Don Wood Says Retail 'Absolutely Sucks' Right Now, But Profit Is Possible
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It is a bad time to be a retail landlord, according to Federal Realty Investment Trust president and CEO Don Wood, but that will not stop the smartest businesses from turning a profit.
“It sucks. It absolutely sucks. This is a really, really tough time to be in retail real estate,” he said at Bisnow’s National Retail Series event in Manhattan on Tuesday. “Everyone involved knows it.”
E-commerce has dangled over brick-and-mortar retail like the Sword of Damocles, with companies like Sears and Macy's citing online shopping as a key factor in deciding to execute mass store closings. Wood said the internet threat is actually just one of several issues plaguing the industry. A consumer shift as Baby Boomers retire and age out of prime spending years, changing trends stemming from smartphones and too much retail space are all headwinds for landlords.
“The single biggest thing you read in the papers that is absolutely true is that supply exceeds demand," he said.
Payless Shoe Source filed bankruptcy and announced plans to shutter 400 stores due to rising competition from online shopping. Ralph Lauren dropped a bombshell that it would close its Fifth Avenue flagship, and GameStop announced it would close up to 225 stores ... and those are just the major closings in the last two weeks. Despite the wave of negative headlines, landlords are finding that tough times do not necessarily mean zero profit.
“It’s certainly a tough time, but I think 2008 was a tougher time,” CEO Steven Grimes of Chicago retail REIT RPAI, who joined Wood on the 2017 Investment Forecast panel, said. “Not only was it a retailer disruption, there was also the credit crisis.”
Following consumers is key to making a profit this cycle. Retail landlords are shedding assets outside the top 25 markets in favor of densely populated areas like greater Boston and New York City, as spending habits and customer service have evolved. The iPhone is to blame, Wood said.
“The smartphone has made everyone nuts because their expectations for level of service has changed because information is now readily available so quickly,” he said.
This drive for near-instant gratification has led most consumers to urban areas, and landlords are following suit. Retail is the only sector of real estate where tenant placement matters, Wood said. In chasing where tenants and retailers want to be, he said the hunt usually leads to bigger cities worldwide because it is where there are more people with more money to spend.
Recalibrating and finding innovative uses for huge spaces left in the wake of big-box store departures is another key to survival. Mall landlords should and will do a lot to fill a vacant space, and experiential retail like Legoland Discovery Center and Pinstripes, a bowling and bocce bistro, has been a strong source of rent growth. Other promising revenue streams have come from beauty tenants like Ulta and fitness centers like Equinox.
“If you go back to 2008, you shied away from health clubs, you shied away from theaters,” Grimes said. “If you don't think about where the consumer [is going now], you’re probably going to be behind the curb.”