November 11, 2019
Interviewed by: David Snow
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Retail Real Estate: Why I’m Pulling Out

A major investor in US retail property, real estate investment firm Taurus, is selling its portfolio and ceasing new investments. Co-founder of Taurus, Peter Merrigan, spoke with Privcap about lack of demand for many malls, the Amazon effect, the rise of logistics properties, and why he’s still bullish about malls in emerging markets.

A major investor in US retail property, real estate investment firm Taurus, is selling its portfolio and ceasing new investments. Co-founder of Taurus, Peter Merrigan, spoke with Privcap about lack of demand for many malls, the Amazon effect, the rise of logistics properties, and why he’s still bullish about malls in emerging markets.

Privcap Transcript

“Retail Real Estate: Why I’m Pulling Out”

Privcap: Peter, you’re firm, Taurus, is a major real estate investment firm. You historically have been a very big investor in retail properties, and the reason we’re speaking today is because you are no longer, at least for now, really focused on retail. I’d like to learn why. Why don’t we start out by rolling back the clock a bit and talking about the degree to which your firm was a big investor in retail.

Peter Merrigan, Taurus: The genesis of the firm was really in the mid-90s, and one of the first projects that we did was pretty well known in the Boston area where I’m based, which is called Assembly Row. It’s currently owned and being developed by Federal Realty, a large REIT in the U.S. We did the land assemblage there. We purchased the mall out of bankruptcy. We did hundreds of other retail projects in both in Europe and Turkey, and the United States and Canada after that.

Privcap: What did you like about retail in general, on a good day? 

Merrigan: The thing we loved about retail in those markets, particularly in the U.S., Canada, and Europe, was that they had large tenants that had requirements for growth. And if you develop strong relationships with them, you’ve gone into the right locations. You were able to have pre-leasing in place and really create a lot of value as an investment right up front. We did a tremendous amount of site acquisition and development work during the last, say, 20 years or so. And then we were able to create a lot of value for our shareholders.

Privcap: And were you doing primarily malls or were there other types of retail properties that you targeted?

Merrigan: We started out doing large footprint, big box type of developments with the discount retailers such as Sports Authority, Bed Bath & Beyond, TJ Max, people like that. And a lot of grocery-anchored stuff. In Europe we entirely focused on grocery-anchored strip centers in mostly in Germany.

Privcap: Interesting. And how would you describe your firm’s posture towards retail now? Are you out? Are you pausing?

Merrigan: In Western Europe we’ve exited all of our retail at this point. We no longer own any facilities in Europe. In the United States we will have exited all of our retail next week when the last asset sells. But we are still developing retail facilities in emerging markets. We have a large mall that’s under construction in India right now. We haven’t abandoned the business entirely, but we’re focusing on markets in countries that actually need the space and need the experience.

Privcap: What is your view on retail properties in the U.S. right now? What has changed and why are you less bullish on that asset class?

Merrigan: There’s just too much supply and there’s not enough demand. I mean, it’s a fairly simple fundamental question. And we identified that change really during the financial crisis about 10 years ago, and that’s when we started to really focus on exiting. There was a point in time in the ’90s when we were developing projects when we would have two or three tenants competing for space in every category. If you were looking at soft goods you would have Bed Bath & Beyond, and Linens ‘n Things, and maybe a TJ Max or competing for the space. And really now you’re down to one tenant. Same thing with sports. If you’re at Sports Authority versus Dick’s, you kind of go down each category. Borders versus Barnes & Noble. And as all these tenants have have fallen by the wayside, there’s just been a real lack of demand for any available space that you might have. If it’s not extremely Class A desirable space. . . and even that is struggling in the high street areas. For the large footprint retailers, there are exceptions to that. But in a lot of cases, there just isn’t enough tenant demand to drive value in the spaces.

Privcap: What are you seeing happening to the anchor tenant spaces? Spaces that used to be held by Sears, J. C. Penney? Who will be the new tenants in those very large spaces in malls?

Merrigan: You know, it’s case by case. Really, if it’s an urban site then they usually can be repurposed for either mixed use or more dense development. It’s not a simple thing because of those tenants that are in those facilities have a lot of rights over how those vacant boxes get redeveloped. But big picture wise you think that there are opportunities for redevelopment, but generally not for conventional big box retail. If it’s a more suburban or rural location, it’s going to be a long wait. There’s not a lot of demand to replace those tenants.

Privcap:  What is your view on Amazon and the effect that it’s had on traditional retail? Is the long term outlook as dire as some people predict or do you see some resilience from physical retail, malls, in finding different ways to use that property?

Merrigan: I mean, I think we’ve spoken with our actions on that. We’re not optimistic about the retail business generally in the U.S. And the Amazon effect is something that was starting really late ’90s early 2000s, and that’s when we decided to exit the business. I don’t see it getting much better. There are always exceptions to the rule. Sometimes it has to get so bad that it hits bottom and gets better. And there are going to be cases where there’s a lot of distress and you can buy things from it very inexpensively and if you can repurpose assets. But as a general rule, we are not optimistic about about the future tenancy demand in the U.S.

Privcap: What about the argument that malls are going to become places where people go to seek experiences? They’ll see a movie, have a meal, maybe take care of some health care. Is there not enough of that demand to make up for the decline in sort of big box style shopping experiences?

Merrigan: Well, I think you’re seeing that in the product that I mentioned earlier on, which is Assembly Row in Boston. They took over our master plan, expanded on it, improved it, and they’ve created a very successful place there. And so, yes, in urban environments, great locations, there’s certainly going to be demand for that. Is there enough demand to replace every neighborhood shopping center with that kind of experiential retail? I’m not sure that that’s the case. In the large urban clusters you’ll see that. But in more of the smaller places, I think it’s going to be tough.

Privcap: And why are traditional malls still viable in certain emerging markets?

Merrigan: If you look at our project in India, we’re building in Thiruvananthapuram. We’re building an about 850,000 foot Class A mall there. And there really isn’t any other competition. There’s a couple of smaller ones, but not one of as much critical mass as ours. And we’re building it in the center of a mixed use project, which involves two hotels and about 3 million square feet of office. And we’re seeing just huge demand on those other uses, on the office and the residential and the hotel use. And those people are looking for retail access, number one. Class A retail access, but also the experience. So with the lack of supply, we think there’s a lot of opportunities for increasing footfall in those facilities over time as they become kind of the center of gravity for those communities.

Privcap: Well, back to the U.S. If more retail is going through channels such as Amazon and delivery, are you interested in investing in logistics types of properties that would handle these shipments?

Merrigan: Actually Taurus has always been active in logistics, and it’s one of our biggest sectors – as large the retail sector for us over the years. We also do multi-family and we do office and mixed use developments. So we have a very strong logistics practice. In the U.S. we own over 10 million square feet and we built, gosh, I think 2 or 3 million square feet in the last 12 months as well. So we’re always active in logistics through one of our divisions and we see that has been one of the strongest growth sectors. Most of the stuff that we’ve been doing has been in logistics. We build Class A and we buy class B. And when I say Class B I really mean more kind of last mile stuff.

Privcap: And in selecting a strong logistics property, what are the most important considerations?

Merrigan: It’s location – access into the major population centers. So we’re active in Chicago, in Dallas, in Atlanta, and in Florida. So those are all considered to be very strong distribution hubs with a big population bases have to be served and goods have to get to them, get to the people. So we don’t really do so much of the big box distribution. Most of our stuff is smaller tenant sizes. And so, we’ve seen continuous strong demand and strong rent growth in that area.

Privcap: What kind of mall would you see as being most vulnerable right now? Would it be a second tier mall in a second or third tier city? 

Merrigan: Yeah. Second tier malls in second or more kind of rural suburban areas because there just isn’t tenant demand to replace the Kmarts and Sears and J. C. Penney’s and Macy’s and people like that who are exiting those properties. There’s just not a replacement tenant available for it. So you’re really looking at land value in a lot of those places where the site has to be repurposed.

Privcap: What do you think these very vulnerable malls will be repurposed as? Are they going to be torn down?

Merrigan: It’s case by case. Depends on the zoning, depends on the population, depends on the demographics, what the real estate calls for a from a demand perspective. It’s not a case of one thing fits all. But there’s usually some use for it. It could be distribution. It could be healthcare. There’s lots of different things that could service that local community. But it’s not easy because you have to change the zoning. You have to get rid of the other tenants that remain, if there are any tenants that remain. You want to empty out the building. The project that I mentioned at the beginning of the call, which was the Assembly Square project, that was a mall that was in bankruptcy, which is similar to the some of the dynamics you see right now. It was anchored by Kmart and Macy’s, and Macy’s had exited. We had to empty out that mall and we had to go through a buyout program. Even though the mall had failed, there were still straggler tenants in there that had to be taken out so that we could repurpose the overall facility. Today it’s going to be something like that where people have to really clean out the tenancies and start over again.  

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