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What I Learned at the Recession

March 1, 2016 | By John Cumbelich

The first great philosopher of the 21st century, Mike Tyson, wisely observed “Everyone has a plan, until they get punched in the mouth.”  The Great Recession of 2008 – 2010 recalibrated the best of plans like a Tyson uppercut.  During the recession, every market was hit, but some were hit harder than others.  One thing that we learned was that core markets, with their concentrations of population, daytime employment and transit, had shorter and shallower recessions than the suburban edge.

As new development has reignited in the post-recession recovery, it has been noticeably different and more core-oriented.  Developers, lenders and users have determined to avoid exposing themselves to outlying markets and weaker fundamentals.  Those who survived, learned invaluable survival skills.  Those edge markets, once coined as “hot growth markets” too frequently proved themselves in reality to be high-risk markets, populated by homeowners who barely qualified for home loans, and who were among the first to hit the exit door when employers started issuing pink slips as the economy teetered.

Today, retailers are far more inclined to pay the freight for a premium core location, rather than save rent dollars and gamble with a location whose fundamentals aren’t proven.  A telling illustration of this sea-change in thinking was recently shared with me by Robert Frank, CEO of Z Gallerie with whom I recently consummated a lease for a super-premium location.  The subject site is within a few storefronts of Neiman Marcus, Tiffany and Apple in downtown Walnut Creek, CA.  As we were framing the real estate deal, he explained his interest in the site to me thus:  “When I took over as CEO, about half of the stores that I inherited were in great locations.  The other half were ‘great deals’ where the company had been induced to sign up because of attractive economics.  Now, we are relocating all the ‘great deals’ and paying market values for great real estate.”  I like to call this post-recession thinking.

Nothing succeeds like success, and success for the retail or restaurant brand has always been linked to customers.  Lots and lots of customers.

More so than ever before, retailers and restaurants are challenging themselves and the brokers who hunt sites for them to find ways to grow in the core, adjust their offerings, and learn urban retail, even if it costs more.  The lower occupancy costs in non-core markets act as a constant temptation to challenge this discipline for growing brands.  But with an economic recovery now in its sixth year, we have yet to see growth brands resume pre-recession thinking and chase low rents around the edges.

Several notable bankruptcies occurred during the recession taking down storied brands such as Circuit City, Mervyns and Linens N Things – brands that had successfully built up strong portfolios of real estate in site-constrained markets over several decades.  Recognizing the rare opportunity that these closures posed to secure great real estate in high-barriers-to-entry markets, the smartest brands, those with great business models, seized the opportunity.  Ross Dress for Less, Bed Bath & Beyond, Dollar Tree and Home Goods were buyers during the recession, when everyone else was selling.  Their savvy was reminiscent of Warren Buffet’s famous maxim, “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful.” Ultimately, the decision by brands like these to acquire real estate in the midst of the historically painful Great Recession was an affirmation of the virtues of core-market fundamentals. And each of these brands (I am a shareholder of each) have seen their annual sales and stock valuations soar to record highs as the vast sales potential of their great new real estate has come online.

Today, despite sky-high rental rates, occupancy levels at historic highs and the lowest interest rate environment in over 50 years, there are scarcely any big shopping centers in development on the suburban edge.  A generation of been-there, done-that developers who each built dozens of grocery anchored centers and power centers over the past thirty years are scratching their heads at this fundamental change.  Meanwhile, Target and Walmart are evolving their urban and express concepts, grocery stores keep getting smaller, sit down restaurants have been replaced by fast casual QSRs, and more retailers have embraced (gasp!) multi-level stores if that’s what it takes to secure a deal in a proven, core market.

Managing to grow store count while focusing on core markets creates a new set of challenges for the retailer or restaurant, beyond just paying higher rents.  Sites still have to offer convenient parking, proximity to anchor tenant traffic and ease of access.  After all, what good is a core market location if customers can’t find the store and there’s nowhere to park?  In short, the process of building a successful store network is more challenging and more nuanced than it’s ever been. (A good broker helps).

But this is a healthy pressure that is forcing a new generation of developers to reimagine our business, repurpose under-developed core real estate sites, and form strategic partnerships with the retail and dining brands that can best adapt to the next evolution of retail.  Indeed, the genius of this business is the ability of the best and brightest to constantly meet these evolutionary challenges.  As Iron Mike would say, anything less would be Ludicrous!