Aspen Dental
Rheem Valley Shopping Center
Client Spotlight
Uncertainty or Opportunity?
As the sun begins to set on the withered stalk of another eventful year in commercial real estate, uncertainty prevails in Q4 of 2022 as forecasters ponder the direction that markets will take in 2023.
Throughout 2021 and the first half of 2022, the same industry voices which had grown dormant through a trying pandemic, rent the air with cheers when a post-Covid recovery brought users off the sidelines. The recovery that began to blossom in early-2021 produced an exceptional 18-month run, fueled in part by historically low interest rates, PPP and other government largesse.
Yet a more sobering sentiment has taken hold in late 2022 due to a once-in-a-generation escalation of inflation rates, completely alien to half of today’s market participants. Commercial real estate markets today find themselves caught in a negative loop of rising inflation, rising interest rates, rising construction costs and an ever-shrinking pool of large format retail tenants with strong credit that are seeking to grow. Several of the key catalysts to new retail growth appear to be missing.
Amazon appeared, briefly, to be stepping into this void. But headwinds encountered by the e-commerce giant in the brutally competitive world of grocery retailing have hastened a re-thinking, or perhaps a retreat, from this proposed store roll-out. Largely due to Amazon’s emergence in the grocery space, and much more importantly from a CRE perspective, the news of the announced consolidation of the Kroger and Albertsons real estate fleets represents a gigantic shift in the national retail real estate landscape. If approved, the merged behemoth will be far better positioned to compete with both the largest bricks and mortar grocer/retailer in the world, Wal Mart, and the largest E-commerce retailer in the world, Amazon.
The inevitable shedding of real estate that the Federal Trade Commission will stipulate for the Kroger merger/acquisition will present an unscripted and welcome boost to retail commercial real estate markets. The opportunity for users, investors and developers to acquire proven real estate in core markets will generate interest from all quarters, especially since the disposition of redundant real estate will be a condition of FTC approval, at whatever price the market will bear. Investors of every stripe – parsimonious, acrimonious and sanctimonious will each have a shot at what will be, at least in part, a lot of great retail real estate. All by itself, a national Kroger/Albertsons disposition program would represent a boomlet of development, leasing and job creation in numerous markets. Man proposes and the FTC disposes.
Mid-term elections have the chance to swing both houses of the federal government into Republican control, which historically speaking would suggest a business-friendly climate and the de-emphasis of utopian progressive spending, such as the threat to saddle the US taxpayer with billions in expunged student debt obligations. More importantly, with an economy at near full employment, the consumer today is in a strong cash position. Strong employment and cash are proxies for economic expansion, both of which will work to counter inflation’s impacts. And any decision by the Federal Reserve to stop, or ultimately reverse interest rate increases will encourage growth to find its footing again. With America at a very high level of employment, consumers in a strong cash position, a shift to a more pro-business Congress appearing realistic and tapering interest rate increases, a 2023 recession is no foregone conclusion.
Our current outlook suggests that the US voter, as well as governmental agencies including the Federal Reserve and Federal Trade Commission, will each play an outsized role in determining how real estate markets will take shape in 2023. And a US economy that is still finding its post-COVID footing will present numerous, if not widespread, opportunities for growth.
Raising Cane’s – Ceres Lease
1613 N Main Street, WC – Sale
Sprouts / Fitness 19 – For Sale
Goodyear Rocklin
Rotten Robbie – Dixon, CA
Roam Artisan Burgers
World Famous HOTBOYS
I Remember
In the early days, I would take a listing on a retail center with one or two 1,200 SF vacancies, hoping to get leases signed at $1.00/SF per month with a Subway or Supercuts franchisee. That would result in a leasing commission of $6,000, which would be split 50/50 with the outside broker, then 50/50 with the house, leaving me with two $750 commission checks…before taxes.
I remember…leases with a pizza restaurant, a sandwich shop, an appliance store, auto parts stores, Chinese restaurants, book stores, skate shops, a chiropractor. The vast majority of the people I did business with back then were small businessmen. Both the landlords and the tenants. I quickly came to learn that they all had an interesting story. Either they had started with one restaurant or store, and eventually grown it into a small “chain” of three or five locations. Or, they had saved and borrowed enough money to buy their first rental property, and now had three, or five…or ten. I learned to always ask them to tell me their story. They all had such interesting stories about how they had done it.
I soon realized that my nascent career in commercial real estate gave me the opportunity to drink deeply the waters of enterprising small businessmen; people who bet on themselves, each finding their own paths to success.
So long ago. Reagan was in the White House and Johnny Carson still ruled late night television. But I never watched television. I came in early, I worked late, I worked on Saturdays, and went into the office for an hour on Sunday after church. I was young and poor, but rich in energy and the fear of failure, and that fueled me to build the small steps to my own success.
It all distilled. Pitching new listings. Cold calls. Succeeding and failing. Learning how owners and users made decisions. Helping businesses grow. Learning how the lender, the real estate attorney, the contractor, the city official and the other members of the cast with whom I now shared a stage all fit together.
In those days most of the young real estate brokers that I knew aspired to become real estate developers. Developers were the builders, the decision makers and the catalysts who first envisioned and then built the shopping centers that made the industry grow larger, better and ever-new. In the pre-personal computer, pre-email, pre-internet era in which I began, the retail industries’ growth was built upon wave after wave of big box retailer roll outs. Daring and successful real estate developers in my world were mavericks, cowboys and bad asses. Prior to the great consolidation of portfolios by NYSE REITs and other Wall Street backed investment funds, real estate developers built impressive regional portfolios based on key anchor-tenant relationships and deep roots in local markets. They were rarely the highly educated types – more frequently savvy risk evaluators with equal parts charisma, capital and smarts.
But I was more interested in building a brokerage company. My own. When I started interning at Coldwell Banker (now CBRE) in the early 1980s, I learned that its founder Colbert Coldwell was a graduate of the University of California, Berkeley. I then learned that Dean Witter, another iconic brokerage builder, was a Cal grad as well. My own Cal provenance helped to focus a young mind searching for a career path to ponder the example of men like these. Building a respected brokerage company struck me as noble goal, worthy of my best efforts and just possibly within my grasp.
Little did I realize how all of those small-fry real estate investors, retailers and restaurateurs who were telling me their stories about betting on themselves, and succeeding, had crystalized the vision in my mind, that I could do something similar, in my real estate brokerage space. I talked to a client, who introduced me to a banker, who gave me a line of credit to start my business. It turned out that someone else was willing to place a bet on me too. I opened for business on my birthday, May 20, as the new century began.
And the business became successful beyond my imaginings. I don’t mean financially. I mean that I learned what we were capable of when competing against, not working for, the best in the business. And after a year or two, I realized how this was the last job I would ever have.
My story in not unique. I just did what my parents had always preached. Work hard. Always try to exceed expectations. Surround yourself with people who are better than you.
In today’s pandemic recovery, we’ve consummated a sizable share of the business defining the next chapter in retail real estate. With Amazon. With Costco. With Crate & Barrel and Raising Cane’s and Lucid Motors and CVS and Dutch Bros and with many others. I’m in the fourth decade of learning my craft and I’m rich in relationships, in clients who became friends, in wisdom to share and stories to tell.
Looking back, there were good times and there were hard times, but there were really never any bad times. Perhaps I’ve turned into one of those people I met so many years ago who has an interesting story to tell.
A long way from hustling for those $750 checks.
Recession or Re-Set?
Recently the Wall Street Journal published an article observing that if the US economy is in a recession, “it’s a very strange one” (July 4, 2022). Every recession over the past 80 years has been characterized by two consistent factors: increased unemployment and a contraction of the economy. Yet despite a recent reduction in the size of the economy, employment continues to expand, nearing 97% nationally. In today’s US economy, virtually everyone who wants a job has one.
Against this backdrop, firms like our commercial real estate practice truly find ourselves busier than ever before, as all those businesses that moved to the sidelines during the pandemic have come charging back onto the field, aided by scores of new businesses including EV companies such as Lucid and Rivian, retail healthcare brands like Carbon Health and One Medical, and booming QSR brands whose sales have shattered previous highs. Add to these users the residential and mixed-use developers who are crowding the playing field by densifying suburban markets, cramming projects ever closer to dining, transit, shopping and services.
As I take a daily poll of peer brokerage firms and our investor/developer/owner clients, as well as the user-brands that we help to grow, they all chorus in unison about persistent demand for growth that is primarily constrained by supply chain delays. While the rising construction & fuel costs that have been accurately and well-chronicled are certainly having their impacts too, user demand stubbornly persists. Simultaneously, consumers have increasingly encountered the staffing shortages that have suddenly caused cafes, restaurants and other labor dependent businesses to reduce hours, and caused airlines to slash flights by the thousands, among other retail staffing impacts. Staffing shortages and near-full employment levels are not signals of an economy in recession.
No, I will not label the unevenness that the economy is experiencing as a recession. Rather I would posit that the twin phenomenon of swelling employment and a contraction in spending are simply the logical results of an economy in which multiple artificial props that have served their purposes have recently been removed. The foundering US economy of 2020-2021 was defined by two unprecedented interventions – the PPP loan/forgiveness program (free money), and near zero interest rates (almost free money). Additionally, the government’s direct stimulus payments (free money) and the extension of unemployment benefits (free money) further buoyed the economy. How couldn’t they?
As this unprecedented level of government largesse has recently wound down, what we now find is not a US economy in recession, but rather an economy that is right-sizing to a normal, healthy and non-artificially inflated size. It would be no more accurate to describe the present right-sizing of the economy as a “recession” than it would have been to describe the artificially curated pandemic recovery that preceded it as “organic” growth. Our capitalistic system absorbs positive and negative economic impacts alike, and is continuously righted by the self-correcting gyroscope of free markets.
Government interventions like PPP and generationally-low interest rates were never intended to be permanent. Only those who might have assumed the artificial economy of 2020-2021 to be a “new normal” could characterize the US economy’s 2022 right-sizing as a recession.
Amy’s Drive Thru
Retail-politik
Observers of world affairs are familiar with realpolitik – the term used to describe a system of principles based on practical rather than ideological considerations. Radical changes in the US economy throughout the COVID pandemic provided a vivid illustration of what occurs in business when practical considerations overwhelm ideology.
In San Francisco, politicians have long grown accustomed to imposing legislation, ordinances and other diktats on operators of retail and dining establishments designed to siphon off revenues, in exchange for the privilege of doing business in the glamorous city by the bay. To fund its progressive vision, San Francisco has long been at the forefront of the nation’s costliest minimum wage & health care requirements on retail establishments.
More recently, San Francisco legislated an anti-chain store ordinance, designed to restrict the most proven and profitable providers of wages, jobs and tax receipts from entering the city limits. Practically speaking, the Formula-Retail ordinance as it is known, would have been better fashioned as the Vacancy-Creation ordinance. When subsequently confronted with mounting retail vacancies, San Francisco’s policy-makers observed the vacancy mess that they had indisputably helped to create, and then loftily imposed a punishing vacancy tax on their aggrieved landlords of retail spaces. The Board of Supervisors advised the public that the vacancy issue was the result of what the Board described as “bad actor” landlords. Really? Apparently, accountability is not an ideological consideration employed by San Francisco’s policy makers as they sought to reconcile the shambles they had made of their once glittering retail landscape.
A useful data point as one considers just how outrageously politicized the environment is in San Francisco, was the successful petition to place an insulting Proposition on a 2008 ballot, renaming a water pollution control facility as the George W. Bush Sewage Plant. While the denigrating measure did not pass, though collecting over 30% of the popular vote, it exposed a sickness in San Francisco. One-party rule is a dangerous thing, no matter whose politics are involved. As Mark Twain observed, “To lodge all power in one party and keep it there is to insure bad government and the sure and gradual deterioration of the public morals.” Yet cheap-shot ballot measures, while offensive, are not the worst reflection of contemporary San Francisco.
Clearly the breaking point for several retailers was the city’s latest affront to the business community, its determination to stop prosecuting theft. San Francisco’s Prop 47 reduced felony theft and drug possession charges to misdemeanors. Clearly, the bad guys got the news. A Union Square and Embarcadero Center awash in historic vacancy tells the story better than any blog post or editorial.
Finally, retailers have had enough and are leaving. Both CVS and Walgreens have announced widespread closures in San Francisco. Think about that. The biggest national winners in retail through the COVID pandemic have been essential retailers. CVS and Walgreens sell everything from prescription medicines to milk to diapers to cleaning supplies. They are as essential as it gets. It would be hard NOT to be successful in a densely populated and historically high-barriers to entry market, during a pandemic when you are selling essential goods to a captive audience.
For major retailers like these, well trained in brass knuckles real estate negotiations with far more savvy counterparties in thousands of other municipalities, the practical costs of doing business in San Francisco have finally swamped the benefits of indulging the city’s crippling ideologies. These national chains, like all businesses, are acting according to their self-interests based on realities in the marketplace. They have determined that they are better served paying wages, paying taxes, paying rent and providing their truly essential services somewhere else. Big Retail is answering the punitive, arrogant and woke ideology of its host city with decisive and unmistakable action. Big Retail is leaving San Francisco. The exit of these chains leaves a gaping hole in the menu of critical services being offered to San Francisco’s residents, especially in the retail pharmaceutical space. The exit of critical retail service providers is a lesson in Retail-politik that every heavy-handed city and state government should soberly reflect upon.
Viral videos amass weekly of looters running rampant through the stores, and then brazenly fencing their stolen loot on the sidewalk outside the store, knowing that in San Francisco, they will not be prosecuted. Yet the decision to stop prosecuting crime, while sensational, is not the only reason that best-in-class retailers are leaving. It is just the latest reason. The tragedy of San Francisco’s fall from grace has been decades in the making and self-imposed. The city has become an Opera-Bouffe of one-party rule and a progressive agenda run amok.
The national economy has had scores of winners in the rebound from the COVID lockdown. Innovations around mobile ordering, online retailing, mixed-use developments, the embrace of electric vehicles, adaptations by major chain retail and dining brands that have allowed them to bounce-back, grow market share, raise wages and hire like crazy, are just a few of the ways communities and their business partners have met the challenges of our times. A generation ago, San Francisco would have been in the vanguard of these success stories. But in today’s San Francisco residents are immersed in the greatest measure of lawlessness, litter, graffiti, homelessness and panhandling that the city has ever known. In a national economy chock full of innovators, recovery stories and winners, it’s hard to dispute that San Francisco is the biggest loser of all.
Dutch Bros Lease – Ceres
Dutch Bros Sale – Merced
El Pollo Loco – Hayward
3065 McKee Road (La Plaza Market) – Sale
901 San Pablo Ave Sale
The Covid Rules
The Ides of March was celebrated in ancient Rome on March 15th each year, as the deadline for settling debts. As the commercial real estate industry continues to emerge from the punishing Covid pandemic, it too has genuinely begun to settle in this March of 2022. We’ve learned a lot about how consumers and markets have adjusted to the post-Covid paradigm.
Below we share the Top 10 Covid Rules that have reshaped the shopping center industry.
- Essential Retail eats Experiential Retail for lunch. In the pre Covid era, Experiential Uses like Fitness, Theatres and Entertainment concepts like Dave & Busters were peddled as a clever backfill strategy for a mounting inventory of vacated big boxes that failed due to e-commerce impacts. Many tried to rationalize these uses as having the advantage of being internet-resistant, since you had to leave the house to enjoy your workout or movie & popcorn. During Covid, brands like Peloton and Netflix illustrated how those services were in fact deliverable at home, and virtually all Experiential Retailers had to fight for survival, while the grocers, pharmacies, banks and drive thrus soared.
- The Money will be Spent…Covid just re-organized where. All those home-office set ups, backyard barbeques, home gyms and domestic vacations at US resorts perfectly illustrated how consumers are going to consume, regardless of hurdles arranged by governmental agencies around where they could spend it.
- Drive Thru Everything. Groceries, Pharmacies, Coffee, Lunch, Dinner, Banking, Urgent Care, Covid exams. What next? Covid taught us how the car is the new customer and retail and dining brands, as well as many other non-retail organizations tailored their services to the consumer’s vehicle.
- Online Partners are here to stay. Grub Hub and Door Dash, Uber and Lyft, Yelp and Facebook, and many other platforms that help to integrate retailers and consumers became entrenched and indispensable during Covid. They are all here to stay.
- The rise of E-commerce will keep rising. But bricks & mortar retail isn’t going away. The 2020’s will be a decade of further integration between consumers and retailers with mobile devices, creating growth opportunities for both home delivery and in-store and restaurant visits.
- Chicken is the new Beef. Exhibit A: Chick Fil A. Exhibit B: Raising Cane’s. Exhibit C: Slim Chickens.
- Just Walk Out technology will be the new normal faster than you think. Amazon is raising the bar…for everyone. Consumers will adapt to JWO technology in the same ways that they did to grocery store adaptations like bar codes and self-checkout. A consumer would not think of buying a television without a remote or a car without a keyless fob. JWO is a game changer in convenience for the consumer that will leave late adapters scrambling to play catch up.
- De-risking deals will be the next battlefront between Landlords and Tenants. Spiking inflation, soaring construction costs, supply-chain delays and geo-political uncertainty have all conspired to make the science of projecting development costs guesswork. Both Landlords and Tenants will seek to push construction cost risk to the other parties’ side of the ledger on new builds. Landlords will seek ground leases in which tenants self-develop, while credit tenants will seek to make Landlords deliver turn-key stores.
- PPP Worked. Rents were paid. Mortgages were paid. Salaries were paid. Taxes were paid.
- Covid was the first great Darwinian moment of the 21st Century in the US Economy. “Business conditions change, and survivors adapt” – Sam Walton. Generational events like the Covid pandemic embody change, adaptation and survival. They also act as the catalyst for a new generation of winners in retail.
Dutch Bros
Monument Plaza Sale
Monument Plaza
Cars are the New Customer
Our firm just consummated our first-ever ground lease transaction with a restaurant brand that will build a triple-lane drive thru. The design will allow the brand to accommodate over 50 vehicles in the drive thru stack at one time. This next generation super-sized drive thru is not only an accommodation to a booming restaurant brand, but a solution that addresses frustrated shopping center owners whose parking lots have become swamped in cueing automobiles, and municipalities concerned over vehicles backing up onto busy streets.
Similarly, grocery, retail and dining leases now have standard language requiring dedicated parking stalls for online order customers. These parking spots create convenience for the consumers as well as better integration between the retail or dining establishment with delivery service partners like Grubhub, DoorDash, Uber Eats, etc.
As ever, shopping center owners are trying to improve & differentiate their assets from their competitor’s assets in various ways that will attract best in class users. Increasingly, providing conveniences and solutions to those customers means designing a shopping center paradigm that turns the consumer’s car into the customer.
One of the frustrations of the weekly shopping trip has long been the challenge of reckoning a long list of groceries into a small window of time. Shopping center owners that can optimize this experience for the consumer can thereby position themselves to capture both credit tenants and premium rents. An example of this optimization is yet another vehicle-first innovation in retail centers – the charging station. Notice how owners are increasingly adding EV charging stations to their common areas in high visibility locations. The addition of this service to the consumer and his vehicle, efficiently combines a shopping trip with a full charge on the car battery. That gives the consumer the valuable gift of time, in exchange for the decision to select one center over another.
Covid restrictions on indoor dining, concerns about gathering in large retail stores or other venues, and limitations on air travel were the spark that set off an explosion of innovations around how consumers work, shop, relax and dine. As person-to-person interaction has become restricted in various ways, our vehicles have become the point of contact with our retail establishments. Grocery stores, drive thru restaurants, banks, pharmacies, coffee shops and other users have each improved their interface with the consumer’s vehicle as the latest front in the battle for the consumer dollar. Look for further auto-centered innovations as shopping center owners and savvy brands seek to become leaders in this changing retail paradigm.
Obviously, the shift away from in-person dining and shopping has necessitated more time in the car, thus more fuel consumption, and more visits to the fueling station. The present boom in fuel and C-store expansion is a direct result of these market pressures. Still another outcome of all the time in cars has been a boomlet of car wash brand expansion.
It’s, um, no accident that Caliber Collision has become a darling in the Net-Leased investment market. Why? Auto body repairs are internet proof, recession proof & pandemic proof. Add to this a paradigm shift in consumer behavior that puts the car at the center of the retail experience, and brands like Caliber have a clear runway of increased demand.
What’s next? Drive thru urgent care? Well…yes. If you are like me and millions of others, you received your COVID screening test in the drive thru aisle. The further expansion of health-related services for the car-bound consumer is a certainty.
While the pandemic will eventually run its course, look for the automobile focused innovations that have quickly taken root both in consumer behavior and retailing to become the new normal.
The Brant
Essential Truths
Among the many radical and fundamental changes wrought in retail through the COVID crisis, perhaps none has been more widely accepted than the notion that what we now call Essential Services are the most indispensable and resilient of all retail offerings. The places where we purchase our food, fuel, medicine and home improvements have powerfully outshone all others throughout the recent pandemic.
Now, having trained ourselves to look at retailing through the lens of Essentiality, a remarkable trend has become apparent, as various retailing brands are increasingly seeking to put multiple essential offerings under one roof. Perhaps you have noticed how your grocery store…has gotten into the fuel business. Or how the place where you buy fuel has been dramatically growing the size of its grocery offering, quickly moving from 500 SF to 2,500 SF to 5,000+ SF.
This poses an interesting question, and perhaps a peek into the future of retailing. Why wouldn’t CVS or Lowes or Walgreens get into the fuel business too? If Costco can sell gas, why can’t Home Depot?
Among the most fascinating of the early adapters in this re-shaped world of retail are Convenience Stores. Numerous brands such as EG Services (Tom Thumb, Turkey Hill, Quik Stop, etc), Maverik, Rocket, Pilot Flying J and others are now building C-stores of 5,000, 6,000 and 7,000 SF. And increasingly these brands are leveraging the repeatable traffic that both fuel and grocery sales generate not simply to sell their essential products, but to monetize the traffic it generates by leasing space to Quick Service Restaurants and other retail and dining brands inside their box.
Brands like Subway, Arby’s and others are moving quickly inside of these mega-sized C-stores, having learned to expand their site selection choices beyond the traditional shopping center, to the interior of a highly trafficked box that sells fuel and groceries 24/7/365. Savvy brands always seek to position themselves where the customers can be counted on. And you can’t count on a more durable source of customer traffic than the place that sells both groceries and fuel.
We are on the leading edge of a radical reinvention in retailing that will continue to morph and grow as the integration or marriage of various essential service providers continues to play out.
Consistent traffic is the lingua franca of retailing. For decades, grocery stores have proven to be the critical catalyst that spawned thousands of shopping centers, creating the daily-needs shopping patterns that attracted the café, the bank, the shop and the restaurant. Looking forward, brands that can offer essential goods and services will seek both to consolidate and congregate, thus concentrating retail traffic much like the neighborhood grocery store did, and catalyzing a next generation in retail development.
My Corona
The past year was a trial by combat in the scorched earth environment of the commercial real estate industry. The government-mandated closure of retail and dining establishments did much more than punish the present – it pulled the rug out on the future as well, moving proven retail brands and enterprising entrepreneurs alike to the sidelines, if they remained at all.
The fight for survival among these brands was chronicled daily in the business press, as countless business failures, as well as innovations around online purchasing, take-out and delivery services quickly unfolded. Brands and their customers scaled a learning curve together in real time as the national economy became a business-to-consumer test laboratory. Less understood and far less reported on was the plight of the contractor, the architect, the consultant or, yes, the brokerage company whose income was entirely dependent on the constant and evolving growth of a retail real estate industry that had been locked down.
As weeks turned to months and news about the pandemic worsened, bankruptcies multiplied and vacancies across each and every retail submarket surged. One thing we learned quickly was that in 2020, our business was no longer about signing leases or purchase agreements. I searched for opportunity within the upheaval, learned patience, counted my blessings, and kept looking for opportunities to build.
One thing we saw was how an interesting array of essential uses and smartphone savvy brands had the opportunity to become kingmakers in brokerage. Fuel & C-store brands from Maverik, to EG, to Rocket burst onto the scene, while stalwarts like 7-11 and Circle K stepped on the gas. Dunkin’, salon suite concepts and deep discounters like Dollar Tree each identified expanding windows for growth in the midst of the disruption. The alpha-male of disruptors, Amazon, took the opportunity to begin its own aggressive expansion into bricks & mortar retailing.
“Business conditions change and survivors adapt.” So said the most successful retailer of the 20th century, Sam Walton, some forty years ago. His words came into sharp focus over the past year not because his teaching had suddenly become true, but rather because the chaos of the marketplace perfectly illustrated the veracity of this essential dogma of doing business.
For businesses like ours it was hard to determine if 2020 was going to be our Watergate…or our Waterloo. Was it merely a crisis, or would it prove to be a defeat? Firms like ours had long ago learned how to grow our businesses whether the industry was breathing out or breathing in; expanding or contracting. But when a global health crisis and the government mandated shut down of the economy froze businesses, the industry froze with it.
Into this paradigm, Mr. Walton’s heirs had to learn to adapt. Adaptation means many things: cutting costs, restructuring financing, adding business lines, dropping others, re-evaluating clientele and business partnerships, and more. For us, a key to this adaptation was harvesting new business with an eye to the future – listings on land, vacated big boxes, transit-oriented developments, and suddenly vacated but well-located retail, to poise the firm to prosper as soon as the market was ready to transact. Of course, listings are great, and prime listings are even better. But as the old saying goes in brokerage, nobody gets paid until the sign comes down. Undeterred, we waded into the swelling ranks of troubled landlords, not with a long list of active tenants in tow, but rather with a long resume, one that detailed how we had navigated our clients through prior storms.
Another adaptation was showcasing our commitment to being the market leader in relevant, useful, retail market data. In an industry suddenly devoid of transactional data or comps, our reporting on vacancy and absorption data stretching back several years in various submarkets brought current market conditions into meaningful context. Adapting means differentiating in a productive way. And each time that we published data on what was happening in the marketplace, our phone rang and our inboxes filled with people who needed to talk.
Through numerous downcycles over the past thirty-three years, we have learned, and re-learned, how strong firms in every industry have the opportunity to grow market share in down markets. Collecting the revenue that comes from increased market share comes later, but a bigger slice of the pie compensates for the long wait.
Tough times in business are a filter that tell us many things about ourselves and others. Beyond the more obvious feedback about financial wherewithal, generational cataclysms in business reveal something important about character. Pessimists are ill-suited to tough times. The ability to see through the storm’s dark clouds and envision a bright future on the other side is a test of one’s faith in himself and those he has partnered with. Maybe Sam Walton said it best: “High expectations are the key to everything.”
The Waymark
Lucid Motors
Lululemon – 1201 S Main
Popup – Listing – One Piedmont – QSR/Fitness Use
Walgreens – Tuscon, AZ
The Crisis-Proof Shopping Center
While an anxious national media reports on the retail apocalypse, spiking vacancy rates and big-name bankruptcies, perhaps it’s time for cooler heads to shift their focus squarely to the winners in the present disruption. Doom and gloom sells newspapers, but the list of prospering brands is long, and growing, as consumers adapt their shopping habits both to e-commerce revolution, and the current COVID crisis. Big wins by clever and opportunistic brands is the most under-reported story in retail today.
Indeed, the current state of affairs in the economy has created a new set of darlings in retail, as select retail and dining brands have demonstrated themselves to be both essential and internet-resistant. Expect that savvy commercial owners will be re-positioning their tenant mixes going forward to maximize the stability and success of their assets around these winning brands.
Grocery stores have clearly re-established themselves as the most essential and implacable of anchor tenants, posting soaring sales and record profits as consumers pare back travel and dine at home. Look for a broader and deeper array of grocery store offerings, in smaller sizes and unconventional locations to play out in retail in the 2020’s.
The classic grocery store co-anchor, the pharmacy, has demonstrated itself to be equally internet resistant, while the elevated safety and security that their frequent drive thrus offer have made pharmacies an easy winner in the COVID era. Prescription and over the counter medicines, as well as paper products and cleaning products all represent regular visits to the local pharmacy.
Hardware stores, home improvement big boxes and large format general merchandisers have all qualified as essential, while also benefitting from consumers staying at home, working from home, and consequently working on an array of home improvements, home office set ups, etc.
Drive-thru restaurants, coffee shops and QSRs have proven themselves able to generate as much, or in some cases even more revenues, than they were achieving in the pre-COVID paradigm. As traditional dine-in establishments have closed or reduced capacity with outdoor dining only, drive thrus have filled the void with hungry consumers and kept their cash registers ringing.
Likewise, brands that have adopted mobile ordering and smartphone apps, or marshalled proximate parking space for the mobile customers and delivery drivers have been able to differentiate themselves and align with the needs of consumers in the changing market environment. Dunkin’, Sweetgreen, Chipotle and Chick-fil-A are among the long and growing list of brands that have nimbly met changing consumer habits.
Other winners in retail? Garden centers and outdoor furniture retailers have benefitted as consumers spend money on their homes, instead of flying to Hawaii or Europe this summer. With less flying comes more driving, and gas stations and their C-stores and car washes have kept on humming. Add to these other crisis-resistant concepts including banks and credit unions, urgent care clinics and collision repair, and a picture starts to form on how tomorrow’s landlords will curate the internet-resistant, crisis-resistant tenant mix.
Dramatic and fast changing market conditions are quickly serving to sort out the new winners in retail. Look for savvy REITs, investors and owners to re-position their assets around these new winners to collect a bigger slice of tomorrow’s commercial rent stream.
Kenworthy Crossing – El Paso, TX
Reynolds Ranch – Lodi, CA
Kenworthy Crossing – El Paso, TX
Reynolds Ranch Sale – Lodi
Glass Half Full
Setbacks. Trials. Disappointments. As we digest the manifold challenges facing our families, businesses, schools and communities, athletes offer a valuable lesson for a time of trials. Athletes and sports leagues have been much in the news of late, navigating their way, like the rest of us, through the myriad of challenges besetting the economy and nation.
We often marvel at our athletic heroes, whose talents, competitiveness and resilience are frequently a source of both inspiration and instruction. While we may be tempted to credit the athlete’s success to genetic advantages of size or speed, every successful coach or athlete will attest that their achievements are the result of hard work, dedication and a fighting spirit. Not only does every successful athlete encounter loss, pain, sweat, tears and obstacles, they will tell you that these relentless challenges are their most reliable pathways to success.
Champions, those whose work stands the test of time, illustrate to us how there are no shortcuts to lasting success. The great ones have trained themselves to seize every challenge head on, indeed to seek them out. They welcome the adversity before them and keep on fighting, no matter how many times they are knocked down. They teach us how winning is not a result, but a way of life.
In our business lives, a mighty foe has risen, one that threatens the mastery we felt that we had over our craft and our careers. As our industry shudders and shifts, as businesses flop and the media howls, our heroes remind us that the hurdles that have arisen in our business lives are nothing less than opportunities to get better at what we do – these are our pathways to success.
It’s smart people that win in the long run, and now is a time for thinking, or re-thinking how we approach our industry, our customers, partners and clients. The rules of the game are being rewritten daily in our business, clearing the way for new leaders like you and me to chart a path that sees a glass that is half full, and reimagines and then rebuilds a broad new road to prosperity.
Chaos breeds opportunity in every marketplace. The dispassionate and seasoned real estate investor knows in his bones how a window is now opening to play offense, while others play defense. The smart service firm CEO understands that the current disruption is an opportunity to differentiate itself as a leader, and add market share that will bear fruit as the market stabilizes and reboots.
If you are of my vintage, you’ve just started to play the fourth quarter of the game in your career. Until recently, the scoreboard was looking pretty good – but the game has suddenly changed rather dramatically. One thing I know for certain is that the game will be played very differently in the fourth quarter than it was in the first three. And I’m ready to grasp hold of that challenge and partner with clients and coworkers to re-think what we do in commercial real estate. We are already aggressively setting about studying who is winning, where the opportunities are, and who is going to lead the way in this paradigm shift. While the media is fixated on the losers, our focus is on the new and emerging winners.
We are going to collaborate, listen, teach, learn and grow. And yes we are going to stumble and fall. But hard work, dedication and a fighting spirit are not the inheritance of athletes alone, but of champions in every arena. Let’s embrace the new challenges in our business lives and let them become our pathways to success.
Fitness 19 – Jarvis Ave, Newark, CA
Hampton Inn (aka: Inns of America)
Five Points Shopping Center – Redwood City
Caliber Collision – Fresno
Caliber Collision – Fresno, CA
Walgreens 1031 Exchange – NY
Walgreens, NY – 1031 Exchange
Ceres Crossings Now Pre-Leasing!
Repurpose, Rezone or Replace
The overbuilt US market for retail space was one crisis away from a major correction. That correction is now upon us.
The COVID-19 pandemic has brought into sharp relief the costs and consequences of the overbuilt nature of US retail real estate. Pre-COVID the US already had double the amount of retail space per capita of Canada, and quadruple the amount of Germany. The US inventory of retail space was historically over-developed, yet national occupancy levels remained steady for the past several years, supported primarily by a buoyant national economy that enjoyed an unprecedented bull run.
However, the relentless rise of e-commerce has been systematically dismantling scores of once proven retail brands while stunting the brick & mortar growth of others. The lethal combination of this retail paradigm shift to e-commerce with the COVID-19 pandemic’s shuttering of non-essential businesses is leaving in its wake a large and fast-growing inventory of vacated retail boxes. What was initially seen as a siloed infection to Department Stores and Regional Malls, has methodically spread to the Power Center arena, as sporting goods, home improvement, consumer electronics and other categories of large format retail stores shutter.
The COVID-19 pandemic has accelerated a growing national inventory of vacant big box space (JC Penney, Neiman Marcus, Stage Stores, etc) that has an increasingly bleak outlook for re-leasing, as the tenant pool of high-credit, active users seeking to grow brick & mortar locations continues to shrink. Forward thinking retail brands are largely pivoting instead to seeking their growth through online platforms.
This rapid and unfolding change will inevitably confront owners, investors and municipalities with vacant retail boxes for whom there is no strong retail replacement. Like it or not, an era of Retail Pruning is likely upon us, in which the path forward for big box assets will be to Repurpose, Rezone or Replace.
Let us remember that the most foolproof way to increase Demand…is to reduce Supply. Extracting boxes, or in some cases entire failed shopping centers, from the retail inventory is a sobering but pragmatic course to re-balance supply & demand, keep rents firm, discourage the re-use of vacated boxes by worst-in-class uses, and move our national ratio of retail space per capita to a healthier and crisis-resistant level. No doubt many owners will resist the need for this change, preferring to re-lease a vacated box with a down-market replacement, rather than spend the capital needed to reposition the asset. Likewise, many municipalities will cling to an unrealistic old-paradigm model for sales tax revenue based on an inventory of retail space that was only expected to grow over time. Yet as John Adams famously observed, facts are stubborn things, and the fact is that swelling vacancy will cause Supply to swamp Demand, bringing myriad blights in its wake. A community cannot ignore a retail vacancy problem indefinitely.
While skeptics may scoff at the notion of retail centers exiting the landscape, our firm has already been approached by savvy investors and developers that have asked us to target broken retail centers as target opportunities for mixed-use redevelopment. Re-imagined retail centers can still include retail uses, but on a right-sized scale that is perhaps 50% or less of the original retail footprint in size. The opportunity to densify these projects with vertical housing product, hotels, or office, medical and civic uses will enable developers to take advantage of the great fundamentals that good retail real estate provides for alternate non-retail users (location, proximity to transit and employees, etc).
Sometimes less is more. As we look ahead to what will become a national big box vacancy problem of unprecedented scale, the answer is extremely unlikely to be found in the form of expanding big box users that will absorb the supply. The answer instead is far more likely to be found in pruning existing inventory back to healthy and sustainable levels. Repurpose, Rezone or Replace.
Bad Actor
In the March elections, San Franciscans approved Proposition D, a new tax sponsored by a member the Board of Supervisors that targets landlords of vacant retail space. The sponsor believes that these owners are intentionally keeping their properties vacant, despite tenant demand. The Supervisor commented that the tax is “about changing certain bad actor landlord’s behavior” and “creating a disincentive for long term vacancies.” Disincentive? Hmmm. Don’t mortgage payments already provide that stimulus, every 30 days?
Note that San Francisco is the same municipality that led the nation when it adopted its anti-chain store “formula retail” policy, which subjects proposed leases to a retailer or restaurant with more than 10 units to a discretionary approval or disapproval by the city. Virtually every other city in the nation (over 99%) allow private property owners to lease their retail and restaurant space to tenants whose use is consistent with the zoning. Not so San Francisco. By restricting brands with 10+ units, the city has done something far worse than limit “chain stores”; it has restricted high-quality, high credit brands with proven business models from serving the community, investing in their properties, paying rent to landlords, and creating jobs. Among those most impacted by these restrictions are entry-level workers and those who lack higher education – two cohorts that historically leverage employment opportunities with retail chains as an entry point into the workforce and steppingstone to higher employment. Having limited the field of quality users that landlords can lease their vacancies to with the formula retail policy, the city has now imposed a punishing tax for the very vacancies they have helped to create.
But the anti-chain store policy is only one of an array of challenges confronting landlords, retailers and restaurants hoping to do business in the city. San Francisco already imposes one of the highest minimum wage requirements in North America. Add to this the soaring costs of healthcare, and a picture starts to form about how single-party rule in California and San Francisco has legislated away the retailer’s and the restaurant’s already tiny profit margin. Retail and dining businesses are highly labor dependent, and the already cutthroat business of retailing winnows out the weak, forcing entrepreneurs to operate on razor thin margins. Despite the impacts of wage and insurance costs on profitability, and the restrictions on leasing spaces to multi-unit credit tenants, the city government now attacks the landlord facing these headwinds, when he and a tenant can’t solve for an economic solution.
But wait, there’s more. Ask any resident, visitor or employee who spends their workday in San Francisco, and they will all lament with disgust the out-of-control litter, graffiti, homelessness, panhandling and crime that characterize today’s San Francisco. The very city government who is responsible to address these blights, but is outmatched by them, is culpable for the disintegrating social environment that has made leasing retail space an often impossible task. Ask the City’s Board of Supervisors just how many of them would open a business where the sidewalks are filthy, the homeless sleep in their doorways and the sights and smells graffiti and urine greet the shopkeeper each morning.
Beyond the wage & healthcare burdens, the formula retail ordinance, and the litter/graffiti/homeless issues, a still larger macro-economic challenge to both retailers and their landlords has exploded in recent years. The unrelenting rise of e-commerce has created a paradigm shift in how consumers purchase their goods and services. No doubt each and every member of the San Francisco Board of Supervisors uses Amazon and other web-based platforms for some of their purchases. The ongoing shift of retail dollars away from bricks and mortar retail to e-commerce sales is a reality that confronts San Francisco and every other city in the nation.
Instead of assisting their landlords to cope with this paradigm shift in retailing, and the growing list of hurdles to consummate a lease, the Board of Supervisors has demonized them. The notion that the city’s landlords are “bad actors” because they have been unable to lease their spaces during an e-commerce revolution in retail, and in the face of myriad city-mandated challenges to doing business, could only be conceived in an ivory tower. The bad actors here are those who create the continuous roadblocks to growth, not the entrepreneurs or investors unable to overcome them.
While progressives like to slap themselves on the back and justify their policies as helping out the “little guy,” they have conveniently forgotten that some little guys are little property owners, little retailers, or little restaurateurs. Rather than coming to their aid with policies that help make their livelihoods possible, and thereby stimulate jobs, services, sales tax revenues and neighborhood vibrancy, San Francisco has determined to punish them with a tax. In essence, the new tax codifies the notion that landlords are to blame for the wage and healthcare costs that tenants can’t afford, for the homelessness, litter and graffiti that discourages retail investment, and for the inexorable rise of e-commerce. San Francisco’s progressives have determined to tax away these stark realities, rather than come alongside the community’s landlords and business owners to solve them.
No doubt an unintended consequence of this new tax will be the decision by owners to lease their spaces to just about any tenant, rather than wait for a good one. A tax like Proposition D is an economic incentive designed to spur action, and it will. When the vape shops, tattoo parlors, liquor stores and other worst-in-class concepts that sell everything from smut to tobacco products to hard liquor begin to open, the city will see the rise of a new brand of bad actors and learn what kind of incentive it has really chosen to create.
