IRVINE, CA—The “mild, but consistent recovery” that the nationalretail sector has been experiencing will be amajor topic of discussion at ICSC RECon later thismonth, predicts Rick Chichester, president and CEO ofFaris Lee Investments. GlobeSt.com sat down withChichester recently and got his take on trends in the sector, howtoday's consumers are changing the face of retail and where thebiggest investment opportunities are for retail properties.

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GlobeSt.com: What would ICSC attendees want to knowabout Faris Lee Investments?

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Chichester: Faris Lee is a nationalinvestment advisory firm that focuses solely on the retail propertysegment, inclusive of single tenant, NNN, sale-leaseback,multi-tenant and mixed use. We have expanded and grownsubstantially over the past several years. To that end, weunderwrite more than 300 properties annually, and we have sold morethan 280 properties in 39 states in the past 24 months. We are afocused and collaborative firm, and we take an extremelydisciplined and thoughtful approach in our underwriting,valuations, and go-to-market strategies. We're not thelargest platform nationally, by intention, so we are not going tobring the army to the table. Instead, we bring the “special ops”—ateam of highly skilled specialists with financial and marketingintellect and creativity. We work together and support each otheron every assignment. The client benefits by having his projectexposed to some of the best and most creative minds in thebusiness.

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GlobeSt.com: What do you think some of the hottopics of discussion will be at ICSC this year?

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Chichester: Most probably, one of thetopics will be the growing, albeit mild, recovery of theeconomy. That's what's creating more strength forus in real estate and in retail in particular. The recovery isstrong enough that demand is getting better, but not so robust thatit is leading to a significant new development supply. As companiesare expanding, they're starting to absorb much of the existingspace, creating stability and upward pressure on rents.Additionally, the financial markets are strong andgetting stronger, with lending becoming ever more attractive andcompelling—this is the catalyst for much of the demand in theproperty investment market.

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Retail is always changing, but the impact ofe-commerce on bricks and mortar can't be ignored.Retailers now have to create an in-store experience to drawconsumers in—much like Apple, where you can have a“showroom” experience that allows you to buy in store if youchoose, or online at a later date. This new, bifurcated channel ofconsumerism is important and the customer is looking at how retailis changing to accommodate for this. There's a tremendous amount ofstructural change taking place in the industry, and retailers needto affirm constantly that the in-store experience is valuable andrelevant to their customer.

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Predominant consumer profiles are also changing.Demographically, Millennials and the X/YGeneration have very different expectations with regardsto their retail shopping habits and behaviors than the BabyBoomers, and retailers are adapting to that. By way ofexample, Millennials prefer to connect and socialize atrestaurants as opposed to malls, which was thepreferred choice a decade ago. This is not new, but the changingdemand is accelerating and it clearly affects the retailer and theretail property markets. I expect this may be a significant part ofthe contextual discussions at ICSC for the retailer and theproperty owner/developer.

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GlobeSt.com: On a macro level, what is driving realestate right now?

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Chichester: The fact that the economicrecovery is so moderate is actually benefiting us more than wemight think because it's limiting new construction… it is the silver lining to our economic recovery. Additionally, the financial (debt) market has been thestimulus 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.

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GlobeSt.com: How will rising interest rates affectproperty values and activity?

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Chichester: In general terms, there isa parallel between cap rates and interest rates, but if theinterest-rate rise is moderate, it can be built into theunderwriting so it won't necessarily drive value down or cap ratesup. So much capital is looking to be placed thatwhat is getting compressed is not the cap rates but the spreads. Aslong as the demand on the debt side remains bullish, and there'sstrong interest for money to be placed into the market, even ifinterest rates increase moderately, cap rates will not necessarilygo up. However, if interest rates were to rise quickly ordramatically, similar to May 2013, it could cause concern and acorresponding adjustment to pricing. I don't see this as a highprobability; therefore, I don't expect that there will too muchupward pressure on cap rates in the near term.

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GlobeSt.com: Where do you see the retail marketgoing over the next 12 months?

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Chichester: If everything continues onits current trajectory —good real estate fundamentals, continuedeconomic growth, and a good interest rate environment —the retailmarket is going to be strong. Retailers with relevant businessstrategies are growing. The consumer continues to gain confidencein the economy, and their spending is increasing. Just last month,we had the strongest month-over-month increase in retail salessince September 2012, as well as the strongest increase in consumerspending since August of 2009. What's important to watch iswhat they're spending their money on, and why: isit larger-ticket items like washer/dryers and cars, necessity-baseditems, clothing and accessories, food/restaurants, homeimprovements? Consumer spending is gaining traction, althoughwe're still somewhat cautious as a nation. My opinion is that themarket is going to be healthy, and we should continue to see good,rational growth throughout the balance of 2014.

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GlobeSt.com: Who is buying and who is sellingretail, and why?

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Chichester: The profile runs the gamutand includes institutions, REITs, professional investors and familyoffices, as well as private investors. The retail sector is acomplex asset class that requires a particular skill set andoperating expertise. For some investors, the sector is not withintheir core competencies and therefore they are net sellers. Forothers, especially institutions and the professional investor, theyare rebalancing their portfolios and balance sheets, and expandingin the sector as they see opportunities for risk-adjusted growth.Many of the professional and private investors have a strong focuson value-add and opportunistic acquisitions that will allow them toredevelop, reposition or re-tenant assets to stabilize and increasevalue. And, finally, there is the private investor looking toinvest in risk-adjusted, stable and more-predicable yields, whichhas certainly contributed to the strong increase in demand for theNNN asset class. Many investors are expanding and buying insecondary and tertiary markets as they explore opportunities foryields; it is important to note that many of these secondarymarkets have stable economies that have performed well, eventhrough the recession.

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The single-tenant, triple-net-lease market,once a niche market, has matured into a very relevant asset class.Institutions, REITs and private individuals are all expanding inthis property sector. And many private investors are looking tomove net worth out of stocks and bonds and into themore-predictable long-term yields that single-tenant investmentsprovide. Single-tenant net-leased investments don't require thesame level of real estate expertise that more actively managedasset types do.

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GlobeSt.com: Where are the biggest investmentopportunities in retail?

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Chichester: Opportunity is in the eyeof the beholder, so it depends on the goals and objectives of eachinvestor. Retail is getting blended into a lot of mixed-usedevelopment because of the change in expectations anddemands of the Millennials and Generation Y. They want a live,work, and play environment, so there's a strong urban-core shift.Demand and competition in the neighborhood centers createsopportunities in repositioning stores and tenants, but also inrepositioning the retail center itself to match the demands of thelocal market. An example would be retenanting a center with storesthat cater to the demographics and ethnicity of the surroundingarea, which may have shifted since the center was originally built.In some cases a specialty grocer will make more sense than a largenational chain.

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Retail requires creativity, intellect and operating discipline.You have to know about the local economy and its demographicprofile, the retail business and the business of the tenant, thefinance market, the operations of the property, and how to stayrelevant to the consumer—not just for today, but into the future.Retail is exciting, dynamic, and uniquely complex, but it is notfor everyone.

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Carrie Rossenfeld

Carrie Rossenfeld is a reporter for the San Diego and Orange County markets on GlobeSt.com and a contributor to Real Estate Forum. She was a trade-magazine and newsletter editor in New York City before moving to Southern California to become a freelance writer and editor for magazines, books and websites. Rossenfeld has written extensively on topics including commercial real estate, running a medical practice, intellectual-property licensing and giftware. She has edited books about profiting from real estate and has ghostwritten a book about starting a home-based business.