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Adapt to succeed, landlords and retailers say at RECon

June 1, 2018

Tenants and landlords must adapt to fast-changing retail trends or face obsolescence, executives said at Marcus & Millichap’s annual Retail Trends session, at RECon.

“Change is really the key buzzword,” said Mike LaFerle, vice president of real estate and construction at The Home Depot. “We live in a world where we’ve seen more changes in the last year or two than we have in the last five to 10 years. The retailers that are successful going forward are the ones who can adapt to change the best.”

In an increasingly online-oriented world, Home Depot developed its digital strategy many years ago, LaFerle noted. “We started thinking about online [things] to supplement our business back in 2012,” he said. “Today it has merged into one, and 85 percent of our total sales have an online portion to it. Our biggest challenge today is making it seamless.”

“We’re in the midst of the third-largest expansion cycle in U.S. history, and there is definitely more runway for this economy”

Consumers are buying more than ever, but it is up to the retail centers and merchants to capture those sales, executives said. “We’re in the midst of the third-largest expansion cycle in U.S. history, and there is definitely more runway for this economy,” said Marcus & Millichap CEO Hessam Nadji. He predicts that interest rates will continue to rise, but not to a worrisome level. “The consumer [element] is as strong as it’s ever been," Nadji said. "In fact, retail sales were 34 percent higher in 2017, compared to their peak 10 years ago.”

Fitness centers are an example of the types of new tenants that are anchoring centers now, said Eric Termansen, president of Western Retail Advisors. “A landlord can bring them into a part of the center that doesn’t have as much traffic during different times of the day, so you can split parking needs with a grocer or a theater. It’s a preferred use, because you like bringing in the active customer, which is different from how we were thinking about them 20 years ago.”

According to Daniel B. Hurwitz, president and CEO of Raider Hill Advisors and former CEO of DDR Corp., grocery-anchored centers remain the most popular retail property type among investors. But he emphasized that success is not guaranteed for all grocery retailers. “They’re not all one asset class,” Hurwitz said. He also predicted that there will be “a significant amount of fallout in the grocery business. The ones that provide value for the dollar will be the winners.”

Termansen echoed that. “The grocery sector is especially complicated today," he said. "Aldi is aggressively growing, pushing hard for more locations, and that will put more price pressure on the traditional grocers, which will cause more fallout in the bottom half of that segment.”

“There’s a big difference between value-add and distressed. Distressed assets don’t need repositioning, they need a bulldozer”

Assets with value-add potential are more sought-after than ever, but investors should be wary of the distinction between value investments and distressed assets, Hurwitz cautioned. “There’s a big difference between value-add and distressed," he said. "Distressed assets don’t need repositioning, they need a bulldozer. We’re not overbuilt, we’re under-demolished.”

Hurwitz noted that fluctuating interest rates worry him less than what he calls the lack of merchandising skills among some retailers. “The thing that concerns me more than interest rates is tenants’ unwillingness to recognize that they’re bad merchants," he said. "I worry about retailers that we sign long-term leases with and they really don’t have the self-awareness that they are producing an inferior product — and that’s actually why people aren’t going to their stores.”

Termansen challenged retail center owners to become more innovative in their own right. “That means not looking at the shopping center the same way you have for the past 25 years," he said. "That means thinking about how you add new tenants like entertainment and health clubs, and how you get rid of space to make your center better, rather than just always adding GLA. Too many people on the landlord and ownership side haven’t adjusted their paradigms; they’re still looking for the 2006 power center cycle, and that’s dead.”

By Ben Johnson

Contributor, Shopping Centers Today

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