The Shakeout between Winners and Losers in Retail Real Estate Will Continue

The Shakeout between Winners and Losers in Retail Real Estate Will Continue

The retail real estate sector should continue to recover this year, says industry veteran Matthew B. Winn. The e-commerce model will grow more complementary to bricks-and-mortar stores, rather than serving as an adversarial channel, he maintains.

Winn recently joined Olshan Properties, a privately-owned real estate investment, management and development firm, as its chief operating officer. Prior to his move to Olshan, he served as leader of Cushman & Wakefield Americas’ retail platform and as chief operating officer at Global Retail. NREI spoke with Winn about trends he’s anticipating in retail real estate this year. An edited transcript of that interview follows.

NREI: When it comes to retail leasing and sales, how do you think 2015 will compare to 2014?

Matthew Winn: On the leasing front, if you compare 2014 to 2015, we’re actually going to see more of the same. I think that’s probably true on the sales front as well. I think we are going to see some acceleration in terms of the time it takes for deals to get done. People have established what the new normal is [by] now. I think they’re comfortable with the leasing decisions they’re making. But I do think it’s going to take a little less time to get a deal done compared to where we were at this time last year. The days when you had five, six, 10 prospects for a space—those days are over. Now it’s going to be two or three people who really want to do the deal, and you’ve got to make a convincing case for why your space is the right one.

NREI: What does that mean for property owners going forward?

Matthew Winn: On the sales front, that means there are winners and losers. One of my favorite things to say is that if you look at development going forward in terms of density or dynamite, there are whole centers that are probably going to end up being losers and get repurposed—it could be anything from residential or mixed-use town centers that get redeveloped to strip shopping centers that never really took off. One of the things that the owners will then be focused on is redevelopment. Everybody is trying to make the most of the assets they have that are winners. They’re trying to find out: do I have an outlot that I can squeeze out? Do I have space where the chains want to be as well? The retailers are trying to identify the winners and find space and they’d rather do a store in a successful shopping center than take a chance.

NREI: Do you think we’ll see any surprises this year?

Matthew Winn: One of the interesting things I’m watching is grocery anchors. I’m watching [them] because if you look at it, everybody thinks “okay, you have to buy food,” and so they [paint] the sector with a broad brush. I think you really have to dig into grocery-anchored shopping centers and say, “What kind of market share am I getting with my anchor?” And there is a real difference between Wegman’s, H-E-B and Whole Foods at the top end, the guys at the bottom like Aldi and Costco, and the traditional grocers like Kroger and Publix. How are they all going to position themselves? It’s different than what we’ve seen in the apparel market. If you’re looking at apparel [retailers’] performance, what we’re talking about in the teen segment is the exact same thing: the luxury retail is doing really well, and value retail is doing well—the Uniqlo and H&M expansions have gone well—and the guys in the middle at, say, Gap have expanded overseas to find new customers because their customers here just aren’t spending the way they were anymore. I think groceries may come out in the same way. There is an element of convenience and need that you don’t have in apparel. But it’s something to really watch, and then also to watch prepared foods and the drugstores, which are getting into what is essentially the grocery segment. So it’s just something that I think we will watch. But I don’t think in 2015 you’re going to see that much effect in the sales market because there’s so much money, institutional especially, chasing those transactions where they can’t find the yield elsewhere, so they’ll be happy to take the yield on a current basis and watch the shake-out and see what happens.

NREI: Any predictions for troubled chains?

Matthew Winn: Sears will be more of the same. They’ve been subletting space for years. When David Lukes was heading Sears, they looked at monetizing assets and making REITs, sort of. I think Sears is going to slowly fade from the landscape. As for RadioShack, a lot of those stores are in neighborhood and community centers and their leasing was 88 percent at its low in 2008, 2009, and now leasing is at around 94 percent. So if I’m a landlord, I actually want [those spaces] back, which gives me a chance to sort of up the rent a bit and modernize the concepts. Probably the spaces will get filled by either some local retailer in the prepared food or restaurant [sector], or it could be retail services, like a tailor, nail salon, dry cleaner etc. There’s more than enough demand for that.

If you look at the model for [other retailers that closed stores], where they were anchoring regional malls and lifestyle centers, the landlords have been happy to take those spaces back and divide the boxes and up the rent. What [the landlord] did at Atlantic Square in Los Angeles, which just finished a $6 million renovation, was they took the empty Crate and Barrel space and put in a Nike flagship at the front and divided it into 12 or 14 2,500-sq.-ft. units. The renovation paid for itself pretty quickly.

NREI: How about e-commerce? Where do you see that going next year, with, for instance, Google and Amazon vying for customers with one-hour delivery?

Matthew Winn: The urban retail environment, where [Google and Amazon] are piloting those delivery services, [is] a really different segment than for the rest of the country. You don’t hear Amazon announcing one-hour delivery in a second-tier city. You just don’t see that. Regarding delivery, there’s the ocean strategy—the coastal major cities [demonstrated by drawing a “smile” around the U.S. with two dots for “eyes” being Chicago and Minneapolis]—and there’s the river strategy, which is about the middle of the country reachable by its rivers. One-hour delivery does not apply to the river cities at all. So what you have is people capitalizing on this density of population.

But we still are under-retailed, if you compare the U.S. to major metropolitan centers around the world. One retailer told me, “Look, you know, for the two stores that we have in Manhattan we have six or seven in London on the high streets.” So because the U.S. population has traditionally been more mobile and the store counts have been less in the major urban areas, there’s an opportunity for Google and Amazon to fill some of that gap. Barnes & Noble has done one-day delivery forever. So the big retailers, as they pursue omni-channel strategies, are just filling in the gaps where they see opportunities to get more customers.

The fascinating ones, to me, are the intermediaries. Essentially, if Amazon or Google are pure e-commerce models, what about Instacart, the company that picks up and delivers groceries in as little as an hour in 14 major cities nationwide? There’s a delivery company that is essentially using store count as a way to–-it doesn’t do one-hour delivery, but it uses scheduled deliveries of groceries for the customer’s convenience, and I use it every week. Instacart is essentially using the physical infrastructure the way Amazon and Google are using their warehouses. So all you’re really talking about with one-hour delivery is convenience. And that’s the premise of retailing today, regardless of what it is.

One other thing about e-commerce, let’s take Warby Parker. That company is doing physical stores so people can touch the product. The company then sees a lift in online sales by doing physical stores. You don’t ever hear somebody say, “Wow, I opened a new page on my website and sales went up in a given area.” I think people always pit the Internet against stores. I don’t think that’s the right way to look at it. Retailers don’t look at it that way. They just look at it as different delivery channels. I think we have to stop looking at it as this war between e-commerce and stores and instead ask, “What is the role of that store?” and consider it on a very individual basis.

NREI: How about the buying habits and power of Millennials?

Matthew Winn: These are the three Ms that drive retail these days: there’s mobile commerce, metropolitan areas/urban retail and then there are the Millennials. There was a recent article in one of the real estate magazines talking about Millennials looking at suburban housing and the chance that the suburbs might boom, and that certainly would affect retail going forward. If the Millennials start families and make decisions, they may move, and everybody thought they were all going to stay in the cities forever. Again, I don’t think that’s a 2015 trend, but it may be a 2018 trend. But it’s certainly something to look at as the job market continues to recover and people move around—will some of them move to the suburban office campuses?

NREI: Recent surveys show that Millennials are increasingly expecting retail companies, as well as their products, to be green. Do you think that’s the case?

Matt Winn: I think it’s just part of the brand ethos of certain retailers to be green. If you were given two equal products, one green and one not, it might drive your product choice. But I don’t know if it’s defining people’s buying decisions, [although] maybe I’m just not sensitive to it. Lululemon, for example, is part of this. If Lululemon did something that wasn’t green, you would hear about it. Then take somebody like Wal-Mart, which may be the greenest company on the planet because of its optimization of its supply chain. I think when you look at sustainability, there are really three pieces to it: it’s got to be commercially viable, it’s got to foster community and it’s got to be for the common good. I think that, in most cases, that has already been factored into practices in general in retailing today. But for building practices, I haven’t seen sustainability driving decisions yet in a way that, say, the American Disabilities Act drove decisions in the early 1990s. Until you have some kind of mandate that says you need to update your property to be XYZ, from a real estate perspective, we won’t see that much more sustainability in retail. 

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