GRS Group’s Allen Brown deals extensively with retail real estate clients in his practice, especially in the net lease sector, so he has a good idea of how the industry is performing. His take? Landlords are weathering a challenging retail environment pretty well and remain optimistic despite the waves of store closings hitting the industry. Like several GRS Group associates, Brown hit the recent ICSC RECon convention in Las Vegas in May. Though Brown said attendance seemed down, and companies scaled back the grandiosity of their receptions, he had a productive show.
When you speak to clients nowadays about store closures, and when you talked to them at RECon last month, how are they taking the many store closures?
Allen Brown: They’ve heard enough of it and experienced enough of it over the past several years. It doesn’t surprise them anymore. They’ve learned how to deal with that by repurposing the stores. Mall owner’s and strip center owners are starting to allow some local tenants into their spaces and adding experiential tenants to the mix.
So local and experiential tenants are welcomed by landlords?
Brown: It changes their rents a little bit, but if it fills up space and it drives bodies in, it’s good for retailers overall. Even in net lease, things go under, and they get repurposed. And some strip centers in the secondary and tertiary markets don’t have national tenants, they have regional and local retailers in them, but they survive because they have a nail salons and other retail that drives foot traffic. Retailers still need to overcome the shoppers that go to the mall to touch or feel something and try it out and go home and buy it online at a better price.
What’s changing in the restaurant sector?
Brown: Millennials don’t cook many meals at home, so they eat out more overall, but they’re spending less per seating than other generations. Owners have to customize the restaurant spaces that they have in the malls to attract them. And they have to be fun things for that generation with decent music. And they must have wifi.
How is net lease holding up in this shifting market?
Brown: 2018 was a solid year in the net-lease market. It’s not growing strong, but it’s solid. It’s holding stable. We are hearing from investment sales professionals that they expect that to continue stable through 2019 and 2020 before an appreciable drop. Beginning last year, cap rates started to rise. Sellers who came to the market late were putting their properties up for sale and finding that the Buyers were looking for higher cap rates. Cap rates have stabilized now, and sellers have realized that they will be a little higher for some property types, and buyers are happy with that movement by the sellers, so the sales continue. If the Fed is stable, and the cost of capital is stable, we’ll continue to see stability in the cap rates. It can continue as long the tenants are doing O.K. and paying their rent. But if the cost of capital is up, then people will want a higher rate of return. Instead of 6.25 percent, they might want 25 to 50 basis points more, reflecting in increased cost of capital. The loans they’ve been getting at the bank have gone up in the last two years. The cost of capital has gone up, so everybody is looking for yield – including private REITs, big REITs and individual investors and that will come at the cost of higher cap rates.
How are non-core markets doing?
Brown: Secondary and tertiary markets are doing OK. My clients are looking for consumer-oriented products like auto-parts stores, paint stores, Dollar Generals. That’s more so in the tertiary markets than in the secondary.
So business is steady overall?
Brown: There is still appetite out there. Last year I saw a higher rate of cancellations on my transactions than I’ve seen this year, though cancellations have picked up a little recently. Many 1031 buyers are identifying multiple properties, and they go under contract on all of them, then start doing diligence and site visits and drop two of them and close on the third one. They might have opened a deal with GRS on one they’re buying in Pennsylvania, but not necessarily the one that they’re looking at in Indiana. If they move forward on the Indiana location and not the Pennsylvania site, GRS loses an order.
What was attendance and overall environment like at RECon?
Brown: I am not sure what the final attendance numbers were, but I felt like attendance was down this year. The log jam of people at certain intersections was not as much as in the past few years. Part of the reason is that many of the major mall owners have moved their leasing meetings off site from the LVCC. There are also fewer retailers at the show right now because they aren’t expanding. So, there are less retailers going to RECon overall and driving the foot traffic. There were several people that I have counted on seeing at the event that did not attend this year. It seemed that many of the booths didn’t have as many people in them. Restaurants also seemed less full. I did client dinners on Sunday night, Monday night and Tuesday night, and I didn’t have any problems getting a reservations, and I noticed more empty seats than I’ve seen in the past.
The event was good for me. I got plenty of meetings in, and my schedule was filled. And the people who I saw were optimistic. While transactions are getting harder to close, there was still a lot of optimism that deal flow would continue into the foreseeable future, into later this year and next year. Nobody wants to take that leap and look past that time.
About GRS Group
GRS Group is a leading provider of commercial real estate (“CRE”) services worldwide. With offices across the United States, Europe, and affiliates around the globe, GRS Group provides local market knowledge with a global perspective for institutional real estate investors, occupiers and lenders worldwide. The GRS Group team has evaluated and advised on over $1 trillion in CRE transactions.
Through the company’s proprietary management process, Global Services Connection, GRS Group delivers an integrated suite of services including Financial Advisory, Transaction Management, Assessment and Title Insurance. We provide a single point of contact, capable of leveraging the GRS Group portfolio of companies and delivering customized solutions to assist our clients in achieving their investment goals.