March 24, 2017
Interviewed by: David Snow
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Reimagining Retail

The e-commerce habits of the largest generation in U.S. history is upending traditional retail, turning malls into “experiential” destination and driving up the value of logistics facilities. Three experts discuss the right real estate investment plays amid these tumultuous changes.

The e-commerce habits of the largest generation in U.S. history is upending traditional retail, turning malls into “experiential” destination and driving up the value of logistics facilities. Three experts discuss the right real estate investment plays amid these tumultuous changes.

Reimagining Retail
The Millennial Impact on Real Estate

David Snow, Privcap:
We’re joined today by Peter Ciganik of GTIS Partners, Andrew Jacobs of Metropolitan (a subsidiary of The Carlyle Group) and Michael Schwartz of RSM. Gentlemen, welcome to Privcap. Thanks for being here.

Unison: Thank you. Thanks for having us.

Snow: We’re talking about the impact of the millennial demographic on real estate. Specifically, let’s talk about the impact on retail real estate, which is being hit by a number of macro trends. Let’s talk about that and how that looks from a real estate investment perspective. First, a question for Andrew: with the rise of e-commerce and the changing—some might say destructive—force that has on certain malls, what’s the real estate play for investors?

Andrew Jacobs, Metropolitan Real Estate:
That’s the billion-dollar question. I would certainly say that what has been bad for bricks-and-mortar retail has certainly been good for logistics, industrial space. In both large distribution centers as well as closer-in [buildings]—especially for closer-in distribution buildings—we’ve seen extraordinary growths in rents in industrial space. And the new development is just catching up to rent growth and demand.

Within retail, for a while now there’s been a barbell approach or a barbell in terms of success. And there’s an experiential nature to retail, especially on the luxury end, that people like to shop. We continue to see growth there. While it’s certainly leveled off, especially in a lot of the markets that have been dependent on overseas travel, on the other end of the spectrum is the discounters. The discounters, in most cases, are able to undercut online, so there, we’ll continue to see demand for the discounters. It’s the in-between that’s been really tough.

Peter Ciganik, GTIS Partners:
It seems to me that there is an element of entertainment and an element of service in the successful repositioning of retail. You get spaces now that were vacated by anchors that are filled with entertainment of some kind, but also services like medical offices and so forth which are, for now, irreplaceable in a personal way. You still have to show up to your doctor’s appointment, for now. And that drives some of the repositioning we are seeing out there. There are some creative ways to turn around older malls and anchor spaces in this way.

Michael Schwartz, RSM US LLP:
It’s great real estate, right? I mean, these malls—

Ciganik: The locations and yes.

Schwartz: Yes, these malls were built at the intersection of Main and Main for so many years. So there may be a higher and better use than an enclosed mall, but it’s great real estate.

Jacobs: But what you’re also seeing is the advent of retail in a couple of different ways based on the lifestyles of millennials. They’re much more active. With our health concerns and life spans growing, you’re seeing a lot of LA Fitness and Export Fitness located in these former grocery stores. They’re taking 30,000 or 40,000 square feet in these power centers. Then, going back probably about 15 years, you saw Walgreens and CVS exiting, if you will, the strip portion going to the standalones and getting space there. Now, they’re building minute clinics in there and they’re servicing and that’s a different type of retail component.

Then, to Peter’s point about a destination and a relocation and, if you will, a repositioning a lot of these Penney’s and Macy’s for destination centers. You’re seeing restaurants. Millennials these days—first of all, they don’t own homes. They’re renting. They’re living in little kitchens. They go out. And where do they go? Be it in the cities or even in the suburbs, they’ll go to a place with restaurants.

Jacobs: On that point, I think it’s pretty funny. I was just touring a residential project in New York and we went into a unit that had just been vacated. The tenant was there for two years and the hang tags, the new tags, were still on the stove because in two years, they never used it once.

Schwartz: Wow.

Snow: So, presumably, they were either ordering in or going out—

Jacobs: Yes.

Snow: —but not cooking.

Jacobs: And it was a small unit, so it was certainly, presumably, a younger person’s unit. The second thing is, I hate to always use these tag lines, but it seems I’ve heard others say (I won’t take credit for this) that the millennials are much more experiential than they are materialistic.

Schwartz: I was meeting somebody for coffee at one recently on a Saturday afternoon. I walked in there and there was not one empty seat or table. Everyone was camped out there, on their computer, using the free Wi-Fi.

Jacobs: While we’re talking about that, we should bring up hospitality just briefly. If you look at some of the new concepts in hospitality, the rooms are very small because the millennials are not staying in the room. They’re spending their time in the lobby, which is large and is very social and very welcoming.

Ciganik: There seems to be a convergence on one end between hotels and retail, and then retail and logistics. Where is the boundary between retail and warehouses when Amazon sets up stores in the city to deliver in two hours what would have taken days before? Are they being a retailer or are they still a logistics company? What exactly is that? At the same time, some of the big anchor stores are servicing their online platforms out of the store now. They pick produce or stuff off the shelves and deliver it to the homes.

Snow: There will be more and more things delivered, including food, so what’s the right real estate play to take advantage of that? Have you seen examples of facilities that were not originally logistics facilities located nearer to where people are living converted into the logistics center of the future? Is that a big play right now?

Ciganik: It is a little harder to convert an older logistic or retail property into a super warehouse. When you look at what Amazon does with their gigantic warehouses that are outside the core, those are specifically built for their needs. They are highly sophisticated, but very low in terms of employment unfortunately. A giant warehouse can be serviced by a few engineers who are basically directing robots that pick all the stuff and ship it.

Jacobs: I would say the net effect of rents for industrial—even close-in industrial in major markets—are not high enough, or not higher than traditional alternative uses like office or residential.

Amazon is going to start flying drones now to deliver product. I’m not sure of the logistics of that with the FAA, but I’m sure somebody smarter than me is figuring it out.

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