Industry Changing Insights from ICSC RECon

ICSC’s 2018 RECon Global Retail Real Estate Convention hosted the world’s largest global gathering of retail real estate professionals, among whom industry acumen and insights were shared and discussed. We answered questions like “What is the future of malls and power centers?” “How will technology play a role in maintaining a competitive advantage for retail real estate companies?” and ” How are internet sales impacting retailers?” From our various meetings and conversations, here is how the industry is changing, and what you can expect to see in the future:

1. Contrarians looking for power center product are finding higher yields, but are having a difficult time assessing risk. How this shows up in the market is fewer offers made, and pricing significantly off of Sellers’ expectations. There still is a truing up process going on in this part of the market, and the balance of 2018 will reflect this shift.

2.There is high competition for grocery anchored product, with pricing remaining firm in this product type. This lack of softening on pricing reflects investor sentiment that there is less risk in this area of retail.

3. Daily needs shopping is not as threatened as was perceived last year – Internet sales are enhancing sales for daily needs retailers, and not threatening them. Most shoppers still want to pick certain grocery items personally. However, some items they are pre-ordering which they pick up after shopping for non-preordered items.

4.Malls continue to seek their equilibrium point in the market – pricing for this product type remains very soft, reflective of reduced demand, lack of financing, and a collective view is that there is much more fallout in this sector – some saying that there will be half as many malls in the future as there are today. The adjustment will take many forms, ranging from partial repurposing to alternative uses, to complete scrapes.

An interesting observation from one seasoned client: The demise of malls started with the rise of the two-income family, which led to shorter and fewer shopping trips, and a higher focus on value, which fostered the development of power centers and the advent of discount retailers.

5.Technology is a key to maintaining a competitive advantage. For some it will involve AI, and for others a more robust use of existing technology. Real estate in general has been slow to adopt technology, however retail tenants are definitely embracing technology as part of their operating strategy. Mobile phone data is being leveraged in many ways including tracking consumers, spending patterns, etc.

6. There remains a disconnect between buyers and sellers on pricing overall, but that gap is narrowing, and we anticipate a high volume of transactions in the third and fourth quarters of this year.

In general, we are in a transitional market with more optimism than pessimism. Retail investors need to carefully assess the risk of their portfolio and their new acquisitions. Fears about online retailing undermining sticks-and-bricks retail are overblown; however the industry is rapidly moving further toward value and convenience, tied to the changing lifestyle of the average American. Companies investing in technology maintain a competitive advantage. Let us know how we can help you.

Market Trends and Volatility on Real Estate Values

Assessing market cycles and risk is a necessary component of any investment strategy. Whether in a positive or negative cycle, there are opportunities in real estate beyond the “buy low; sell high” saying, depending upon long-term goals. However, it is much easier to assess previous trends. It is difficult to predict the future; otherwise, everyone would have predicted the market crash of 2008. To measure performance, we should look at how real estate compares to historical and emerging data, as well as other securities to mitigate risk.

Historical Data

Historical data includes sales information, vacancy rates, and interest rates. Sales data is widely used by the appraisal methods as it gives an indication of where property values have been. The downside is that sales comparables are often lagging and may not keep up with immediate corrections in the marketplace. Vacancy rates can tell us whether there is an surplus of spaces.

A great example is provided by Harvard Market Cycle Quadrants using vacancy and construction to show phases of the market cycle. If an increase in vacancy in a specific market is starting to occur, we may consider this phase to be an indication of an impending downward trend. Often new construction falls behind market phases. Once the market is in an expansion phase, companies look to new construction to capitalize on investment momentum. However, construction often takes time including design, permits and production. By the time the new product hits the market, there could already be a change in the cycle or even cause a change by increasing available units.

 

Another trend to look at is interest rates. When the Federal Open Market Committee raises rates, it affects the housing economy as well as investment properties. Generally as interest rates rise, a negative impact on residential properties will occur. Monthly payments increase and thereby affect affordability. As expected appreciation decreases, the desire to own may also decrease. And of course, interest rates affect investment yields. As the cost of borrowing increases, expected rates of returns must also increase. Recently, we have seen interest rates already increase with anticipated additional rate hikes throughout the year.

Securities

The risk of investing in real estate also must also be compared with returns on other security investments such as bonds, stocks, and treasury bills. Recently, the rates on treasury bills have increased, making those more appealing to more risk adverse investors. T-bill rates impact real estate income yields as investors then expect higher returns when compared to the benchmark of a riskless investment.

REITs are an alternative source of offsetting risk by investing in portfolio holdings and different asset types. Many of our clients are REITs and have positioned their success on the ability to purchase our value-add retail listings thereby increasing yield.

What is the future real estate outlook?

Using some of these indicators we make more informed predictions about the future of expected returns. While purchasing real estate always entails some risk, it also comes with reward. From at least 1985-2009, real estate investments exceeded the rate of inflation and produced investment returns. Increasing returns is also a hedge against concerns about inflation. While uncertainty in the market can be a factor affecting values, knowing how to analyze the trends can help offset volatility.

Our team is uniquely qualified to walk investors through multiple retail assets from single tenant, multi-tenant, to grocery anchored power centers and properly position dispositions ahead of the market curve.