ICSC Western Division Highlights and Net Lease Health

In an increasingly complicated retail real estate world, GRS Group sent some of its team members to the ICSC Western Division conference to get an update on what people are saying about the commercial real estate sector. We spoke with Kevin May, a business development director with the firm, and Allen Brown, national accounts manager and Arizona operations manager, about what they learned at the conference. They touched on the overall state of the industry, the health of net lease retail and more.

What was the overall tone at the conference?

Kevin May: It appears that retail sales are going to be strong for the holidays. Attendees were very upbeat, but a couple people said that prices are too high, and they think a correction is coming. Tom McGee, the CEO of ICSC, said that retail sales are not losing as much to online as the media would have us believe.

But some people do think prices are inflated and are a little gun shy on the transaction end.

Did people like the change of venue from San Diego to Los Angeles?

May: Most people seemed to not like the change of having to go Los Angeles. But the attendance was about the same. There were 4,620 attendees last year and 4,595 attended this year. But people from out of town seemed more interested in going to San Diego. Even people from L.A., like me, would rather go to San Diego.

Allen Brown: People I talked to felt like meetings and attendance were down over last year. The prices of the hotels in downtown Los Angeles were astronomical compared to what we paid in San Diego. A lot of companies had fewer people from their offices this year because the price of the trip was higher.

On the net lease front, was there any concern about potential tax reform ending 1031s?

Brown: No net lease professionals I spoke to really brought up that subject. They were discussing upcoming deals. We are starting to see cap rates go up, which leads to a little bit of a depression in purchase prices. They expect to see that trend to continue and are pushing sellers to get their product to the market to take advantage of 1031 money that is out there now. They believe we will continue to see upward pressure on cap rates, which puts downward pressure on sales prices.

Sellers are trying to get product to the market now as quick as they can. No one I have talked to in the last few months is really worried about that 1031 credit going away, though, because it will absolutely destroy the real estate marketplace, and real estate is one of the key foundations of the economy.

They just don’t believe that Congress and the White House are going to make that a key component of anything. It needs to remain out there and available. We may see some changes in it, but I don’t think it’s going to go away.

What about expanding concepts?

Brown: I spoke with one person who is responsible for the western region development for Dairy Queen. They’re going through an expansion. In Arizona, Nevada, parts of California, Oregon, Washington, Alaska and Hawaii, they expect to bring 12-18 units in the next year. Nation-wide it is expanding by about 80 units a year.

There is restaurant expansion going on, but there is not so much with some of the bigger-name companies. It’s more new concepts and not your typical fast food. We won’t see as many Red Lobsters, Applebee’s and Chili’s, instead you’re going to see some new brands out there.

The pizza segment is extremely hot right now. There are a lot of different pizza brands coming out to go along with the fickle tastes of the Millennials, who are really driving food expansion.

May: McGee said that retailers really need to adapt to the wants and needs of the Millennials, and that is leading to a lot of the expansion of fast-casual-dining restaurants.

Brown: The Millennials are here to stay, and they don’t cook in the kitchen that much. They really enjoy the social aspect [of dining out]. They don’t work late hours and are all about their social lives and connecting with other people.

Brown: New development is still a bit tepid. People are not building and taking as much risk as they did a couple of years ago. Instead of “build it and they will come,” companies are now building for the demand that they have. The retail expansion has slowed in that regard. It used to be that they would follow rooftops, but there is not as much expanding development in metro areas as there was 10 years ago before the downturn hit.

What about the state of vacated big-box stores?

Brown: The tenor on it is that power centers, regional malls, and strip centers have changed the way they think about the tenants they put in their properties. They used to want the national tenant under longer-term leases. Now they’re willing to take more boutique tenants on short-term leases just so they can keep their spots filled. Landlords might get lower rent than from the national retailers. It used to be that shopping-center owners dictated the terms. That’s not the case anymore. It’s a bit more of a tenant’s market.