You’ve heard the saying that if it quacks like a duck, walks like a duck, and looks like a duck, then it’s a duck. And that saying used to apply to retail real estate too.
Categorizing retail properties used to be easy. Investors could just toss properties into different buckets based on size, tenants and location. But it’s not so easy to do that anymore, says Thomas Park, senior director with TIAA-CREF Asset Management.
“Retail is certainly the most dynamic of all property sectors, probably because it’s consumer driven,” Park says. “Retail is constantly moving, and changing consumer preferences show up quickly compared to other property types.”
Park and Martha Peyton, managing director with TIAA-CREF Asset Management, recently co-authored a research piece titled “Shopping for Retail Property Investment: The Art in the Science.” The piece debates the importance of defining retail property types and provides insight into how TIAA-CREF evaluates investment opportunities. The institutional investor has decades of experience in the sector, starting with its first retail property purchase in 1947 and its first commercial mortgage loan in 1948.
“When it comes to office and industrial properties, there is a commodity aspect to a large degree,” Park says. “That’s not the case with retail. Space next to a Whole Foods is different than space next to a Big Lots.”
Investors, particularly institutional investors, have historically determined their investment strategy by targeting specific buckets of retail properties for their portfolios. ICSC has 11 different categories for retail properties; it even has a bucket for airport retail. NCREIF, meanwhile, only has six categories for properties in the sector.
And therein lies the challenge for investors. How can these investors evaluate potential investments if they can’t even define them? And does it really matter if you call a property a community center or a power center?
Park and Peyton’s research piece contends that defining retail properties isn’t really that important. They point to two main reasons: the size overlap across ICSC’s definitions weakens the usefulness of size as a delineator, and tenant mix has become less useful in defining properties because it’s becoming more and more eclectic.
The Shops at Highland Village in suburban Dallas is a perfect example to illustrate the blurred lines between different property types. The tenant mix at this property consists primarily of lifestyle tenants, including specialty retailers and restaurants. A Barnes & Noble and AMC Theater anchor the property.
Yet the Shops at Highland Village also has tenant categories that place it in a different property bucket. For example, Whole Foods occupies an anchor spot, and the property also houses a variety of service-related tenants, including a pilates bar, a high-end salon, and FedEx Office. The Shops at Highland Village is just one example of blurring in categories. Consider this: big boxes are being added to malls, while new outlet centers contain full-price, off-price and outlet stores.
“Retailers today are being more flexible, both with their concepts and the types of space they’re willing to take,” Park says. “They’re trying to reach a broad consumer group and they’re looking for vibrancy wherever they can find it.”
Cues from retailers
TIAA-CREF applies a “holistic analytic framework” to all retail property categories, focusing on trade area demographics, the competitive environment, and the property’s strengths as indicated by the tenant mix and sales, according to the research note.
When it comes to trade areas, investors can take cues from retailers. Today’s retailers are sophisticated when it comes to targeting specific trade areas and study many variables before committing to a new store, including demographics, wealth levels and consumer spending.
Retailer demand can help investors determine whether a particular asset fits into their portfolio. However, many investors today are pursuing redevelopment or value-add opportunities, which means they may see more potential with a property than retailers do.
Park acknowledges that TIAA-CREF has an investment bias in favor of larger metro areas, i.e., those with populations of one million and more. It especially likes markets with relatively stronger historical employment growth and future growth prospects. “These size and employment growth characteristics support greater spending potential and enhance a property’s selling liquidity,” according to the report.
Beyond trade area demographics and a property’s competitive positioning, TIAA-CREF analyzes the projected durability of that position within the larger market. Park says evaluating competitive strengths and weaknesses is not solely a quantitative exercise because it must take into account future consumer preferences and shopping trends.
Peyton and Park’s research piece points to the grocery and apparel sectors as good examples of the importance of understanding a retailer’s place within the marketplaces. Knowledge of who’s hot and who’s not, along with their optimal store sizes, can be crucial in identifying properties with stronger competitive positions from those that are weaker, the paper states.
Ultimately, investors should not allow narrow definitions of retail properties to play a large part in the analysis of potential investments.
“Centers in any category can be attractive investment opportunities,” Park points out.