LAS VEGAS-The overall tone of ICSC's RECon conference here was all-out enthusiasm. Well, not all out. Taking a slightly more watchful approach, Passco president Larry Sullivan says he's waiting a bit “for the outlook to get a little firmer” before he recommits to the retail sector in a big way. What's he seeing that many others apparently aren't? In this exclusive interview from the show floor of RECon 2014, he explains.

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Q: Where are the hottest investment markets as defined by Passco, and what are the parameters by which you define them?

A: We have an investment strategy we call Next X, meaning we try to find the markets that are going to be good for the next 10 years. And we spend a lot of our research, acquisition and management efforts trying to figure out which parts of the country will deliver the best results for our clients, for us and for our bankers. Today, we really love the biotechnology and biomedical industries, and we love areas of the country that have higher education facilities. So, as an example, the Raleigh, Durham, Chapel Hill area of North Carolina is one of our favorite markets because we think over the next 10 years it will outperform the United States as a whole.

Q: What about the retail side?

A: The same. We're looking for the same underlying fundamentals. Retail always becomes a little harder because it is so micro-market based. You can always find a good retail center anywhere. But, again, on a broader scale, we want to be in a city with multiple investors, so we're looking for areas where possibly we can find not only retail but also multifamily and really make a position for ourselves in that market.

Q: We've done a lot of stories, both on GlobeSt.com and in Real Estate Forum, about the shift in many investors' focus toward secondary and tertiary markets. Are you seeing that?

A: Yes, and I smiled a bit because back in '06 or '07 we made a very conscious decision to move into secondary markets. But the premise was not what you'd expect. Certainly a part of it was for better, higher yields, but we felt over time a heavier brunt of institutional capital would move down to the secondary markets. Traditionally, everybody played in the primary markets across the country, for good reason, and we're there as well. But we felt over time, over the next 10 years, we would see more capital coming into the secondary markets, and that's exactly what happened. I smiled because it worked out well for our clients. The bad news is that it's a more competitive world in pricing terms.

Getting back to that Next X philosophy, certain areas of the country aren't growing. I mentioned biomedical. If you look at the right-to-work states down south, where Hyundai, BMW and Boeing are building large manufacturing facilities, the reason they're going down there is cheaper labor, a better work environment and a better tax-incentive environment, and that's all good for the retail consumer.

Q: You guys cover the waterfront. Where does retail figure in that picture?

A: It's interesting. Passco is a 16-year-old firm. And for 10 years we were all retail. Back in '06 we made a conscious decision to shed a lot of our portfolio and move into multifamily. In the last 12 months, we've started to reverse that and we're re-opening the retail pipeline for new acquisitions and value-add opportunities. So I'm looking forward to 2014 and '15 and you're probably going to see what was 100/0 multifamily become two-third/one-third, with the one-third being retail. And we're willing to push that forward and make that brawnier, but we want to see a little more substance to the economic recovery. We really want to make sure we're stabilized. One month consumer confidence is great and the next month it is down. It's schizophrenic.

Q: So you and I meet at RECon '15. Do you think the market will have recovered enough by then to make that happen?

A: Yes. If the fundamentals in place continue to hold, I think in another year we're going to see a very nice market with a little more clarity on the Internet and brick-and-mortar.

Instant Insights /

Passco's Retail Strategy...A Next X Viewpoint

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