'Not Your Grandmom’s Mall': How The Biggest Retail REITs Are Handling Retail’s Seismic Shifts
About six months ago, a mall owner approached Pennsylvania Real Estate Investment Trust CEO Joe Coradino and offered to sell a mall for $1M.
It was an intriguing offer, made more so by the fact that PREIT sold the same mall to the same owner for $17M years earlier. Ultimately, Coradino said, he passed.
“It's going to be worth less than that soon,” he said at Bisnow’s National Retail East event Thursday. “It’s a different business, it’s a fun business … it’s all moving in the right direction, but it’s not your grandmom’s mall anymore."
Around the world, retailers and landlords are reckoning with rapid changes to the ways people shop, and where and how they want to do it.
In the first half of the year, more than 2,500 store locations closed across the country, according to JLL. Before the year is out, about 600 more locations will close up shop.
“There is too much retail in the United States of America. There is. Some of it has to be repurposed,” Federal Realty Investment Trust President and CEO Don Wood said. “Retailers are clearly doing better as a result of the tax cuts and as a result of the economic changes in the country — it is a much different environment than it was a year ago — but there is still more supply than there is demand.”
Catering to millennial consumers, preparing for the next generation of buyers, and curating and shaping retail experiences to draw in shoppers were all discussed at the event, held at 866 United Nations Plaza in Manhattan.
Major retail asset owners who spoke at the event said while retail is not dead, shopping locations, retailers and malls are going to need to adapt. Some think it is up to landlords to lead the change.
“I'm kind of tired of hearing about Toys R Us ... it's yesterday’s news,” Coradino said, adding he had just been texting with a coworking company that wants to open facilities in PREIT properties. “We need to be creative … and not expect that the retailers who do a terrible job in our properties are one day going to find the cure. They're not. It’s up to us to find the retailers.”
The closure and shrinkage of big-name stores like Sears, JCPenney and Macy’s have dominated headlines. But industry players said some retailers have moved quickly to adapt.
Kimco Realty Corp. Chief Operating Officer David Jamieson said the retail environment is now reaching an “equilibrium” with companies that were damaged by Amazon’s explosion of market disruption now regaining their footing.
“[Best Buy is] probably the best example of being really hurt by Amazon, [but] they've been able to transform their business,” Jamieson said. "I think that’s what you've started to see across the board."
Kimco has been in the process of transforming its portfolio. It owns 460 shopping centers, but Jamieson said its first mixed-use project with 100K SF of retail and 322 residential units, which just opened in Philadelphia, is an indication of where the REIT is taking its properties.
“In terms of the retail environment, we’ve started to see a bit of change in the tone and investor perception,” Jamieson said.
Acadia Realty Trust CEO Ken Bernstein said that despite lots of use of the word “armageddon,” the economy remains strong and consumer spending has risen. Acadia is putting capital toward taking primary assets from the public markets and privatizing them, according to Bernstein.
“If you can buy high-yield, borrow 2-to-1, you can clip a very attractive levered return provided you pick assets that are going survive this shakeout,” he told the audience. “And that has been more challenging than we thought, so we are buying less of it than I'd hoped, but there is still attractive opportunity there.”
Madison Marquette Chief Investment Officer David Brainerd said it is very hard to find acquisitions in places like New York, Seattle, D.C. and San Francisco that make sense. So the company is looking beyond those major metros.
“We've been spending a lot of our time, in terms of looking for new opportunities, either in really the high-growth markets in the Sun Belt — Dallas, Austin, Nashville — or looking at really transformative opportunities a lot of the times in the edgier neighborhoods in major markets,” he said, adding that much of it is using retail as a base to create value for other types of assets within the property.
“We are doing a fair amount of development and looking at a number of broken malls and trying to figure out where they can be bought for a number that makes sense,” he said.
Cedar Realty Trust Chief Operating Officer Robin McBride Zeigler said targeting areas of high population density, rather than focusing solely on income, is a sure bet.
“One of the benefits of focusing on those types of markets is that you have a wide trough of different types of demographics living in those markets,” she said. “So you have everyone from the types of folks who aren't necessarily your Amazon Fresh and Amazon Prime consumer, they are your daily or weekly grocery store shoppers.”
Wood said the best way to approach the coming years is to diversify, and to make sure success does not hinge on one type of asset. He said almost 20% of the retail REIT's income comes from office and residential rents.
“The way I like to look at it, don’t be dependent on any one thing,” he said. "Have as many arrows in your quiver as possible."