Gauging six measures, RentCafe has generated its take on America’s most prosperous cities since 2000.
RentCafe recently conducted an analysis of more than 300 U.S. cities to determine which had posted the most sustained growth over a variety of metrics since 2000.
The firm looked at the magnitude of proportional changes that affected their population, median income, home values, share of inhabitants holding a higher education degree, poverty rate and unemployment rate. Among other findings, it found that only 11 out of more than 300 cities have registered improvements across all prosperity indicators between 2000 and 2016.
Crunching that data, the firm generated a top 20 list of the most prosperous U.S. cities.
“By looking at the top 20 most prosperous cities in the U.S. on a map, we can’t help but notice that the East Coast–West Coast battle is on yet again,” Balazs Szekely wrote in a blog post for RentCafe. “Although that hardly comes as a shock. More surprising is that Texas alone is represented by no less than 6 cities in the top 20, one more than California–or in other words, as many as the entire West Coast combined. The fact that not a single city from a landlocked state has made it to the shortlist is also some food for thought.
The study included all U.S. cities with populations of 100,000 or more in 2016. Data from 2000 was sourced from U.S. Census Summary Files, while the 2016 data came from the U.S. Census ACS five-year estimates and data.
In the following gallery, you’ll find the top 20 along with each city’s scores in each of the six metrics RentCafe evaluated.
Here are some key points real estate professionals shared during the second day on the showroom floor.
The sentiment among retail real estate professionals remained upbeat on the second day of exhibitions at this year’s RECon. Some attendees felt the “doom and gloom” of retail headlines seem to be, at least for the moment, somewhat in the past as retailers, owners and developers try to move the industry forward. Others, however, also continued to note that the pace of activity appeared slower than in previous years. In 2018, the conference fell over the Jewish holiday Shavuot, potentially impacting attendance levels. A representative for ICSC wrote in an email that total attendee count was not tabulated by Tuesday morning, though the organization had anticipated attendance to be on par with previous years.
Regardless of attendance levels, many attendees on Tuesday reported that meeting schedules were full and deals were getting done. For example, Joseph Coradino, chairman and CEO of mall owner PREIT, said his firm had a record high number of meetings with new tenants from a range of categories—a sign of a successful conference, he noted.
Here are some key points real estate professionals shared during the second day on the showroom floor.
- Competition is increasing for grocery-anchored properties, and it’s harder to shed power center assets. Many attendees pointed to the desire to focus more on incorporating grocery tenants into retail properties, and two chiefs of firms focused on grocery-anchored centers acknowledged the competition for them is getting tougher. Thomas McGuinness, president and CEO of InvenTrust Properties, a REIT that focuses on open-air centers, said his firm has increasingly focused more on grocery-anchored centers and has shed many power centers, which had faced headwinds similar to the mall sector in secondary and tertiary markets since 2015. “It’s not easy to sell power and to buy grocery,” he noted. McGuiness added, however, that there are cash-flow buyers looking to buy power centers in smaller markets before interest rates rise. Joel Murphy, CEO of New Market Properties, which owns grocery-anchored shopping centers in Sun Belt states, agreed that the competition to buy grocery-anchored centers is tough. This is even more the case as pension funds, looking to fill retail components in their allocation mandates, turn to necessity retail as a potentially safer bet than other retail properties, he added.
- The dissolution of the middle class is a key challenge. The gap between the top 10 percent of America’s wealth and the bottom 90 percent has been growing for decades, and it’s a fundamental challenge for the retail real estate industry, said Yaromir Steiner, founder and CEO of Steiner + Associates, a real estate developer. Consumers are still spending money, but the loss of a big chunk of America’s middle class has triggered the rise of discount brands and warehouse club retailers. Given these changes, the industry cannot be shocked that some malls are dying and value retailers like Dollar General are growing, Steiner noted. “This income shift is fundamental.”
- Malls will continue to shutter and evolve. America’s nearly 1,200 malls will likely be cut down to 600, according to Carl Tash, chief strategist at Starwood Retail Partners. And the malls that survive will be those that have, in some cases, transformed into completely different uses. Tash notes, for example, that one Starwood mall, Fair Lane Towne Center in Deerborn, Mich., saw nearby Ford Motor Corp.’s research and development division expand its offices into the mall, overtaking a vacant Lord & Taylor store. At another property in Nebraska, a local community college is weighing holding classes in a Bon-Ton location. Coradino, of PREIT, said his firm shed 17 malls in secondary and tertiary markets, which has helped to boost its sales to $385 per sq. ft. from $340 per sq. ft., and that the REIT continues to prune its portfolio where needed. “The mall space is changing at a blistering pace,” he noted. Other firms are also trying to shed properties, but Coradino said the buyer pool has shrunk and cap rates have risen. PREIT also continues to change the tenant composition at its malls, Coradino added, shifting from apparel retailers to mixed-use opportunities.
- Amazon’s acquisition of Whole Foods does not appear to be as disruptive to the grocery sector as originally thought—at least so far. The sense when Amazon announced its deal to buy grocery chain Whole Foods was that the move might trigger price reductions, according to McGuinness. But nearly a year after the announcement, that doesn’t appear to be the case, he said: There has been some price discounting, “but maybe not as material as we thought.” However, the partnership is still evolving. “I think it’s still new and they’re trying to figure it out,” McGuinness said. Murphy, of New Market Properties, said another initial reaction to the deal was that Amazon was going to disrupt the grocery sector like it did the bookstore industry. But that hasn’t happened yet either. Instead, the move has pushed other grocers, like Kroger and Publix, to innovate. “They woke up pretty quickly,” Murphy said.
- Publicly-traded retail REITs are being painted with a broad brush—and perhaps unfairly so. McGuinness said lower-tier malls and power centers may deserve some of the negative sentiment surrounding them, particularly as class-C and class-B malls are more than likely to go dark. That sentiment appears to be spilling into other retail REIT sub-sectors, yet the fundamentals of community shopping centers are still strong, he noted. “It’s just raining on all of retail, and the hope is there’s just kind of a bifurcation,” McGuiness said.
- Technology is key to the industry’s survival, but some are still slow to adopt. Many conference attendees pointed to the importance of adopting new technologies to help facilitate the merging of online and in-store sales. “Everything is about an experience, and speed and convenience,” said Jedd Nero, principal and executive managing director of New York City retail at Avison Young, a real estate services firm. However, not everyone is jumping to add the latest tools to their stores. Nero noted, for example, how the ICSC technology hub called the Innovation Exchange featured many new products to help the retail real estate business, but drew a sparse crowd. “This is what people are still not acknowledging and facing,” he said.
The flurry of investment deals is a notable shift for an industry that appeared to be bracing for a slowdown.
The year is not even at the half-way mark and it is already proving to be a big year for billion-dollar transactions. And there are likely more mega-deals on the horizon that could give transaction volume an added lift.
The flurry of investment deals is a notable shift for an industry that appeared to be bracing for a slowdown. Transaction volume has been on a gradual downward trajectory after hitting a post-recession peak of $546 billion in 2015. Annual sales dipped to $495 billion in 2016 and $468 billion in 2017 and were forecast to slide to $450 billion this year, according to the ULI Real Estate Consensus Forecast released in April.
“It’s likely that 2018 will see an uptick in investment activity as these big deals tend to add up very quickly,” notes Rene Circ, director of CoStar Portfolio Strategy. A few years ago, in 2015, the industry saw a similar spike in transaction volume due to a series of large portfolio deals. For example, Blackstone sold IndCor Properties to an affiliate of the Singapore sovereign wealth fund GIC for $8.1 billion, while Prologis and Norges Bank bought the KTR Capital portfolio for $5.9 billion.
Mega deals slowed in 2016 and 2017, but it wasn’t due to lack of interest, says Circ. It was more a situation where some large portfolios traded, and it has taken time for sellers to create new portfolios or add value to better position portfolios for sale, he notes.
Real estate is likely being swept along in a broader resurgence in M&A activity that is occurring across sectors with e-commerce, logistics and technology being some of the notable leaders. “We have waited a long time for this M&A activity to unleash again,” says K.C. Conway, chief economist for the CCIM Institute. “We have yet to get back to pre-2007 levels, but it is increasing largely due to both the Tax Act and deregulation by the Trump Administration,” he adds. Conway also serves as the director of research and corporate engagement at the Alabama Center for Real Estate at the University of Alabama.
Plenty of dry powder available
Recent acquisition activity is another sign that companies have plenty of capital available to fuel more growth. Global private equity real estate funds had an estimated $266 billion in dry powder available for investment as of March 2018. This represents a nearly 7.0 percent increase over the dry power available at year-ed 2017, of which over 60.0 percent was focused on North America, according to consulting firm PwC. “It’s not surprising that with asset values on individual acquisitions priced fully that we’re seeing acquirers with dry powder and balance sheet capability turn to business combinations through M&A in order to find growth,” says Byron Carlock Jr., U.S. real estate leader at PwC.
PwC noted in its Q1 Deal Tracker report that real estate deals during January and February were on par with those of 2017. Deal value of $61 billion was down a slight 1.0 percent compared to the same period in 2017, while the number of deals closed—4,581—was up by 2.0 percent. However, mega deals announced in March, April and May from the likes of Brookfield Property Partners, Blackstone and Prologis will likely give deal volume a significant boost.
In addition, there is still a lot of capital in the market looking for a place to go, including foreign capital that is targeting U.S. real estate, adds Conway. Investors like tangible earning assets like real estate that perform better against inflation and rising interest rates, and geo-political issues in Iran, North Korea and the Middle East are also pushing foreign investors to look for a safe haven for capital, he says.
According to Conway, companies also have more capital available as a result of tax cuts. For example, at Berkshire Hathaway’s annual stock holders meeting in Omaha, Warren Buffet noted he is sitting on $120 billion in cash to deploy as a result of the Tax Act compared with $30 billion a year ago. Buffet also said that his biggest challenge is identifying good places to deploy the cash and he is limited in how much he can roll into companies he already owns at Berkshire. So real estate is looking quite attractive again, says Conway.
Low NAV equals buying opportunities
Some of the M&A deals that have occurred in the public REIT sector have been fueled by lower net asset values. Private equity firms in particular are counting on the fact that valuations in the public space may be misstated. In addition, there may be an opportunity for private buyers to realize added value by leveraging assets higher than what public REITs typically allow. Most public REITs maintain lower leverage on assets, often below 50 percent, as compared to private owners that may lever up to 65 or 70 percent.
“Even though the cost of debt has been going up, it is still relatively cheap by historical standards,” says Carlock. “So the arbitrage from higher leverage and lower public valuations gives the private equity investors potential upside through eliminating public company costs, levering up the portfolio and potentially realizing some G&A savings (general & administrative spending).”
Here are some views from the convention floor.
The International Council of Shopping Centers (ICSC) kicked off its annual RECon convention for retail real estate professionals this week in Las Vegas. Optimism abounded during the first day of the show, though some industry insiders expressed concerns related to how to navigate the loss of big-box tenants and finding the right tenant mix for retail properties. Here are some views from the convention floor on Monday.
The retail real estate industry’s largest convention was dominated by one major theme: change.
The first exhibition day at the International Council of Shopping Center’s (ICSC) annual RECon conference in Las Vegas—the largest convention for those in the retail real estate industry to meet, network and make deals—was dominated by one major theme: change.
And the change, according to several experts on the convention floor, appears to be coming from many different directions: the rise of non-traditional retailers, the demise of traditional chains, the necessity to rethink retail concepts and how people will shop and live in the future.
Despite these question marks, many industry insiders described the show’s atmosphere on Monday as optimistic, citing these challenges as opportunities for creativity. Schedules for meetings were as full as in previous years, they said, and booths appeared to bustle with activity. “People are positive. Retail sales are good,” says Holly Rome, executive vice president and director of national retail leasing for real estate services firm JLL.
Still, some other retail real estate professionals said attendance appeared lower than during previous years, noting some exhibition space was empty and that not as many traditional retail tenants—mainly fashion retailers—were exhibiting this year. However, mall giant Simon Property Group had booth at the conference floor, after years of holding RECon meetings off-site. And the reality of the challenges facing the industry—e-commerce competition and large retailer bankruptcies, for example—are on attendees’ minds. “I think people are concerned,” says Gary Albrecht, co-chairman of the real estate department at law firm Cole Schotz.
Here are some key trends retail real estate experts noted on Monday, the first full day of exhibitions.
- Tenant mix is more critical than ever. “It used to be location, location, location. Today it’s location, location, location and tenant mix,” says Alan Esquenazi, partner at Florida-based real estate services firm CREC. Creating the right tenant mix was top of mind on Monday, and increasingly, that mix includes a range of different categories of tenants, from hospitality to medical services. “You have to look at your property with new eyes,” Rome says. This includes figuring out how to handle retailers that vacate large tracts of space—like Toys ‘R’ Us—and those that need to reconfigure how much space they really need. However, Joseph Cosenza, vice chairman at the Inland Real Estate Group, says retailer rightsizing can be a positive development as well. Cosenza points to Kohl’s move to reduce space and partner with grocer Aldi, which has proved a success, as well as the fact that some retailers, like cosmetics seller Ulta and Amazon-owned grocery chain Whole Foods, are expanding. Retailers have to focus on modernizing their physical spaces and having a product that can’t be bought with the click of a mouse through Amazon, Cosenza notes. His one piece of advice to those navigating these changes? “Don’t panic, get smart.”
- Does everyone really need a food hall? Food halls were also a popular topic on the convention floor as a way to bring experience, uniqueness and local ties to a property. But it might not be the solution for all centers, says Grant Gary, president of brokerage services at The Woodmont Company, a real estate development, brokerage and leasing firm. One effect Grant’s firm has seen is that food halls, in an attempt to bring in more customers to a shopping center, can lead to a pullback in sales at that centers’ restaurants. There may also be other food halls being planned at competitor sites. “You really have to do the homework to see how sustainable a good hall will be at the end of the day,” he notes.
- There appears to be an increase of international retail chains’ interest in expansion. Several experts noted the strong international interest at the conference. “People still need a place to put money,” says Anjee Solanki, national director of retail services at Colliers International, a real estate services firm. Of international retailers moving to new markets globally, food and beverage companies top the list, says David Close, EMEA cross border director at real estate services firm CBRE. Some top expanding companies include Joe & the Juice, Leon and Wasabi—players that can provide healthy food quickly, Close says. While markets like Dubai and Hong Kong are top among brands seeking to expand, U.S. cities like New York are also coveted, he adds.
- Landlords want to own and control their data. This means that some are exploring acquiring data centers to keep on site, says Solanki. This has two benefits: it helps to guarantee productivity for POS operations and allows landlords to collect data on customers and own it. “Everyone wants to be their own master of their own market and market share,” she notes.
- Hotels are increasingly being incorporated into retail sites. This was the message from Eric Jacobs, chief development officer, North America, of Marriott International’s Select Service brand of hotels. Marriott and mall owner Simon recently announced adding five hotels to Simon’s retail centers, and Jacobs says there are more deals in the works with Simon and others. The industry, he notes, is increasingly looking at hotels to fill the voids left behind by big-box retailers and to cater to a customer base that craves walkability. “This is just an evolution and paying attention to what our consumers are saying worldwide when they travel,” Jacobs notes.
- It may be time to sell. At the show, there was a sense that owners were seeking to shed retail assets now, when they may be able to get a good price before interest rates rise, Albrecht says. This was particularly the case for non-core assets, he notes. “They feel like now is a good time,” he adds.
Demand remains strong, but the number of new apartments opening has been trending higher than the number of apartments absorbed.
Apartment landlords can no longer raise rents like they used to. So many new apartment units are opening that the percentage that vacancy is inching higher across the country.
This year “will likely remain challenging for many landlords and apartment investors,” says Victor Calanog, chief economist and senior vice president in the New York City office of data firm Reis Inc.
Strong demand for apartments has helped limit the damage from new supply. Apartment rents are likely to keep growing on average through 2019, even though rents are not growing nearly as much as they used to.
“Short of a recession—which not even the Federal Reserve’s Comprehensive Capital Analysis and Review projections are expecting any time this year—apartment fundamentals will likely weather this storm,” says Calanog.
Strong demand shields apartment markets
Robust demand absorbed more than 200,000 apartments over the year that ended in the first quarter of 2018, just as it has for the last 17 consecutive quarters in the core 150 markets followed by data firm RealPage, Inc., based in Richardson, Texas.
“Apartment demand remains remarkably robust, buffering the industry from vacancy spikes and allowing operators to maintain solid growth as the up-cycle enters into its ninth year,” says Greg Willett, chief economist for RealPage.
Over the last nine years, strong demand has led to the absorption of more than 2.1 million apartments, more than the 1.8 million new apartment units developers built over the same period.
Demand remains strong, but the number of new apartments opening has been trending higher than the number of apartments absorbed. Developers are expected to open a little more than 300,000 new units a year through 2019, matching the current high level of production, according to RealPage.
“Supply levels are peaking, but won’t decline materially any time soon,” Willett says.
All the new development is putting stress on the apartment sector. “Vacancies have been rising since late 2016 as a veritable avalanche of new supply (a record high for some areas) works as a counterbalancing force,” says Calanog.
The overall market is still relatively healthy, despite the new supply. Of the apartments in the U.S., 95 percent were occupied at the end of first quarter in 2018. That’s equal to the occupancy rate the year before and down just 10 basis points from the quarter before, thanks to a particularly strong performance in the month of March, according to research firm MPF.
High occupancy rates are helping keep apartment rents high and rising. “Rent growth—while below the cycle’s peaks—has outperformed many investors’ expectations,” says Willett. Same-property rents for new leases climbed 2.6 percent in first quarter compared to the year before. That’s about the same as the rate of rent growth has been over the last four quarters, according to RealPage.
Demand is likely to continue to be strong, though not quite enough to fill all of the new units coming on-line. “We don’t expect demand will quite keep pace with supply, but the gap will be narrow enough to maintain healthy fundamentals,” says Willett.
Apartment occupancy rate is likely to drop to the mid-94 percent range, according to RealPage’s forecast through 2019. That’s down slightly from 95 percent in the fourth quarter of 2017. It’s also a relatively healthy level.
Rents should grow by more than 2.0 percent per year on average over this period. “Class-A and urban portfolios are expected to perform materially softer, while suburban and class-B appears positioned to thrive,” says Willett.
Developers have generally opened the largest number of new apartments in the markets that have also had the strongest demand for new apartments. “Charlotte, Nashville, Austin and Salt Lake City led the pack – all recording growth of more than 30 percent in their occupied unit count,” says Willett.
LaSalle Hotel Properties (NYSE: LHO) said May 21 that it has agreed to be sold to private equity group Blackstone Group LP in an all-cash transaction worth $4.8 billion.
Blackstone will pay $33.50 per share, a premium of about 5 percent above LaSalle’s closing share price of $31.90 on May 18. The transaction is expected to close in the third quarter.
WiredScore Certification offers landlords a way to attract tenants, study claims.
Class-B office buildings can compete with newer properties for tenants and generate higher rents if they offer first class connectivity, according to a new report from research firm CoStar Portfolio Strategy that looked at how WiredScore Certification, a third-party evaluation system for rating a building’s Internet connectivity performance and infrastructure, impacts rents and occupancy in Manhattan. CoStar and WiredScore have been collaborating as data partners since 2014, according to CRE Tech.
Wired Certification is an international connectivity standard for identifying, evaluating and verifying commercial buildings with the fastest and most reliable Internet connections.
The study found that class-B office buildings benefited from a rental increase of up to $7.50 per sq. ft. for Wired Certification, when controlling for building quality and distance from a subway station.
According to Dave Cochran, executive vice president in the Dallas-Fort Worth office of real estate services firm Colliers International, office tenants’ technology needs have changed a lot just in the past several years. “Five years ago, when a tenant asked for a space with connectivity, we would search for offices that would allow for open floor plans,” Cochran notes. “Now, connectivity means seamless connection to servers, wi-fi, emails, and devices all the time at any spot in the office. Without great connectivity, class B-office buildings will not be able to compete.”
WiredScore’s Founder/CEO Arie Barendrecht notes that he has heard countless anecdotes from landlords on Wired Certification’s ability to generate longer lease terms and higher rents in office buildings.
In determining the financial benefits of Wired Certification, CoStar blended its own five-star building rating system, which looks at factors such as design, systems, amenities, landscaping and certifications, with WiredScore’s rating system, which rates building connectivity based on number and type of Internet service provider (ISP) options, infrastructure, bandwidth capabilities, readiness and reliability.
Depending on connectivity performance achieved, buildings are rated as Platinum, Gold, Silver or Certified. Shaw Lupton, a senior managing consultant at CoStar Portfolio Strategy, says that for each level of Wired Certification, the study found a 6.9 percent rent differential. He notes that Wired Certification vouches for connectivity features that matter most to tenants, including:
- Ease of installation. Connectivity has to be plug-and-play so workers can get up and running on move-in day.
- Variety of ISP options. The more ISP providers offered, the better the pricing because there is greater competition.
- Connectivity resilience. Businesses require Internet reliability because when the connection goes down, productivity is paralyzed and they lose money.
- Cell phone connectivity. Businesses want assurance of cell phone coverage everywhere, as their employees want to work in locations throughout the building where there may not be Wi-Fi service.
“Connectivity is the oxygen that runs all businesses today, underpinning lower-level uses such as video conferencing, higher-level operations like cloud computing and in the future will support virtual reality,” says Barendrecht.
Achieving the highest level of Wired Certification should be considered by landlords that want to attract technology, advertising, media and information (TAMI) tenants, as the study found that these tenants occupy 13.3 percent of Wired Certified Platinum buildings in New York. At the same time, they account for only about 8.4 percent of occupancy in buildings Certified Silver and Gold and 6.9 percent of occupancy in unrated buildings.
TAMI tenants are increasingly choosing the best office space in the best locations as a means of competing for creative talent, noted the report. Wired Certified buildings in the study with the highest concentration of TAMI tenants were on average about 45 percent closer to a New York subway stop.
“When looking at office space, tenants [are rarely] allowed to see what’s behind the walls,” says Barendrecht, noting than when evaluating older buildings, a WiredScore telcom engineer performs a rigorous inspection of the building’s connectivity before guaranteeing it performance. The good news, he adds, is it is much easier to upgrade Internet connectivity than other building features, like environmental performance.
The 43-year-old Willis Tower (former Sears Tower) in Chicago, which is managed by Equity Office, for example, recently achieved Platinum-level Wired Certification. The connectivity infrastructure upgrade is part of the iconic, 110-story building’s $500-million overhaul, a joint venture of Blackstone and Equity Office. Blackstone and Equity Office are among WiredScore’s clients.
Spencer Levy cautions that industrial and multifamily will confront short-term supply headwinds, and stresses that retail has been unfairly pummeled.
Spencer Levy, head of Americas research at commercial real estate services firm CBRE, makes it clear that he’s not in the business of giving stock tips. Nonetheless, he certainly has his favorite sectors among public and private REITs.
Industrial and multifamily top Levy’s list of standout sectors, while he says retail is the most challenged category in commercial real estate. However, Levy cautions that industrial and multifamily will confront short-term supply headwinds, and stresses that retail has been unfairly pummeled.
Levy’s market assessment aligns with investor sentiment. In a CBRE survey earlier this year of about 300 investors in the Americas, 50 percent identified industrial as their preferred property sector, with multifamily ranking second at 20 percent. Only 10 percent of the investors favored retail.
In a Q&A with NREI, Levy explains how “local is the new global” philosophy is buoying industrial, why investing in multifamily represents a strong long-term strategy and why e-commerce pressures facing retail are overblown.
This Q&A has been edited for length, style and clarity.
NREI: Do you have any sense about how long industrial will remain a sector that performs well?
Spencer Levy: There are two simultaneous trends that will bolster industrial for some time. One of the trends is obviously e-commerce, which involves the “last mile,” and that’s probably the largest demand-driving trend.
There’s a second trend out that not as many people talk about that I call “Local is the new global.” You probably have seen a boom of microbreweries, right? Why are you seeing all these microbreweries? Is it trendy? Is it cool? Do people like beer more? The answer is no. The answer is it might be trendy and cool, but people don’t like beer more. What it is is that people are now forming more local businesses that can compete with the forces of globalization and automation. Some of these local businesses are microbreweries; they tend to be in smaller industrial buildings.
So, the real trend that you need to follow is not industrial overall, but it’s the shift of the definition of what constitutes institutional-grade industrial, which was solely large warehouses and distribution centers.
How long will this last? Well, it will last as long as we don’t build ourselves into a problem. In two of the last several quarters, we’ve seen new supply exceed absorption; supply is becoming an issue in some markets. I think industrial doing well will last for a very long time, but you may see some short-term excess supply issues.
NREI: What about multifamily?
Spencer Levy: If you’re in the real estate game for a long-term hold, there’s no better place to be than the multifamily space. Similar to industrial, you will see some short-term supply issues. But overall, the preference for renting versus buying is only increasing, so multifamily is a great place to be over the long term.
NREI: And what’s your take on retail?
Spencer Levy: Retail has gotten crushed over the last two years because of the negative implication of e-commerce. In my opinion, it is the single biggest overwrought story in commercial real estate. Most retail that’s owned by public REITs is not going to be put into oblivion by e-commerce; REITs have been shedding some of their second-tier, less internet-resistant assets for a long time. They tend to have better assets in these REITs that are grocery-anchored and/or are in strong demographic locations.
I like the long-term [outlook] of industrial and multifamily because of the positive trends. But I think that the attractive buying opportunities from a capital markets perspective are in the retail REIT space, in large part because there’s been a tremendous overreaction to the encroachment of the internet.
When people ask me about retail, I’m very direct. I say that the fundamental disruptor of retail is not e-commerce, it is demographics, meaning there have been demographic shifts out of certain areas that mean you cannot re-tenant into one of these experiential or other types of retail. If you have strong rooftops, strong growth, you’re going to be just fine.
Some people will say, “Oh, well, take a look at New York City retail—that must be a harbinger for the broader market.” Not true. New York City retail and a grocery-anchored shopping center in Yonkers are apples and oranges. One is based upon the luxury and international segment of the market; the other is based upon necessity retail for the local rooftops. So, the reason why New York City retail has seen some softness in the last year is because of overpricing. People pay a lot for these assets, and they have to charge rents that are beyond where retailers are now willing to pay. But the overall strength of the New York City market hasn’t changed.
Last year the event drew in 37,000 industry insiders, and ICSC expects a similar number of attendees in 2018.
Amid decreasing investor interest in retail properties and negative outlook for retail real estate, real estate professionals and retailers expect deal-making to continue as usual—if not better than—previous years at ICSC’s annual RECon convention next week in Las Vegas.
“I think it’s just going to be business as usual,” says Mark Tergesen, executive managing director at ABS Partners Real Estate, which focuses on street-level retail in mixed-use properties in New York.
Last year the event drew in 37,000 industry insiders, and ICSC expects a similar number of attendees this year, wrote an ICSC spokesperson in an email. There will be 1,100 exhibitors at the conference, which runs from May 20 to 23, and the conference will showcase around two dozen technology companies at the ICSC’s Innovation Exchange.
At real estate services firm JLL, the sense is that this year’s conference will be busier for its team of about 175 professionals than it has been in a while, says Greg Maloney, CEO of the firm’s retail Americas division. Consumer optimism is at historically high levels since the recession, which bodes well for retail real estate, he notes. “We see right now retail really starting to soar,” Maloney says.
Hal Shapiro, senior director at Winick Reality Group, a retail leasing firm in New York that serves the tri-state area, says he believes some of the negative press lags behind what’s happening in the market, as his firm is seeing more activity as landlords have begun to lower asking rents and offer concessions—particularly in New York. Heading into the conference, Shapiro says his sentiment is one of “cautious optimism.” “I think the dollars are out there to be spent in the retail world, but the retailers lack the confidence,” he notes.
Real estate services firm CBRE intends to bring about 800 to 900 team members to the conference, about the same amount as in 2017, says Anthony Buono, global president of retail at the firm. Buono notes that the retail real estate industry may be experiencing some disruption, but the sentiment for the business is “very strong.” “I don’t have any fear or hesitation or doubt right now,” Buono says. “I think there’s a lot of positive signs for what we do.”
CBRE’s first quarter retail report noted that retail sales grew in the first few months of the year, and net absorption and asking rents also increased. Data from real estate research firm Reis also found that vacancy did not spike for the sector in the first quarter.
There are pockets of struggle—the bankruptcy of big-box retailer Toys ‘R’ Us and the closures of department stores are two examples—but there are areas of strength as well, Buono notes. Food and beverage and online retailers, for example, are growing categories in brick-and-mortar.
When it comes to big-box closures, Maloney says it is too early to say how these closures will impact the industry. There is still optimism that the space can be filled or redeveloped, he notes. “Once we know when we get the space back—that’s when the fun begins,” Maloney says.
Still, Maloney expects that questions will surface about how to determine what are the right store footprints for retailers, and when is the best time to right-size retailers’ portfolios. “It’s hard to juggle when you do it and how you do it,” he says.
Retailers are also looking at omni-channel distribution of their products and brands, and at real estate as a choice—these are certain to be top questions at the show, Buono says. “All of those things today are really being reimagined in our industry,” he notes.