Retail Traffic

Seismic Industry Shifts Set the Stage for the Retail Real Estate World Summit

As Michael Kercheval, the president and CEO of ICSC, points out, global industry summits like the one scheduled to take place this September in Shanghai are not annual events. ICSC puts together the Retail Real Estate World Summits periodically, as a response to major changes in the global retail real estate industry and the way retailers and retail developers do business.

In advance of the 2012 Summit, Retail Traffic sat down with the ICSC chief recently to talk about the importance of this year’s conference for industry professionals, the reason ICSC trustees felt this was the right time to hold one and his hopes for the future of the global retail real estate marketplace.

Retail Traffic: The program for the Summit is organized around five seismic shifts happening in the world of retail real estate that people should be aware of. Can you talk about what those shifts are?

Kercheval: Yes. They are, in no particular order of importance,: the booming middle class, the plateauing of development in mature markets and the explosion of development elsewhere, retailers truly going global, investment capital seeking solid risk-adjusted returns and the fact that retail continues to offer the lowest volatility among real estate asset classes and the enormous need for creating jobs in markets like Western Europe and United States.

Each of these five things would warrant a summit to figure how we deal with it on its own, but to have all five of them happening at the same time is unprecedented and that’s why we are having this Summit. How do we handle these crises? How do we handle these opportunities?

I think there is a sixth shift, which overlays all of that, and that’s the internet. It’s very interesting, for some people it’s perceived as a non-event. For others, it’s the most significant thing happening to our industry. If you are cutting hair or selling coffee, it’s less of an issue. If you are selling books, you really have to rethink your business model. The future is going to be figuring out how to adopt and adapt technology to retail. Not how you fight technology, but how do you embrace it?

RT: What, in your view, are some of the most important issues for global retailers and retail developers that will be discussed in-depth at the Summit?

Kercheval: For global retailers, I think the first thing is addressing the burgeoning middle class in emerging markets: finding out where the opportunities are, how to market to those consumers, how to merchandise those stores, how to tap [those opportunities].

The second issue is finding the store locations and deciding where they put their stores. In the last week, I had two retailers who are expanding globally tell me almost the same story: “I got off the airplane and my first thought was: what do I do next?” It’s a big problem, but a great opportunity for us to talk about how you tackle this. Do you go through a broker? Do you go through a developer? Do you team up with another retailer? And a lot of it has to do with the absence of market information retailers are used to in their home markets. It’s not to say that information isn’t there, but it may be in a different format than they are used to.

After that, the question is how do we manage the different laws and business customs in these countries? These retailers aren’t naïve, but they are finding there are many subtleties in documents and lease contracts [in different countries], there is an extraordinary amount of variation and navigating through it is a significant challenge. In spite of these challenges and obstacles, the rapidly growing middle class [in new markets] makes it all worthwhile.

For landlords and owners in developed markets, they want to continue to grow. In the U.S. and in Western Europe you can grow by building new properties or through acquisition. But the development pipeline in U.S. is pretty skinny, it’s very, very arid right now, so the opportunity to grow your business for your shareholders and your investors is limited from a development standpoint. So what do you do?

Simon Property Group is very good at making acquisitions [in foreign markets] and that’s one strategy. Another strategy is to actually enter those markets and find partners and do new ground-up developments, such as Taubman Centers id doing in Asia. Some Western European companies are looking at Eastern Europe for new developments, generally with local partners. And Kimco Realty Group, if they are not the largest developer in Mexico, they are one of the largest, all through partnerships. This seems to be a trend that has some longevity to it, some legs.

The emerging markets are so under-served and the challenge for us as an industry is to make sure what is constructed is built to best practices, is in the best locations, is managed by professional companies and is tenanted by good tenants that are appropriate for those markets.

At the same time, retailers from outside the U.S., especially Western European retailers, are looking at the U.S. as a rich market opportunity for them. There are developers and owners in the U.S. who are seeing this as a great opportunity to re-tenant their space, to work with cities to do infill development and re-development. And cities are encouraging bringing in new retailers because retail creates a hack of a lot of jobs. Cities and towns that are trying to boost employment are saying “Let’s find a way to get retail back.”

RT: When we spoke to Sandeep Mathrani, who is the co-chair for this Summit, he noted that one of ICSC’s goals is to become a truly global organization. How much success are you having with this?

Kercheval: Our global objective is to be the thought leader in our industry. It isn’t to have a huge membership, but to be the association which helps expand the best practices and creates the best business opportunities around the world. In a market like China there are tens of thousands of people who work in our industry and they don’t belong to some other organization. They might not even know an organization like ours exists.

So what Sandeep is referring to is that this event raises the profile so that participants in our industry could say “Oh, there is an association in my industry that can help grow my business.” The imperative to do this is in response to the fact that [emerging markets] is where the industry is booming. Our fastest growing membership right now is in Latin America. So we want best practices, transparency, freely flowing capital and even more flowing set of ideas around the world.

RT: Who do you want to see attending this Summit?

Kercheval: A lot of the people who have already signed up are CEOs from pension funds, insurance companies, real estate companies. There are also heads of real estate for retail companies. Some of the speakers are CEOs of retail companies. The purpose of this is really a think tank, so it should be the people who can contribute as much as they can take away from the conference. You want the people who are senior enough in their companies, and maybe in their experience.

It was also pointed out to me that we want to make sure to get the middle tier of management to this conference. It’s understood that this group is probably younger in age, more in-tune with technology and more representative of the growing consumer class. Within our industry, there is another big shift [happening] and that is the graying of senior management. I joke that a lot of our industry looks like me—a white middle-aged man. Most of the world is not made up of white, middle-aged man, so we need more of those people to set the future. Everyone would benefit from more representation.

RT: What are some other things industry members should understand about the event?

Kercheval: The two things that hopefully people will get is one, the enormous importance of these five cataclysmic events that are all happening at the same time and that will totally transform our industry, and two, we don’t do these summits all the time. We don’t do them every year, it’s been about once in five years, when we have these fundamental shifts in our industry and we feel that we need to take three days to discuss what’s going on and how to deal with it. It’s the urgency and the importance of it and the absence of frequency to discuss it. I don’t want somebody on September 15 to say “Oh my Gosh, it was a huge thing, I should have been there.”

Shanghai was selected as a [meeting place] more out of convenience than anything else, but to me, the fact that the meeting is in Shanghai is a positive. So much of what’s going on in the world today is influenced by China. Many of our delegates have also not been to China before. The worst thing for me has been when people have said: “I am not interested in going because I don’t do any business in China.” Show me a piece of clothing that doesn’t say “Made in China” on it. [Plus], it’s not about China. And it’s also not very expensive to attend.

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