June 10, 2019
Interviewed by: David Snow

Physical Retail is Here to Stay

Part of the thought-leadership series: Real Estate in Rising US Cities. Rising US cities are attracting young people in droves who come for the jobs and the lower cost of living. What is the retail investment play in these areas, particularly when young people are more likely to use e-commerce to shop? Our three real estate investment professional discuss how they gain confidence in a retail property before investing, and why e-commerce and physical retail space will become increasingly symbiotic.


Transcript for: Physical Retail is Here to Stay

David Snow, Privcap: We’re talking about a very hot topic, rising cities in the US. These are places that are generating jobs, they’re not gateway cities, but they are drawing young people who are looking for opportunities, and often with a lower cost of living. They’re also a great opportunity for real estate investors, institutional real estate investors like the three of you, and so I’m fascinated to hear your take on what makes for an attractive opportunity in these exciting cities today. One of the major food groups in real estate investment is retail, and so I’m interested in your views on what the retail investment opportunity is in these rising cities we’ve been discussing. Later on top of that, of course, is the phenomenon of the internet and e-commerce and how that changes the customers’ interaction with physical property, which is where you all invest. Maybe first question for Derek, who is a specialist investor in retail, what do you look for in a neighborhood, and in a city that lets you feel confident that a retail investment is going to make sense? What are the most important things you look at?

Derek McGavik, Newport Capital: We’re very focused on the micro. So it’s how many people are in one, two, sometimes we’ll look at three miles, but usually not, to be honest. If you have to get in the car and drive more than three miles to go to a grocery store, you might as well keep going and go to Iowa, and buy groceries. What’s the traffic pattern driving by the center? If there’s not 30 thousand cars a day going by the center, then it’s probably not on a main thoroughfare, very simply, and if there aren’t 25 to 30 thousand people within a mile, or really within two miles, then it’s probably not a main density. 

I think in our portfolio, our average one mile radius is about 40 thousand people. That’s the size of many small towns across America. And we have an average of 40 thousand cars a day driving by it. The next thing we look at, of course, is we start looking at the tenancy and one of the first questions about the tenancy is, how do they react in today’s world of e-commerce? 

Grocery stores, they all got a big wake up call when Amazon bought Whole Foods, and since then, I think Kroger has invested something like three billion dollars into its online e-commerce. So they’re all about “If you want to shop online and have it delivered, that’s fine. If you want to shop online, pick it up in the store, that’s great. If you happen to be in the store and you’re looking online and you order something, you can come back and pick it up later.” I always laugh about it, but Footlocker is way ahead of the curve in figuring that out, and making sure that all their customers know in advance that there’s something good for them to buy at Footlocker.  So it’s all about, do the retailers fit the neighborhood? Does the neighborhood adapt to what the retailers are offering? And do you get that kind of relationship? My favorite example is TJ Maxx. TJ Maxx, it’s like an … it’s going hunting every single time you go in a store. It’s just an adventure. You don’t know what’s there, and it draws people back.

Snow: Rising cities, by definition, are attracting younger people, oftentimes professional, and probably much more attuned to online shopping than older generations. So how do you get your arms around that if a neighborhood is changing? If it’s a place like Nashville, or Austin, where young people are just flooding in, flooding into these very desirable neighborhoods. How do you get confident that 10 years from now as they establish families, or whatever it is, they’re going to be shopping at the local shopping center in enough numbers that they’re … that the retailers are going to be able to pay your rent?

Laura Dietzel, RSM: Yes, a successful retail strategy is going to be differentiated in the fact that there’s going to be a focus on omnichannel retail. So every retailer is focusing on multiple various revenue streams, e-commerce, their brick and mortar footprint, but also e-commerce companies want to have a brick and mortar presence. So they’re looking to build the loyalty to their brand, and even Amazon has Amazon Go stores where even though I’m ordering online, there’s a footprint presence downtown Chicago where I can go pick up my goods.

Preston Sargent, Bailard: Or restaurants.

Dietzel: Or restaurants, absolutely. Restaurants have been an extremely popular anchor, where millennials really like to go out to eat. They did a study on spending, and millennials spend most of their money eating.

McGavic: And it’s funny because I think you watch over the next five years, the largest growing, and by largest I mean footprint of retailer, will probably be Amazon over the next five years. But what I think is also fascinating is that over the next 10 years, which is … nobody can really see more than two, but the most best … the most recent reading I’ve seen says by the year 2028, still 85% of all purchases will have some form of bricks and mortar store tied to them. Which means it’s just the opposite of what’s happening to the department stores. The pure online only retailer, they’re not going to be able to survive. They’re going to have to go to be an omnichannel retailer, which includes brick and mortar.

Snow: By the way, Amazon, if predictions come true, is also eventually going to be a major provider of healthcare centers.

Dietzel: Right.

Sargent: Exactly.

Snow: Which is a separate story, but those need a physical location.

Derek: Well, and that goes to, what’s the definition of a neighborhood shopping center? It used to be it’s just grocer, barber or drugstore, et cetera. Well now I’d say in a third of our centers, we have some form of healthcare, and by healthcare, it’s either physical therapy or we just put in a 35 thousand square foot Children’s pediatric center in one of our shopping centers. And again, it’s the same thing.