‘If You’re Not Looking Forward in this Business Today, You’re Going to Lose’

By By Tom Yeatts, SNL Blogs

Owners and investors in retail segments that are not “internet-resistant” and “recession-resistant,” beware.

There was a general consensus last week at IMN’s Winter Forum on Real Estate Opportunity and Private Fund Investing that the ongoing sea change in retail will be just as punishing in 2017 as it was in 2016, if not more so. Expect more store closures and bankruptcies as consumers defy expectations and as online sales gains continue to outpace same-store sales growth, observers said.

“If you own a mall with a Limited, Sports Authority and PacSun in it, you’re screwed,” David Puchi, managing partner of capital development at Baceline Investments, said, rattling off a few of 2016’s retail casualties. “I don’t know what you do. … The trends are not going away. The Limited is not coming back. Sports Authority is not coming back. Office Depot is not going to come back at 50,000 square feet. It’s just not happening.”

Sean Dalfen, president and chief investment officer for Dalfen America Corp., predicted a future where a much smaller roster of profitable players dominate.”I’m a firm believer that we’re going to end up with very few retail companies in the end, that many are going to drop off the globe,” he said.

Variations of Puchi’s and Dalfen’s fatalism have circulated around the retail business for years, since internet sales first began chipping into the foundations of brick-and-mortar-centric business models. But the remarks last week in Laguna Beach, Calif., had some added potency, coming just weeks after another “Even with new buildings being built, which is not a lot, footprints are decreasing,” Jonathan Hipp, president and CEO of Calkain Companies, said on a retail dedicated panel. “Everybody needs less space.”

Landlords and other cheerleaders of the brick-and-mortar model typically counter creeping pessimism in the space by framing store closures as an inevitable part of a cyclical business, and by touting the importance of storefronts as showrooms and service nodes in omnichannel strategies. To be sure, conference attendees last week testified to the many opportunities in “internet-resistant” retail, like restaurants, customer service-rich businesses at the high end and other experience-oriented models.

In an interview, Jeffrey Havsy, chief economist for Americas research at CBRE, said shopping centers are not going away, but their retailer mixes will continue to change, sometimes dramatically.”There’s going to be a decline in a lot of areas,” he said. “But they’ll just be replaced by different kinds of concepts.”Joel Mayer, managing director and head of retail for Rockwood Capital LLC, predicted many malls will be redeveloped into mixed-use assets, a market evolution that will present new opportunities, provided retailers, landlords and investors remain flexible and forward-looking.

“If you’re not looking forward in this business today, you’re going to lose,” Mayer said.

Dalfen said the greater opportunity, ultimately, may be in the industrial segment, a beneficiary of the explosion of online sales platforms and perhaps the darling real estate subsector currently.

“Whether it’s the paper on this table here, the mic, the shirt on my back, my shoes — everything is touching industrial today,” he said. “No other product type has that much universal appeal and demand. And no, it’s not sexy. But we all need it.”

Dalfen pointed out that even successful retailers with robust online platforms are going to have to evolve their supply chains, because delivery costs are substantially offsetting the profits from internet sales. Amazon has set a high bar with two-day delivery. Vacant retail space ultimately may be redeveloped to serve as both a showroom and an efficient, last-mile delivery outpost.

“Consumers have the power now,” he said.

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