What’s In Store? With Karly and Chris (Trends + Closures)
Guest: Karly Iacono
Topics: Retail trends, store closures, healthcare
Chris Ressa 0:00
This is Retail Retold, the story of how that store ended up in your neighborhood. I’m your host, Chris Ressa, and I invite you to join my conversation with some of the retail industry’s biggest influencers. This podcast is brought to you by DLC Management.
Karly Iacono 0:24
Welcome everybody to ‘What’s In Store’, the show where we discuss hot topics at the cross section of retail and real estate. I’m Karly Iacono, Senior Vice President at CBRE and I’m joined by Chris Russa the CEO of DLC. Welcome, Chris, how are you today? Great to see you.
I’m doing well. How are you?
Just amazing. It is a lovely winter day in northern New Jersey and happy to be cranking out some business. So no complaints they did they canceled school by you. You did not know. Roads are trash.
Tech school cancelled before anything even happened. I was mind blown.
That’s only because we’ve had no snow days. So everyone’s getting desperate. So if there’s talk of snow, they’re gonna cancel. Interesting. That’s my theory anyway. Okay, it’s been smooth sailing for us so far. So for everyone listening, we have three very interesting retail topics we’re gonna cover today we’re going to talk about why store closures should be could be a good thing.
We’re going to talk about the overall health of retail and retailers in particular, and then the merging of healthcare and retail, sort of squeeze all of that into an action packed 20 to 30 minute episodes. So we’re glad you could join us. And let’s dive in. So number one, store openings versus store closures.
Of course, I put out a research report, very recently, just in the last few weeks that there were about 1800 store openings predicted for 2023 and only about 525 store closures. So I know you might have a different slant on this, Chris than most people, why could store closures be a good thing.
So a couple things, I’m going to backup for one second on the store openings and closures. I think the store openings we talked about this last time, but it’s good to hit home, the store openings are going to be more impactful than people think, in 2023. Because in our industry, there’s a tail.
And so last year, if we had all these record lease signings with supply chain issues, municipal backups, construction delays, essentially, if the store was like for, you know, real interior remodel, if the store was signed lease, after May one, it’s not easy to get that store opened in that same year, because most of the retailers, they don’t want to open between the holidays, they have to draw the plans get permits actually do construction.
So we had a record industry year last year for leasing space. This is the year where a lot of those tenants open. And so I think it makes those shopping centers those retail properties even better than they already were. And there was a lot of momentum from 21 to 22. Already. The store closures. I think one of the things that’s happened and we’re going to talk about this a little later, is there’s no available space in America.
And we can’t build at the same rate of return that we once could have because of construction costs. And I say can’t you can but it’s more challenging to build at the same rate of return that you once could have. And so some of this loosening up of space is providing runway for retailers who simply can’t find the right opportunities today.
And I think, you know, as some store closures happen for retailers whose businesses aren’t what they once were, I think there’s a little bit of a churning like all these retailers who from post pandemic got stronger and stronger and stronger, they’re continuing to expand. They’re continuing to fortify retail real estate in America. And then there’s some other spaces that are aren’t as productive as they could be.
And the strong potential tenants for these in retail retail service health care are lining up to gobble up many of these spaces. And so which will just continue to make this happen asset class stronger and stronger. And I’ve been saying for a while that the over if you take a 30 year period, I think, and you started in, like the great financial crisis in the Oh 809 I think between then and like 2019
That would be, in my opinion, you could argue is going to be the most turbulent of the times, we had so much retail that was turned over that. And that is behind the industry now. And now it’s a lot of these growth companies, a lot of mature successful companies that have strong financials good, you know, good balance sheets, are growing sales and relevant to the consumer.
That’s really helping retail. You know, we always have store closures. None of I don’t think the closures and we haven’t had any mass store closures or any bankruptcies that have moved the needle and retail real estate in quite some time since pre pandemic or in the, in the 2020 year.
The members decided to jump in there. I think the numbers there were 50%, less closures in 22 than in 21. Yeah. So I mean, that’s a big shift. And And just to reiterate something that you were touching on the closures are almost welcomed now, because our vacancy is it historically low levels, if it was a time, a different time in the market, the store closures could be disastrous for a property if they were widespread.
But we’re really in such a period of time for retail that there’s no availability, we have a lot of tenants expanding. So all of this confluence of factors is making a store closure, we’d say like even a Bed Bath and Beyond that was just announced or something that maybe is larger square footage almost welcome. Because it allows a landlord to kind of breathe new life into that center. So could be a good thing
That’s said, more concise, in a more concise manner that I said it.
Just a summary.
I think that you’re spot on that at the end of the day, if there was widespread closures, hundreds of 1000s, right, well, we’re talking something different. But the the last point I was hitting on is when I don’t believe we’re going to get to the closures of that period, post grant financial crisis.
These are some just businesses that didn’t work in the normal course of business, that are churning through the retail ecosystem, which always happens, but it’s a lot less number, I think will play out than has been in in prior to time periods.
And another thing I would touch on some of the historic closures, the bath and beyond that I just mentioned, being an exception here. But some of the store closures are not because the retailer is not healthy. They could just be pruning their portfolio shifting their focus, it’s a sign of active management of their brand. So gap is a great example.
They’re closing a bunch of stores, but they’re mostly in malls that have seen less foot traffic, or maybe you’re in a process of redevelopment. And they’re opening more athletic stores and Old Navy and parts of their brand that are very, very productive for them. So I think it’s misleading when you see just a headline saying, okay, gap closing X number of stores, they’re just doing terribly when some of that is smart. It’s active monitoring of their brand in their portfolio.
Right. And you said this app before, how many what of course, I’d say how many stores were closed this year?
and how many closed in 21? And 22? Does it say
It just said 50%. Fewer closures in 22 from 21. Got it. And another interesting breakout stat from that report was apparel retailers led the closures and 22 making up 30, almost 30% 29% of total closures. Interesting big chunk?
Well, I think that for me the punchline, at the end of the day is when we’re sitting here and 2024. I think the retail asked retail real estate asset class and the RE and the retailers in those are actually stronger than they are today. Which to me is a hard thing to say because fundamentally, it’s pretty strong.
It’s coming into a recessionary period coming into a time when the financial markets are so challenged and there’s so much volatility, to have this be I think sort of a hidden gem is a fantastic sign for retail. Right We have wonderful underlying asset values. We have more tenants who want to expand and we have space So we have limited construction pipelines because it’s been constrained due to high costs over the last few years.
So that leads to historically low vacancy. So all the fundamentals for existing properties keep getting stronger in a time when economically the world is getting more challenged. So I know we agree on this. But I think retail is really a bright spot for the next few years relative to other asset types, for sure. Do you want to touch on any further about the health of retailers? I have a few interesting stats to share on that. But I know. So for
I think the, as I was mentioning, like, we got through this term of these retailers that no longer exist in that period, post great financial crisis. And then coming out of COVID, these retailers were able to stockpile cash and, you know, had really strong here’s a really strong year, that year and the year after, if you look, and to me, in particular in the value retail space.
One, let’s just those are the retailers that which are primarily in the open air retail space, those are the retailers that do the best during recessionary times. And if you just look at, one of the things I’m always looking at is the consumer staples, mutual funds.
And if you look at their growth over the last five years, they’re all double digit compounded, you know, I, I forget which one it was, you know, when I was looking, I think, you know, Vanguards consumer staples index is like, you know, up 25%, I think something like that over a five year period. So, to me, and that’s modest growth, for on an annualized basis. During that time, I’ve recognized that.
But the point is, through the entire, you know, spectrum of different economic climates, consumer staples like, they don’t go that they do pretty well during recessionary times. And they, and they still people still need them during the good times. And to that end, if you think about the retailers, in open air retail, a lot of these consumer staples are challenged to sell online, because there’s no profit in selling them online. And they’re in all the stores that we shop in in an open air place.
And so I think it’s a good proxy to leading into the underlying fundamentals of the real estate are really strong. And when you look at, let’s call a cap rates rising, or set differently, prices, values of properties coming down, you might think that the underlying real estate might be cracking. But that’s not the case, it’s getting stronger. The under the credit profiles of tenants are at scale, improving the traffic at certain properties is doing really well.
The retailer sales have grown, the properties physically looked better landlords across the country invested in these, they weren’t doing all this new construction and development that poured it into existing real estate. And you look at that, you would just look at a snapshot of the value of real estate, you would think there’s like cracks in real estate, when it’s really so tied to interest rates. Right, not necessarily the core fundamental real estate, which I think is the golden opportunity.
I think so too. And it’s hard to really convey that right to people who are not in the industry day to day, exactly what you said they see values coming down cap rates going up, the asset type is falling apart, when in really the fundamental reality the fundamentals are much, much stronger.
The longevity of the assets, the sort of future proofing and stability of them is improving monumentally it’s just the the returns are very much driven, like you just mentioned by the Fed’s monetary policy, which is constraining a lot of things right now. So sure, exceptionally important distinction about the quality of the asset versus monetary policy, completely agree.
The stat I wanted to bring up before we move on, I think is a fascinating one. s&p came out with a report this week, where the most recent reports that the median probability of default for all publicly traded us retailers fell to only 3.3% This month, and that was a drop of 70 basis points from the end of last year. Wow. So to me, that’s a pretty big improvement in a short period of time, a really low number A 3.3% probability of default.
Now, again, these are only publicly traded retailers that that they were monitoring. But I think that’s a fantastic statistic. And they break it down further to say that the highest probability of default was internet and direct marketing retailers at 9%. So they are outsized. So the probability of default is the highest in internet and direct marketing retailers. Wow. I mean, that’s what we’ve been saying all along. But it’s nice to have s&p Bacchus up. Right. Thanks, guys.
That was, that’s a really powerful stat.
It really is. Very interesting. So I think, you know, bricks and mortar again, here to stay. And the tenant quality is certainly improving, like we were just saying, so wanted to share that. Yeah, leverage on to our last topic for today, which is the merging of healthcare and retail. So I posted an article yesterday on LinkedIn along with a poll about Dollar General sort of foray into health care services.
Now, not healthcare products, actually, in 2021, they started a new DG wellness initiative, that’s just over 3000 stores, I think right now, where they’re carrying more health care products in their store. This is different. What they’re piloting right now in Tennessee is mobile clinics to offer vaccinations lab work, lots of health care services, primary care services, not just, you know, basic vaccines.
So an expanded array of health care services connected to their stores. I thought it was an interesting angle. And the poll showed that everyone who voted was pretty split between one, this is a huge myth, it’s way off their brand. And what are they doing to to, we need more access to health care in rural areas, and retail is the best closest point to the consumer, to get that, you know, to them, to the people who need it.
So I think that’s an interesting dichotomy. Does this fit with the brand? Or does it really matter if it fits with the brand or not, we’re already close to the consumer, and why not add the service on. And I know Walmart’s trying this. Kroger is trying health care services, of course, CVS, and Walgreens are expanding their health care services. So I don’t know what are your thoughts on non healthcare, retailers dipping their toe into healthcare?
I mean, Amazon bought one medical, which is a whole urgent care business as well in last year, so I don’t put them in as a healthcare retailer in the same vein of CVS. So I think, you know, what I think big business is trying to do generally. And I’ll put both Amazon and Dollar General is continually tapping into opportunities to gain higher share of wallet from the consumer. And I think the first thing I think about when I think about things like this, is do you buy a business?
Or do you start your own? So that that’s the first thing I think about? So to me, it’s the question of health care, from a retail perspective, and on brand and all that piece like dollar generals, pretty sophisticated at delivering product delivering value to consumers. And when I think about them, whether they do that through toothpaste, you know, a, you know, a wire for my cell phone, or they do that through a a vaccination.
Not sure that it necessarily matters as long as they provide, you know, they can continue the premise of really providing value to their consumers, where where I get where my head goes is, you know, do they partner with someone? Do they acquire a business to scale it? But I think the reason that the acquisition for Amazon at one medical when they were working through that made more sense at the time for them was because the the difference in physical locations.
So I agree there’s a huge opportunity to get access to health care in rural areas for Dollar General. And they have the physical real estate to make it easy. And there’s probably a lot of synergies and like, it’s a traffic driver, right? I don’t it’s like 15 to 20% of all GDP is spelled spent on health care in America.
So you If you’re going to go get something, you know, a primary care, you know facility, picking up the Gatorade at Dollar General after probably makes a lot of sense, I think it’s a way to continue to drive traffic to their sites, I think it’s a way for them to provide more value for their consumer than they were doing before.
And they have a competitive advantage over a lot of people that they have physical real estate, in rural areas, which the economics are sometimes challenged to do, because the cost of HVAC unit doesn’t change no matter where you are. And so building that infrastructure is not easy.
So getting providing a value untapped opportunity in rural areas, and this cross selling this traffic driving to their stores. I think it could be interesting. It will it be easy to execute, I can tell you don’t know anything about it. But I know it’s not easy to execute. But I think it’s an interesting opportunity. I don’t think they’re, you know, they’re out in my field here.
So I think for the pilot, they’re partnering with a company called daco. So they have mobile services. So it’s not in the Dollar General Store, which is a distinction from what Walmart and Kroger are trying to do. Sure. So it could be as phase one, like you said, you partner, or do you build it out yourself. And maybe that’s where the change happens. And maybe this is just a partnership and it stays outside the store.
And then people come in after that would certainly be easier to roll out or maybe use existing square footage. I think what will be interesting in this space in the next five years, let’s call it is the competition. Right?
So we’re going to have a bifurcation of healthcare services between vaccines and you have a standard cold, what do you do like very base level services to more admitted advanced, right, you have diabetes, and you need monitoring, which is something that this mobile clinics and they could do as well.
So I think you’re gonna see a lot of companies go into sort of the the low hanging fruit, the vaccines, right, our nurse easy to dispense them, we saw that during COVID, everyone was offering vaccines and lots of different locations. But how far do retailers take it? And when does it stop being synergistic and become too complex? And then where do people go for those other medical services? So at what level? Does retail stop being the answer? I think it will be an interesting thing to watch.
Well, I think it’s just getting started. So I think that that is a long time away, Carly, because one healthcare has made a pitch, they want to be closer to the consumer. And that’s for everything that’s you’re not an overnight stay in a hospital, they want out of the hospital, it’s cheaper, closer to a consumer.
And so that’s typically retail real estate, that’s the closest real estate to the consumer. So I think one you’re gonna find continue to find health care services, in retail properties, that’s here to stay for a long, long time. As far as retailers,
Right, that’s different. So within the properties, you might have a dentist who has a space, right, that’s different than sure Dollar General.
As far as retailers running them, I think a lot of the retailers that are working on this, one of the things they have is this huge scale. And I think they have an untapped opportunity to provide a value to their customer in an industry that has just had a historic, you know, historic reputation of not providing a value, and been just so price heavy.
And if if they can, if they can work their way through and and bring the economies of scale to healthcare that they brought to their industry, whether it’s Amazon Walmart, Kroger, which I think they’re like economy, all of them are amazing at this, if they can do that to healthcare, I think just the opposite. I think you’re going to see it explode versus decline, if they can actually provide a value to the healthcare industry that we haven’t seen.
And in the size of these groups, how they are bringing down prices period. It could be really compelling.
I think one of the keys there and again, I’m not an healthcare expert, but it seems like one of the keys would be standardizing services. So if you can have, you know, vaccines again, very easy. You come here your options, here’s how much it costs to straightforward service.
So if you can make whatever other healthcare procedures and monitoring are required, more standardized. I think that’s how you could scale more easily. Just the general physical with all the follow ups might be harder for retailers to execute. I guess we’ll see how sophisticated we’ll see what service as they provide,
I think one of the things that they both have is like all the companies we talked about are like, have massive amounts of data on consumers, right? You know, they know everything about about the consumer. So I think that’s going to be a real advantage to someone who doesn’t have the same level of information.
Right. Agree. Now, that’s a great point, especially as AI continues to advance and analyze that data. But we will save that for another episode. But I think the use of data is fascinating, and will give them a competitive advantage because actly right, I’m glad you brought that up.
I would add one more thing. California. We, you know, to your poll point, one of the things I’m all about being laser focused, and I get it, and this could seem off brand to the people who posted like, this is so off brand, what are they doing blah, blah, blah. Whenever like some business gets in trouble. All that the naysayers ever say is these guys didn’t innovate. They didn’t try anything new.
They just drove the business into the ground in general who’s like taking some shots, they’re trying new things. Here’s, here’s Walmart and Kroger and these guys are innovating. Amazon gets so much credit for doing this over the last 20 years, and so many of them not working out. Well. I am excited that the retailers are taking shots, some of them won’t work. Maybe the mobile clinics don’t work for Dollar General.
At a minimum, I’m pumped that retailers are taking more shots, dollar generals been really taking shots, they opened up Pop Shop, whole new concept. They’ve scaled that already. I’m a proud landlord. They have they’re trying this mobile clinic for healthcare like this is a company who’s not sitting around and waiting for you know, to be the next you know, victim. So for that, I hats off, applaud.
A great good point. All right, we’ve covered a lot today. I hope everyone enjoyed this episode. Be sure to tune in next month for more hot pressing retail real estate concepts Chris, really appreciate your insights Great to see you as always you and everyone listening that was what’s in store I can’t wait to see you again next month. Take care everyone.
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