Kensington Real Estate Group


COSTAR: Top 5 Takeaways From 2015 RECon Conference

By Randyl Drummer | CoStar

As featured on May 20, 2015

This week’s International Council of Shopping Centers (ICSC) RECon convention saw the strongest turnout in years, with at least 35,000 deal-makers attending annual retail property conference in Las Vegas. With retail sales edging back up and a lack of suitable sites, expanding retailers are prompting a fledgling wave of new development activity.

During panel sessions, attendees and presenters focused on a number of common themes involving retailers, landlords, lenders and investors.

Tenants, Landlords and Investors Ready to Make Deals

While the activity and energy level at last year’s RECon was vibrant, most investors remained in fact-finding and information-gathering mode, as opposed to ready to pull the trigger on acquisitions, said Richard Chichester, president and CEO of Faris Lee Investments.

“Today, the people we’re talking to are ready to make choices. They want to know what to buy and sell, how should they position their assets, and what investment strategy is in their best interest relative to their dollar risk,” Chichester said.

Anjee Solanki, national retail director, U.S. retail services at Colliers International in San Francisco, said she heard nothing that would suggest the retail transaction market is getting too frothy or that an expectations gap is opening between seller and buyers.

“There’s definitely a lot of investment capital out there, but what we’re hearing from the investor services side is that many institutional investors are still under-weighed in retail,” Solanki said.

“Investors are in a deal-making mode, they realize there’s a lot of money on the sidelines and they’re being more creative in creating opportunities and ideas,” adds Christopher Cooper, principal and managing director with Avison Young in Los Angeles.

JLL Managing Director Kris Cooper said retail property transactions have reached new heights following the recession and trades are expected to increase further by a projected 15% in a strong but steady 2015.

“We’re seeing investors buy (retail property) at higher premiums and venture into different markets in pursuit of yield,” Cooper said. “Retail investors’ acquisition strategies are being driven by limited supply and high demand. It’s that simple.”

New Supply Coming, but May Not Be Ground-Up Development

With with the Internet continuing to take sales away from bricks-and-mortar centers and more consolidation among retailers, it’s getting harder to get new development projects off the ground, said Brad Umansky, president of Progressive Real Estate Partners.

“New projects have to be very specific to individual retailers, with most developers saying they want to do business specifically with a Smart & Final, or an L.A. Fitness, for example,” Umansky said. “The days of a developer going out and tying up a piece of land and then finding the retailers for it are over. The risk versus the reward is just too great right now. Certainly there’s no such thing as speculative development.”

Investors’ Appetite for Top Malls and Power Centers as Strong as Ever

Many owners of smaller two- or three-tenant properties are looking to unload lesser-quality properties so they can recycle their capital into power centers, said Colliers International’s Solanki.

“I heard (from investors) about buying power centers all day long today, which surprised me because when I think about power centers, I think about repositioning,” she said.

Solanki said her firm has a client that recently acquired several closed Target stores sized at between 150,000 and 200,000 square feet and are in the process of repositioning them as multi-tenant spaces targeting such tenants as Dick’s Sporting Goods, she said.

‘Food Experience’ Increasingly Part of Retail Redevelopment

“Retail is not a standalone asset anymore. It’s got to be part of a larger concept, especially in Los Angeles,” said Christopher Cooper, principal and managing director with Avison Young in L.A. “Investors and tenants are looking for destination retail and urban infill, and projects have to married up with either hospitality or office or residential.”

In many centers changing hands or being repositioned, developers want to reallocate gross leasable area previously occupied by junior anchors as food and beverage, often as “food experience” with several 3,000-square-feet or less quick-service eateries, added Colliers’ Solanki.

“Restaurants are the new junior anchors. Who knew?” she said. In order to stay relevant, landlords and retailers have to meet the consumers’ needs, otherwise they will be out positioned.

“At some point we’ll no longer call these unanchored centers retail centers; we’re going to call them services centers,” said Shari Tucker-Gasser, nation council chair of multi-tenant retail with Sperry Van New in Phoenix. “Many will be anchored by yoga studios and pet salons. You can’t get your nails done on the internet.”

Other properties will be called entertainment centers anchored by restaurants and bars, theaters and other venues with a retail component, Tucker-Gasser said.

Despite Plentiful Lending Capital, Underwriting Remains Strict

While debt capital is available for development, it comes at more conservative loan to value ratios and often requires developer guarantee, Avison Young’s Cooper said.

That said, debt capital for value-add and repositioning of retail projects continues to be fueled by interest rates expected to remain low for the next eight to 12 months, with life companies, CMBS, banks, pension funds and debt funds still eager to provide capital on retail assets. JLL is seeing typical loan-to-value ratios of 65% – 85%, with several sources looking to hold mezzanine and preferred equity at up to 90% leverage.

“Capital is more widely available than even a year ago,” says Jimmy Board, a managing director for JLL, who advises owners and investors to consider renovation and repositioning strategies. “Now is the time to upgrade your space and make the most of the low cost of capital.”


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