you can look at this, and we are not taking this off talking about the markets, buyers and sellers.

So I will touch on that. This, this point is really more of why it’s a great time to be a retail landlord, in my mind, and what it looks like from the tenant landlord perspective right now in terms of supply and demand. So since you were on the landlord space, how is this supply and demand imbalance been for you?

Ressa 22:59
It’s been, you know, we’ve had, I think, in all the Republic reads are showing they’ve had records leasing years, the past, you know, two or three years. And I think right now there is a lack of supply. And you mentioned the point where like large franchisees are trying to buy smaller franchises, it’s because buying someone else’s a path to growth, where it is very hard to go location by location and try to open up stores.

At the end of the day, there’s not enough locations for them to open up. So the only way they can grow is they have to have some acquisition in their mix. Yeah, we’ve we’ve never had more opportunities where we have multiple tenants of interest in one space, I think, you know, until this year, and there’s some bankruptcy folks in the in the audience here. But until this year, we haven’t had any bankruptcies of note, right.

And the one thing that puts supply on the market faster than anything is mass store closures. When our industry doesn’t have mass store closures, and you have the creep of new store openings. Vacancy gets gobbled up faster than people realize you you turn your head and vacancies gone. And today, you know, at the end of the day that there’s more retailers looking for space than there is space available.

There’s certainly, you know, really, really tough and challenging properties that aren’t least but in general majority of the properties are well, least if you look at just the occupancy of the public companies as a proxy, it’s pretty remarkable how much occupancy is moved, especially when you had this period of COVID where all these stores closed and some didn’t reopen and people thought it was going to be you know, rental real estate was gonna be vacant forever.

And it turned out to be just the opposite of that. And, you know, I’ve been shocked at the Used by how much demand there is for space. You know, I had the good fortune, as you know, I went to the, to get an experience, I went to the Bed Bath and Beyond bankruptcy auction.

And, you know, it was incredible to just to see the amount of retailers and, and landlords who were bidding on leases, because, you know, there was no other available space, and they didn’t want that to, you know, go back and, you know, triple digit leases got souls, which I thought was pretty remarkable given, you know, the scale of that bankruptcy.

So and the fact, you know, a lot of those leases didn’t have 10 years of lease term, which most retailers would want, if they were gonna pay at least some of those leases were above market rents, and they still got sold. So demand is still regarded, you know, notwithstanding market conditions, demand is still high, it is tough to make deals, pencils, the economics of deals are challenged, primarily driven by construction costs.

And the capital that either side has to put into a deal. But the demand for space is there. And the reason I think this, you know, when we talk about why is this, why is it more valuable than people think I challenge anyone to think of a time when demand was so high for space. So the tenant, the underlying credit, the asset, the asset prices were coming down.

So price of shopping centers and real estates coming down. And yet, the demand for the credit for the underlying space that supports those values is higher than it’s ever been. And that, to me is pretty remarkable. And makes it really interesting time to buy.

Iacono 26:47
We have a few more minutes. So I want to dive into some more of the specifics of some of these bankruptcy filings that you mentioned. Because I think they’re absolutely fascinating. You had shared with me the lease in Winter Park, Florida for Bed Bath and Beyond that went for was at 1.8 million

Ressa 27:05
It was like, I was less than 1.3 or something like that. But it was

Iacono 27:09
A believable amount of money to buy an existing space that was not even that long term. So I think, of course, that wasn’t the story in every market in every store. But the fervor that that bankruptcy cause still amazes me to this day.

Ressa 27:25
It was pretty, it was pretty crazy sitting there and, and watching these retailers, you know, bid up these leases, because they had to pay when you buy if to pay the debt rent, then if we were doing a deal with the tenant, they would have to, you know, there would probably be some landlord contribution, there was no landlord contribution from the catback side. It was pretty wild.

Iacono 27:48
Do you think this is a crystal ball question? So may not be fair, but do you think we’re gonna see that sort of competition? Should writing move forward with a bankruptcy filing different types of real estate? But they’ve got some core locations as well? Who do you think would be bidding? And do you think we’d see the same level of competition?

Ressa 28:10
So I think it’s gonna be a little different? Because I think, I think, I don’t know. We’ve got bankruptcy earlier, I think, right? It’s gonna come out, I don’t, but I think right, it’s, I don’t think right, it’s gonna go away. So, but I, you know, but they’re gonna I think, you know, if you look at the reason that they’re filing, right, it’s really this really wild circumstance that isn’t really core to their business.

But really put them, you know, a lot of pressure on them to to restructure, they’re going to take the opportunity, I’m sure to dispose of some, you know, poor leases, but I think it’s going to be a little bit of a different scenario than the others. One, they have a lot more stores than a lot of these other groups.

But the one interesting thing is they are, you know, typically unbelievable locations. Right, right on corners and whatnot. So we’ll see, I think this is a that’s a very unusual case, given the circumstances that forced them, you know, right. So look at this.

Iacono 29:23
More to unfold on that limb for sure. So a few more points on the supply demand, just to put some numbers to it. So the average availability across the US right now is 4.8%, which is the lowest availability rate we’ve had since 2005, when CBRE began tracking the metric, so I mean, that to me is still amazing.

And you can break that down between suburban availability, High Street, single tenant, multi tenant, like there’s a lot of subgroups, but that’s the national number across all these different buckets.

So to have the lowest vacancy we’ve ever had have construction costs. It’s just all time highs, I think they’re coming down a little, but still really, really difficult to make it pencil, like you mentioned, have tenants who are healthy, and trying to expand if they can find space, I think this speaks very well for the assets themselves coming through the period of economic challenge.

Now, I will say to shift gears because you know, we’ve got to be realistic to the capital markets are a different story, very, very difficult from supply and demand. But that’s simply a factor of the fact that financing is just not accretive to those purchases right now. So we have negative leverage, we have very strict loan covenants, extremely difficult to get assets, finance.

So it’s not the lack of interest or demand for retail real estate from the investor perspective. In fact, it’s quite the opposite. It’s this, in my opinion, sort of artificial challenge that we have right now with monetary policy that’s causing the market to freeze. So I had to throw that in, right, because we’re talking about retail real estate overall. But I think the if you can get them and you can make the assets pencil, they’ve never been stronger.

And there’s a lot of factors that are pointing to that continuing to be the case over time. And the last thing I’ll touch on from the investment standpoint, this is historically been a private client space with some REITs, but not to the level that we see in other asset classes, we’re seeing it become more institutionalized. And it hasn’t hit yet, right? So there’s still opportunity from the supply demand of the market perspective.

But it’s coming. So we’re starting to get calls from funds and groups who have only bought multifamily or industrial, they only wanted that secure real estate, which is how they look at it right. And now they’re calling cash, you know, I think we probably should invest in retail, it’s doing really well. What does this look like? How do we scale? How do we buy something right now? And what do we do with all these five, six cap deals on the market.

So again, no one’s really sure how to make it pencil, but the attention and the focus on the asset class is there. So when things balance back out, I think it’s going to be a whole different work. Which could be bad for you as a landlord from a position standpoint so far now. Right now, the competition, I think will be will be increasing.

So those are all the reasons we think retail real estate is more valuable than you think with some challenges sprinkled in at the end, we would love to share more content, but we’d like to open it up to questions. So if anyone has questions, they will come around with the microphone, feel free to stand up.

And while we’re waiting for that, for her to get to those of you with questions, I did want to let you know where our podcast will be airing. So what’s in store goes out on both of our respective podcast channels. Mine is CRE Fast Five, which is on YouTube, Spotify, Apple, everywhere, you might want to consume content, so definitely check it out and subscribe.

Ressa 33:02
Ours is Retail Retold, same thing. Apple, iTunes, Spotify, Amazon, all the places where you might listen to a podcast.

Iacono 33:12
So definitely subscribe, comment, and feel free to reach out to either of us with content, ideas, guests, anything that you might be interested to hear us cover moving forward. All right.

Audience Member 1 33:27
Hi, guys, thanks for sharing your thoughts today. I was curious to hear your thoughts on how, you know retailers are pursuing and omnipresent model now. Do you see retail landlords recognizing that? And then, you know, looking to invest in distribution space? And if so, what’s the optimal footprint for that?

Ressa 33:55
So I think this is still being worked on right now. Because, you know, there’s, there’s a bunch of different models that are out there. But at the end of the day, the retailers want to control their own distribution. So there’s been talk of like a landlord, like creating like a separate space where all the retailers can share. But a lot of the national brand retailers don’t want to share right?

Target already ships 95% from store, they don’t want or need the landlord’s help on how to fulfill from store. So I think that’s still being worked on. I think the landlords, you know, have talked about how do we create space so that there’s additional space so that that can get that is just for distribution?

I think what by and large that we’re seeing that’s because of the sharing because of the cost. What we’re seeing is retailers are just trying to figure out how to do that from store and many retailers have become are super successful about fulfilling from store.

Iacono 35:04
I’ll just add quickly that ecommerce is becoming a smaller percentage of overall retail sales. So we obviously had a huge spike in the pandemic, off the charts growth in E commerce for clear reasons. And that’s been declining steadily. So we’ll see when it levels out, but ecommerce is still a declining percentage of overall retail sales.

Ressa 35:27
But, but for whatever it’s worth, I thought, like, you know, in early 2020, I thought there was gonna be these massive distribution, you know, hubs in retail properties. And my mindset on that has definitely shifted, like I’ve shifted, I met with a lot of the large format, micro fulfillment players out there.

And my tune has shifted, because the retailers are super sophisticated, and they figured out how to do it from their four walls, and manage the inventory. And I think that’s what they’re leaning toward in their whole supply chain is how to do that rather than try to get, you know, additional space from landlord and share it with or other retailers.

Iacono 36:13
Thanks, thank you. Any more questions on the other seven?

Audience Member 2 36:32
So the buzzword earlier was flexibility. And one thing that I’ve definitely noticed, right, from a broker side and thinking outside the box, and how to repurpose some of these traditional retail spaces, and you know, incorporating medical.

So what is your take, and as a lot of these national retailers have restrictions, exclusives in leases 20 some odd years ago, and now we run into this roadblock of, we just want to bring in a medical tenant that might not be you know, plasma are some things that are sensitive, but now you have the staples, or Boskalis, or some, you know, anchor tenant that has just medical, you know, encompassing this use restriction.

What are things that you’re doing, I guess, from the landlord side, to be able to kind of overcome this so that way you can be flexible with new tenants coming in.

Ressa 37:32
So a while ago, I like dug myself to see who the chief waiver officer is, though, to see oh, so where in any given year, we’re gonna go to major national retailers and get about 100 waivers a year to allow for prohibited uses. Whether that’s a fitness use a restaurant, a healthcare facility. And by and large, I think retailers have become a lot more receptive to those uses. You know, there was a time when, when they were concerned for a variety of reasons.

And I’ll never forget, I had a 30,000 foot national health care facility in Connecticut that was going next to some major retailers. And this was like in 2012. And the retailer two concerns one, sick people don’t shop and two parking. And this was a health care system, not like just some urgent care.

So large system that wanted the space and they wanted to get on the phone with the retailer typically wouldn’t do that. After nine months, we let him on the phone. And she was like, you know, what are your challenges mister retailer, and the retailer told them? And she goes, Great. I agree. So people don’t shop, but my consumers healthier than yours. What’s your next question?

And the the person said, you know, the parking and she agreed to valet customers if parking gotten to a certain place where it was inhibiting their sales, and it never did. So I think, you know, and that was 2012. That was hard to nine months to get that retailer the Consent. Today. It doesn’t take that long.

There could be a cost, you know, there could be a cost, but I think they’re challenging and they take time. But we’re getting through a lot of the waivers and I think the industry is getting through a lot of the waivers. You know, my biggest advice is when the renewal comes up, clean up the lease.

Iacono 39:34
That’s a great question. Thank you for asking, are used to just quick follow up to his question because that was very interesting. Is it usually a financial trade off or an extra option like what are you offering an exchange ever since you’re the king of what I just learned

Ressa 39:50
What one of my leasing guys is here today so he knows all about waivers all too much. He’s sitting right there but like don’t say have, you know, I’d rather not? I’ll tell them, we have to get waivers coming pass on this deal. I’d rather not have to go get the waiver. But sometimes there’s a financial trade off. And we would just look at that as a cost to doing the deal. No different than replacing the HVAC, and if it pencils,

Bennett pencils, there’s obviously you don’t want to set precedents. But I think, in general, retailers have come a long way in working with landlords on this. I think, in general, this is better for for, you know, for properties, and they know it’s better than having vacancy. You know, we there are, there are numerous scenarios where I can tell you a gazillion there were literally probably, you know, weren’t triple digit waivers a year.

So it’s a big, the challenge is time, you know, our attorneys will tell you now, every lease is not one lease, it’s five leases, because you need four waivers. And those are not really just waivers, they turned into amendments to the lease. And that’s the real challenge. And it’s not just use, right where everyone’s in the you mentioned flexibility. Everyone’s in redeveloping. So we’re, you know, we just, we just are building a Starbucks on a pad.

And it wasn’t, there wasn’t a use restriction. But we were in a no build. So we had to go get two waivers for no build to build a Starbucks in a place on the property where there’s no human beings ever inhabiting that, you know, to ever trafficking, that part of the property, but you still have to go do it. So there was a cost to that one. But we just got it done. Right, John? Just got it done.

Audience Member 3 41:45
So acres, and currently, Tom Honor from Stark and stark, and also the marketplace director here. Thanks again, for agreeing to do this. This has been great. The title of your presentation, and the podcast is what’s in store? So the obvious question I have is in terms of new tenant concepts, what’s in store for us over the next two or three years that you’re kind of seeing now? Not necessarily specific names, but what new concepts do you see that are going to be kind of hot for everything,

Iacono 42:16
Do not say pickleball, I’m dying to say Pickleball. I’m hitting it. So

Ressa 42:21
I held off for my backup.

So I always say like, and I learned this in like the great financial crisis, like, look at the industries that want to be close to the consumer, and they’re your next concept. So who ever wants to be close to the consumer? I think health care is like, the best example of this. Right? When they said that they wanted to get the, you know, the people, the real estate that wasn’t overnight stays out of the hospital. And they they execute flawlessly.

Now, they’re pretty good for landlords, because you know, they pay market or sometimes above market rents, they’re good credit. And so you might have to get a waiver to get them in a retail center. But I think the first thing I would say is what, who wants to get closer to the consumer, I think is the if you’re looking at any trend, who wants to be close to the consumer, like that’s integral to their business, they’re gonna end up in shopping centers.

That’s undoubtedly the case. As a specific, you know, Carly mentioned pickleball, I think. I think the right now, that’s the one that everyone’s talking about that we’re going to have all these pickleball facilities, which I think is really interesting. We’ve talked to a bunch Jon’s pitching me on one right now, literally, literally, that we have to do this in one of our centers. But I think it’s informative as to it’s not about pickleball.

To me, what it’s about is how these new industries evolve. And they get to market so quickly, which wasn’t the case years ago. So I don’t know who the next is. I know who comes to the whoever wants to be closer to the consumer is going to come knocking on retail. That’s it.

Audience Member 4 44:15
We have a question. Although, currently, you’d mentioned in one of the five items, location, location, location. And then the second and third tier retail markets, which I developed. As many of you know, the malls are becoming really empty, really vacant, moving into power centers, retail power centers that I also build.

But I wanted to get your perspective and perspective from Carly Inc. For us, because where the malls are located, I think you’ll agree. They’re great locations, many of them. So what’s going to happen to the malls? Are they going to be redeveloped? Are they going to be torn down?

And also, if you can share with us, if the REITs are the primary owners of those malls? Do you find that the REITs? are the ones that are aggressively going after the power shopping centers? And getting into other investments and getting away from malls? Or what do you do? Is there a happy ending coming forward for the malls?

Iacono 45:41
There’s so many good questions in that one question that everybody just get comfortable in another, another 30 minutes? No, I’m just kidding. But, but those are great follow ups. Thank you for bringing them up. The first one, and we didn’t talk about this. And we talked about locations. I’m so glad you asked this question is the secondary and tertiary markets. And the population shift has been amazing.

So there’s vacancy rates that I mentioned, if you dig into them even further, the vacancy is decreasing faster, decreasing faster. I mean, we have more occupancy in tertiary markets than in what used to be considered our core markets or urban markets, not to say high street retail is dead.

But we’re definitely seeing a huge focus on secondary and tertiary markets, and more demand, from reads and from institutional players who are typically much more risk adverse for markets that we never thought they would go to. So I think if you’re developing in the secondary and tertiary markets, that’s a great place to be right now. And I’m sure you’re seeing that with your tenant demand as well.

We’re seeing tenants also who are really they’re changing their footprint. And we talked about this. Just recently, Chris and I about how retailers are changing their store prototypes, or changing their square footage, the layout, whatever it might be to meet a specific market or meet an existing space. So we’re seeing tenants who wouldn’t have gone into certain areas be flexible, to get to those secondary and tertiary markets to the next thing on location.

It’s, it’s not necessarily just demographics, you also have to think about the location within that market. So it could be a very sparse market. But if you’re at the main signalized intersection, your tenant could absolutely crush it. That can be an extremely successful restaurants store, Target, whatever it is, if you’re at that main and main location within a less core location.

So I think there’s a lot of different ways we could break that down. And then the last thing I’ll touch on before kicking it over to you on the Mall question. That’s a complex question, what happens with malls, that’s why I joke that we could sit here for 30 minutes because it’s it’s very asset specific. Some malls, your a class malls, great locations are doing better than they’ve ever done highest sales per square foot than they’ve had historically, ever.

And then we have our class B, class C malls that are really struggling for the enclosed malls, because we’ve seen a big shift to open air. So I think some malls just aren’t going to make it they’re going to have to be redeveloped in that class C world.

And those tenants are likely a lot of them going to want to stay in the market, but in an open air power center format, which is causing such competition for space for the centers, that DLC and Chris’s company own and other you know, open air retailers like Tengger and outlet malls and anybody who has that more, I guess, in demand space format than the enclosed Mall. You’re gonna jump in?

Ressa 48:44
Sure. So I think a lot of the REITs have, you know, they’ve gotten out of a lot of the sea mall market. So, you know, they they’ve disposed, they’ve sold, they, you know, some have given back to a bank. A lot of those see vaults, so there’s a lot more private ownership on a lot of those than there was, I think, you know, to your one question is the mall REITs are the mall REITs and some of the malls they own are unbelievable.

You know, I don’t see them necessarily coming into the open air world to own that power center. You know, they really made a huge push to get out of that, you know, Simon spun off all their open air stuff to Washington prime. In that, you know, in the Brookfield venture, you know, GGP was taken private. I’m not sure they’re getting into the open air, retail space and owning that power center.

I think they’re focused on their malls that are the most productive and making them more productive. And they do a really good job of that and I think that’s where their focus. Again, that’s just spec you Asia, but that’s if you’re looking at what’s transpired and how they’re operating. That’s my take of it.

When I think about the markets that you mentioned, I think secondary tertiary markets are great, you know, oftentimes would probably rather own the A asset in the, in the secondary or tertiary market than the D asset in that core market.

So I think they’re great, especially when there’s macro economic drivers behind them, you know, we we own in places like Ithaca, New York and Lexington, Kentucky, which are phenomenal markets, but often overlooked by major institutions, because of their secondary and tertiary non coastal or gateway cities.

You know, I see what you’re talking about from the retailers that are going from mall to open air, you know, we’ve been a beneficiary that, you know, over the last 18 months, we’ve made our first buckled deals as a historic mall, tenant, made deal, multiple deals with Bath and Bodyworks and Kay Jewelers, who historically have not been in our centers, and these are productive retailers coming out of malls.

So we’re seeing that trend, but they’re typically not in a mall. It’s typically a mall that’s, you know, kind of lost its way. And then finally, what do I think happens to them? I have no idea. You’re seeing them be redeveloped all the time. Self Storage, industrial multifamily. Who knows? As you mentioned, it’s good dirt. Once economics work themselves out as the highest and best use will be put on that property.

Introducer 51:34
Awesome. Well, thank you both, all of you join me in thanking them for coming today.

Ressa 51:42
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 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

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