IRVINE, CA—The cautious optimism that has marked the generalcommercial real estate industry's approach torecession recovery has permeated theretail sector as well, and some might say we'regetting ready to start celebrating its success. GlobeSt.com spokewith Larry Sullivan, president of PasscoCos., about his characterization of the market and wherehe sees it headed.

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GlobeSt.com: What is your opinion on the state ofthe retail real estate market now as compared to a yearago?

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Sullivan: Certainly it's better nowthan it was a year ago, which was better than the year before.Retail more or less allows a progression for a very closecorrelation to the consumer and how the consumer feels aboutthings. Over that same time horizon, consumers have become morebuoyant, the economy is better and we're not falling back intorecession. Also, there's been a lot of pent-up demand out therebecause people have been holding back for so long. Those two thingsin concert have allowed the retail sector to move forward. It's notNew Year's Eve, where we're ready to pop the champagne cork, butthe hors d'oeuvres are being passed around.

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GlobeSt.com: Where do you see the market headed, andwhat do you see as its biggest strengths and weaknesses movingforward?

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Sullivan: We can still see it movingforward on a slow trajectory. Its biggest strength is the pent-updemand factor. When you come out of such a deep recession ordepression, Americans don't feel comfortable reaching into theirwallet unless they feel good about their job and their family. Theydon't want to hear about foreclosures on their street. There's apent-up power that can be unleashed from consistent good news, butthere's a hesitation to push forward.

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Tenants are still trying to recalibrate themselves to thedynamics of the world post-recession. During the '80s and '90s,there was a movement to big-box retail—large Bed Bath &Beyond and Barnes & Noble stores—andmany stores were between 25,000 and 40,000 square feet. Now, BigBox retailers are reformatting into 10,000to 15,000 square feet andcutting down on inventory because of the space. But at the sametime there's growth in information about what is selling and whatisn't, so they can recalibrate into a smaller format and generategood sales in that format. Retail is now entering a different cycleof intermediate and even smaller-box formats.

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GlobeSt.com: What's your view on online sales'impact on the retail real estate market?

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Sullivan: Onlinesales certainly takes market share from total retailingdollars available, but we want to be proactive about it, and weabsolutely believe it'll grow over time. To that end, there's adifference between commodity item purchasing andexperiences and service. They're completely different retailingbuckets. Commodity purchases can be replicated online, but theexperiences and services bucket is relatively immune to onlineactivity. Hair salons, cleaners, the movies, dining—these areas arenot very impacted by online sales. At the same time, commoditiesare highly susceptible. I'm a San DiegoChargers fan and needed a new hat for the start ofthe season, but I didn't look to the traditional bricks and mortaroptions like Dick's—instead I went right to the Chargers on-linestore. One click and the exact hat I wanted will be at my frontdoor in 48 hours. Taking these shifts into account, our realestate investments tend to gravitate into either the service or thegratification bucket, which includes food, prescription medicationsand the necessities of life.

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GlobeSt.com: What has been Passco's strategy onretail investment, and what are your plans for retail investment inthe future?

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Sullivan: Our overarching strategy isto follow the consumer trajectory and apply that to our retailstrategy. Right now, the “appetizer analogy” I mentioned earlierapplies, as does the experiences and services/gratificationstrategy. We're purchasing on tenants that offer those types ofsituations: grocery, services and those whooperate on a smaller plane. Property sizes typically range from $3million to $30 million. That's where we're investing right now. Theconsumer continues to roll along. We're still gun shy of the powercenters that flourished during the last cycle.

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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.