Changes in Expectations Are Shaping Retail Sector
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IRVINE, CA—The “mild, but consistent recovery” that the national retail sector has been experiencing will be a major topic of discussion at ICSC RECon later this month, predicts Rick Chichester, president and CEO of Faris Lee Investments. GlobeSt.com sat down with Chichester recently and got his take on trends in the sector, how today’s consumers are changing the face of retail and where the biggest investment opportunities are for retail properties.
GlobeSt.com: What would ICSC attendees want to know about Faris Lee Investments?
Chichester: Faris Lee is a national investment advisory firm that focuses solely on the retail property segment, inclusive of single tenant, NNN, sale-leaseback, multi-tenant and mixed use. We have expanded and grown substantially over the past several years. To that end, we underwrite more than 300 properties annually, and we have sold more than 280 properties in 39 states in the past 24 months. We are a focused and collaborative firm, and we take an extremely disciplined and thoughtful approach in our underwriting, valuations, and go-to-market strategies. We’re not the largest platform nationally, by intention, so we are not going to bring the army to the table. Instead, we bring the “special ops”—a team of highly skilled specialists with financial and marketing intellect and creativity. We work together and support each other on every assignment. The client benefits by having his project exposed to some of the best and most creative minds in the business.
GlobeSt.com: What do you think some of the hot topics of discussion will be at ICSC this year?
Chichester: Most probably, one of the topics will be the growing, albeit mild, recovery of the economy. That’s what’s creating more strength for us in real estate and in retail in particular. The recovery is strong enough that demand is getting better, but not so robust that it is leading to a significant new development supply. As companies are expanding, they’re starting to absorb much of the existing space, creating stability and upward pressure on rents. Additionally, the financial markets are strong and getting stronger, with lending becoming ever more attractive and compelling—this is the catalyst for much of the demand in the property investment market.
Retail is always changing, but the impact of e-commerce on bricks and mortar can’t be ignored. Retailers now have to create an in-store experience to draw consumers in—much like Apple, where you can have a “showroom” experience that allows you to buy in store if you choose, or online at a later date. This new, bifurcated channel of consumerism is important and the customer is looking at how retail is changing to accommodate for this. There’s a tremendous amount of structural change taking place in the industry, and retailers need to affirm constantly that the in-store experience is valuable and relevant to their customer.
Predominant consumer profiles are also changing. Demographically, Millennials and the X/Y Generation have very different expectations with regards to their retail shopping habits and behaviors than the Baby Boomers, and retailers are adapting to that. By way of example, Millennials prefer to connect and socialize at restaurants as opposed to malls, which was the preferred choice a decade ago. This is not new, but the changing demand is accelerating and it clearly affects the retailer and the retail property markets. I expect this may be a significant part of the contextual discussions at ICSC for the retailer and the property owner/developer.
GlobeSt.com: On a macro level, what is driving real estate right now?
Chichester: The fact that the economic recovery is so moderate is actually benefiting us more than we might think because it’s limiting new construction … it is the silver lining to our economic recovery. Additionally, the financial (debt) market has been the stimulus for much of the investment activity and value. Meanwhile, real estate fundamentals are beginning to stabilize and strengthen, which provides for more sustainable and rational growth.
GlobeSt.com: How will rising interest rates affect property values and activity?
Chichester: In general terms, there is a parallel between cap rates and interest rates, but if the interest-rate rise is moderate, it can be built into the underwriting so it won’t necessarily drive value down or cap rates up. So much capital is looking to be placed that what is getting compressed is not the cap rates but the spreads. As long as the demand on the debt side remains bullish, and there’s strong interest for money to be placed into the market, even if interest rates increase moderately, cap rates will not necessarily go up. However, if interest rates were to rise quickly or dramatically, similar to May 2013, it could cause concern and a corresponding adjustment to pricing. I don’t see this as a high probability; therefore, I don’t expect that there will too much upward pressure on cap rates in the near term.
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