Top 5 Retail Real Estate Predictions for 2024
Guest: Karly Iacono
Topics: 2024 predictions, sustainability, retail real estate trends
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.
Welcome, everybody to ‘What’s In Store’ with Karly and Chris, the show where we cover hot topics at the cross section of retail and real estate. I’m Karly Iacono. And I’m joined by my co-host, Chris Ressa. Chris, Happy Holidays. How are you? Great to see you.
Happy holidays. Great to see you too.
We are closing out 23 and looking forward to an exciting 24, and today we’re going to cover our top five predictions for 2024 in retail real estate. But before we do, have you finished your Christmas shopping? How are the holidays looking for you?
Christmas shopping, so my wife instituted something where we’re done Christmas shopping by Thanksgiving.
Wow. That’s the earliest I’ve heard. Why?
So I tell you, all the presents are wrapped by Thanksgiving.
That’s absolutely crazy.
So in October on Halloween, I’m getting hammered about like what are we getting Pete, what are we getting Elizabeth? And I’m like, but it works. Thanksgiving. We’re all thought so good.
What do you all December then? I mean, caroling and Christmas parties? I mean, that is the bulk of what most people do in December is stress about presents shop and wrapping. So what are you doing for the holidays?
Photos, okay, we go to see the Polar Express with the kids, which I like. I got one for you. Any goals for 2024? Like, anything interesting?
I don’t know that I have a list I’m ready to go public with but yes, I always have a list of goals for the next year. Do you have a list you’re ready to share?
Well, one of the things I try to do every year is, outside of goals, I try to get better at one skill every year. And so one year I took copywriting, one year voice coach, now I’m thinking about memory, thinking about the real life Wendy Rhodes, which is you know, just how to continually get better when the pressure is on the line and operating under those moments. So anyway, I encourage anyone out there to think about, everyone gets focused on goals.
You go on any social media, everyone’s talking about goals, goals, goals, goals, goals. One of the things that people don’t talk about is like, is there a skill I can just get better at, just one skill? Maybe it’s pickleball? I don’t know. But is there a skill that you want to get better at? And so I try to always come up with one skill to improve that.
Absolutely love that. I’m gonna steal it and work on it this week. There you go. Yeah. Okay, we’ll circle back to this. It’s fantastic. All right, we are actually going to talk about real estate today as well, if we need to. Because we have a lot of good content to cover. So I think we need to jump in to our top five retail real estate projections for 2024. And we’re going to do these, like usual in reverse order, starting with number five. Are you ready?
That was a drumroll, if you can hear it. Got it. Number five is the suburbs are going to dominate in 2024. So tell me why I’ve got some, of course some great data for you. But you tell me anecdotally why you think the suburbs are going to continue to be our strongest markets.
So I think first off, cities are fine. Urban environments are fine. Urban, it has been a darling for a while. And I think suburbs are coming back in the you know, in the 60s and 70s everyone wanted to move out of the cities and move to the suburbs, to family house. I mean, a two car garage, house, backyard. That’s coming back. And I think now it’s a bit. People are a bit, you know, trapped in 3% mortgages that will never be here again and everyone before they make a move and they’re looking at the new payment they have to make to buy a similar home. And it’s dramatically different.
This is forcing people to stay where they are. And then if you look at migratory trends where people are moving to they talk about the MSA is these are the suburbs that are exploding we when when we’re looking at you know buying in some of these markets that we’re buying in the suburbs continue to be this place where people are migrating to.
You throw in work from home, where now, if my office is in the city, well, I can work, I know people now who are working like two, three hours away from where their offices are because they only have to go in two days a week or three days a week. And they’re like, after two days, I’ll make a crazy commute. But the rest of the time I’m home, you know, this excerpt suburb thing was a lot harder, people were very focused on like, commute, commute, commute, commute.
And now, it’s a little less frightening to have a longer commute in a hybrid environment, this keeping people in the suburbs is driving traffic to properties and suburbs. And I believe people are going to continue to want to live in the suburbs, you know, everyone wants a backyard, a two car garage.
And, you know, there’s obviously the people who want to be able to wake up and walk to 47 restaurants in 30 seconds. That number was just so much higher compared to the two car garage desires five years ago, and they’re starting to get a balance. And I think the suburbs are, you know, just everyone thinks like suburbs had like this moment in time, I think it’s just starting. And this is about to snowball for a long time.
So then you’re making a few assumptions, which I’m not saying I disagree with, but two data points that you think are going to be sticky, which is one, if rates come down materially, let’s say to 5%, that that’s not going to be enough to motivate people to give up their 3% mortgage, it’s enough of the Delta, even if rates do come down to some level.
And two, that this flexible hybrid work situation is here to stay, which we debate, of course, all the time. So those two factors, if they stay in place, you think this is like you said just the beginning, the way we live being the sort of the coveted lifestyle, instead of just one option. Is that what you’re saying?
100%. On the hybrid work, why wouldn’t you want to try to attract the best talent in the world? Why would you only want to attract the best talent within 25 minutes of your office?
I think the issue of the long commute though, is something worth discussing. Because even if people only have to go in two days a week, I think that’s going to be bumped up to three or four days a week being the norm over time with four really being pretty consistent. How many people are going to want to sign up for that two or three hour commute? Three or four days a week? I don’t think that many. So I do think the suburbs are here to stay. But the proximity to the office is going to be I think a little more important than you’re putting forth.
I think the acceptance of people working remotely, has just grown, not even just hybrid. When I traveled to a market today, I typically run a list of retailers who are in that market, and to see if there’s anyone I should meet with that I’m not thinking of, that list has grown tremendously, because it’s not really retailers. It’s people who work at retailers. I made a trip to Arkansas this year.
And I extended it because we have two assets that we own there, I extended it and I was meeting with Walmart, extended it for a week, because I met with 14 other retailers who lived in Arkansas. Now their corporate headquarters weren’t in Arkansas, they were across the country. They just worked remotely from those places. So pre-COVID, I wasn’t able to meet with all those people in one shot in Arkansas. But to me, I say that because that’s just a you know, a corollary to the point that I think remote work is getting more accepted.
I believe in the suburbs, but less because I think remote work is 100% remote is going to be the way of the future and more that people want space. They want to be able to drive they want comfort and flexibility. And it’s just an easier lifestyle in a lot of ways. So I think that’s going to continue to push the population migration into more of the suburban markets. So the data that we looked at at CBRE showed that 62% of population migration from 2019 to 22 went to tertiary markets.
And of course everybody defines tertiary a little differently. I think our stats are skewed heavier towards I want to say a million people and the MSA, which by some accounts is still pretty significant market. But that shift was so significant. I mean, that’s the largest largest chunk of population movement we’ve seen, which led to the fastest tightening in retail in those, those tertiary areas.
So availability is the absolute lowest in tertiary markets and in the suburbs, because of that population shift, which, of course, is driving some of the highest rent growth. So I think from an investment standpoint, this is where the upside has been, and will continue to be. So I’m bullish on it from a retail perspective and quality of life, in addition to the flexibility of work that you mentioned,
For sure. I’m bullish on all those reasons. And I agree up in my brain, a million people in an MSA that’s not necessarily tertiary to me, I think tertiary I think, to some place in Montana, where you know that, you know, there’s, you know, in 30 square miles, there’s more cows than people, to me, that’s tertiary out. If that’s not tertiary, then what is that? Is that what do we call that?
Tertiary, fourth level, I don’t know. Well, look at those classifications. It’s, you know, above my paygrade, at CBRE I don’t make, I don’t make the retail classifications, just record the data. So let’s go on to number four. And that is, retail properties are going green. Now, this is something that’s been talked about for a lot of years, right, the move towards sustainability and green real estate.
We’ve seen it in office buildings, we’ve seen it in multifamily new developments. But now it is retail’s time to get on board. And you in particular, as a landlord have some real life examples of how this is being put into place. So what are you seeing day to day that’s actually working in retail in terms of green initiatives?
So there are so many green initiatives. And I think, in the early 2000s, this was obviously already a trend. But it was hard for owners and operators to get their arms around it because it was a huge upfront expense. And you saw the benefits monetarily over the course of like 15, 20, 30 years. And some people are saying like, I might not even own this in five years. You know what I mean? This, that I’m gonna lose money by doing this.
So it took a little while. But I would say the people who in the green energy movement heard this. And now there’s a lot of creative ways to start to create green initiatives at properties. And let’s talk about what some of those are, right? Like, there’s simple ones, like LED lighting is a big one. Right? That’s a cost saver for everyone at the property. It’s more energy efficient.
But to LED light gut, do you know what the timeframe on when that becomes profitable is on LED lighting as like a two week two year payback? Six months, seven years? I have no idea when the cost benefit flips around that.
I’m gonna give you the answer that stinks. But it really depends because the electric is the cost of energy is different in every market. So it depends on the market. And so like we’ve done an analysis of every property and it changes, you know, month to month. So the end, the answer is there are some places where you won’t have any savings. That’s rare. And the typically, one of the other big savings is just the repairs and maintenance of poles and lights.
If you’re getting all new poles and lights, and most of the time it’s lights, and they last longer. Well, you’re saving in that as well. So LED lights, parking lots, right, how many parking lots are there in America, whatever asset class, office, retail, right? LED lights solar is continually, you know, is gaining steam and growing. Obviously, we’ve heard of the EV charging stations. So there’s all these things, right? There’s ways to use less water, water initiatives.
There’s all these things, and we’re just seeing landlords start to play more and more into these things that are both good for the environment and good from a monetary for all the people who use them. One of the things that I mentioned on the LED lighting that’s come to light is financing. There are groups that it could be a $0 up charge $0 cost on something that may be on a shopping center was going to cost $300,000 to do $0 up front and you pay them over two Time with the savings.
I mean that there’s really no downside to that, I think the only concern would be a new technology will come out, that’s even better in a few years, and you’re locked in. But you’ll never time that perfectly. So it sounds like there’s just an upside.
But there’s things like this. And you know, where the amount of solar deals we’re kind of working on right now is, it has never been so robust. And so this, this is starting to come to like, more than people just talking about it, you’re starting to see about it, REITs publish their ESG initiatives and what they’re doing every quarter, it’s growing, it’s making bigger headlines, because people are actually taking action on this. And I think this is great for retail properties, you’re going to see this be a big part of 24.
Do you think most of the push is just an expense mitigation? So kind of controlling costs? Or do you think we might see it swing to this is an interesting way to boost the bottom line from an income generation perspective, maybe renting out parts of the roof or generating excess power or renting out EV space for the EV charging companies to set up their stations? Where are we on that continuum? Is it expensive mitigation in most cases, or okay? So we’re actually adding to the profitability from an admin perspective too. Good.
So it seems like it’s worth looking into, because at the end of the day, retail is, is real estate and land and space. So wherever you have that, then it’s about efficiency of utilization. Love it. All right. Number three, store size is changing, small is out, flexible is in. And this is, I think, a very interesting shift from what we’ve talked about so much the last few years.
So over and over, you’ve heard us say, prototypes are getting smaller, the shrinking of the store, not always the case now, in fact, we have examples of some retailers going even larger and trying brand new prototypes that are 20, 30%, above their existing prototype. So it’s no longer about finding the smallest space possible. It’s about making existing space work. So talk to me, Chris, about some of the flexible formats that you’ve seen, and retailers who have changed their strategy over the last year, or will be I guess, in the next year.
So what I think, there’s a couple things. I think the biggest driver of this is, one, what retailers learned from the COVID pandemic, from a Supply Logistics, inventory management, they’ve gotten really good at this. They’ve gotten really good at inventory management. From a technology, from an actual execution perspective, retailers have gotten really good at inventory management and the logistics side, they spent a lot of time and a lot of dollars on this. That enables them to be flexible, number one.
Number two, right? It used to, it used to be like you fell into like a couple of categories. Was that like showrooming product? Or was I a racket high, and let it fly? What type of retailer was I? And now you’re seeing and starting to talk about people are able to morph and do what they need to do to service that customer to market. You add on the fact that there is no daylight in sight of when the supply will open up for retailers. And vacancy. Even with the some of the bankruptcies is not really moving.
They’re getting leased up. So retailers are getting flexible on, well, the frontage isn’t perfect over there. Or the, it’s about 5000 square feet bigger than I might have thought I needed. But how do I make this work? There’s a lot more how do I make this work, versus my prototype is x. This isn’t that next space, because the next space isn’t there. And you couple in that new development is muted from a construction cost perspective, we’ll talk about right at the end of the day, existing real estate, we have to make it work.
So I think that’s the name of the game is, when I say flexible is, how do we make it work? Which is, you know, refreshing to hear because, you know, it retail was like, and it still is, such a process driven like planogram, how do I scale this in every market at this planogram if the bathrooms aren’t in this spot, well then this doesn’t work. And that worked for a while.
But in today’s environment, if you want to grow, that’s really tough to do, and we’re seeing flexibility everywhere, we’re seeing, you know, the bed bath auction, the amount of retailers who bought leases that weren’t in their prototype to get the core real estate, and that’s what’s winning is like how do I get the right location? the right market to service my customer.
And I’ll figure out how to deal with the other, you know, the couple 1000 feet that maybe I didn’t think I needed or is a little too small? And how do I use my supply chain logistics to make the smaller space work? Or how do I use, you know, my market knowledge to make the bigger space work? And retailers are, I think you’re about to explode with flexibility.
Such a shift in mindset, because for so long it was, you know, our box looks exactly like this. And this is who we are as a brand. And now I feel like retail is not necessarily the outline of the box, it’s so much more, right. It’s the brand image shopping experience. It’s the product mix, it’s the delivery experience, the in store, technology, it’s so much more bundled into the what defines a brand than just when you walk in exactly how everything looks and making that cookie cutter.
So I think this was born out of necessity to your point because vacancy has been so low for the last few years with no end in sight, to limited availabilities. But it’s also kind of a nod to the fact that we’re identifying what a brand is more broadly than just the bricks and mortar experience being cookie cutter. I think it’s fascinating. Let’s go on to number two, which perfectly merges or melds with the number three that we just talked about. And that is development will remain muted through 24.
This is a tough one, I would say it’s it’s not necessarily something we’re excited about. It’s just the realities of the market, right? Construction costs are still very high land costs are high. It’s difficult to make deals penciled so because of that, we really feel that the development pipeline is going to mean remains significantly muted through 2024.
And what is that going to look like for retailers who are trying to expand? Right, it goes back into our last point that they are going to absolutely have to be flexible. So Chris, I know you look at a lot of projects as an owner, what are you thinking about ground up retail development right now?
It’s really hard.
Yeah, it’s just really hard.
It’s really hard. So it’s not easy to do. And that’s driven by all the factors that you said, and, you know, for a while, we mitigated construction costs with cap rate compression. And, you know, construction costs are, I think, are slightly coming down, starting to stabilize, but they’re not at 2019 levels, right. And either we have to get really creative on the development deal. And there’s a lot of creativity going on, or rents have to rise dramatically. And, you know, rents will rise, but dramatically is is the key word there.
And I don’t see that happening. And I think, you know, notwithstanding some rate decreases coming. I think that it’s it’s really hard to make a deal pencil, at a minimum, at a minimum. If it’s, if it’s not hard to make a deal pencil, it took a long time to get there, which will delay anything that happens in 24. And so will there be development in 24. Of course, there’s always some, but it will be muted. It will be it won’t be explosive like some years.
We’re projecting 14 million square feet of multitenant retail space coming online in 24, which is less than half of the projected tenant demand for the year. So if we think low vacancy is a real discussion point now just wait till the end of next year if those numbers come true, because it’s going to be tight, for sure. All right, let’s go to our number one point and a wonderful way we hope to keep some positive energy going into 24.
And that is that deal making will significantly pick up in 24 especially the second half to the end of the year. And being in capital markets, that is something I am incredibly excited about. And of course I think all of us in the industry hope that that is the case. So we have a few things, right, we have the Fed holding interest rates and hinting at several rate heads, rate cuts, oh my goodness, rate cuts next year, which is fantastic and very, very needed.
And then we have the sentiment on retail shifting Because the fundamentals have been so strong for the last few years, so it’s really a confluence of two positive factors that lead us to believe 2024 will be a much better year. And we’re very bullish on activity towards the second half of the year. So Chris, what are you most excited about for dealmaking next year?
Well buying, I hope that we can acquire a lot, we’re in the market to buy a lot, what I would say is the following. I think you hit on the most two important data pieces as it relates to what will move investment sales in 2024, which is interest rate coming down, and the strong fundamentals of retail with new money wanting to come into the space from a safe investment in a potential higher yield than other asset classes, I would say the following, which is, to me the biggest driver of why deal activity will be up next year.
And that is because this industry and retail real estate is small. And the livelihoods of everyone, majority are predicated on deals happening. And people are tired of sitting on the sidelines. And I’m going to be on the play on the, bet on the people not the data here. And people are going to find a way to make deals happen.
And that’s going to be the start and the catalyst of the market to start to really grow in 2024. I think people are gonna get creative, they’re going to find ways to get deals done. And deals are going to happen in 24. Retail real estate doesn’t want to sit on the sidelines.
I completely agree. But to be true to our CBRE data, I will add, I think we’re not gonna see it really take off till the second half of next year, we are predicting potentially some additional cap rate expansion as the market stabilizes maybe 25 to 50 basis points, broadly speaking, not just in retail, which could translate to another five to 15% Decrease in values broadly in capital markets. So that’s possible. We’re not quite at stabilization between bid ask spreads yet.
But I think we’re seeing definitely some price discovery now that we have an idea where interest rates are and hopefully we’re they’ll be towards the end of next year. So we needed that idea of what the market was going to look like we needed the interest rate increases to stop so we could figure out where pricing is gonna settle. And I think that’s where we are right now. So a lot of discovery, a lot of people are anxious to jump back in and get deals done.
Buyers who’ve been waiting for a long time sellers who need to sell because they have either projects coming online or debt coming due, whatever their situation is, and a lot of people anxious to get these deals moving forward. Just might take a few more months until we really see that activity kick into here. The sooner, the better though, but cautiously optimistic for the second half of the year.
All right. Well, I think all in all, we are excited about 24, 23 has been a wild ride, lots of interesting moving parts for retail. And we do expect 24 to be even better. And to all of our listeners we hope that you have a very happy holidays and a fantastic year ahead. Happy New Year. And thank you so much for tuning in.
Thanks everyone. Happy holidays.
That was what’s in store and we will see you all again next year. Take care everyone.
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