IRVINE, CA—The cautious optimism that has marked the general commercial real estate industry's approach to recession recovery has permeated the retail sector as well, and some might say we're getting ready to start celebrating its success. GlobeSt.com spoke with Larry Sullivan, president of Passco Cos., about his characterization of the market and where he sees it headed.

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

Sullivan: Certainly it's better now than it was a year ago, which was better than the year before. Retail more or less allows a progression for a very close correlation to the consumer and how the consumer feels about things. Over that same time horizon, consumers have become more buoyant, the economy is better and we're not falling back into recession. Also, there's been a lot of pent-up demand out there because people have been holding back for so long. Those two things in concert have allowed the retail sector to move forward. It's not New Year's Eve, where we're ready to pop the champagne cork, but the hors d'oeuvres are being passed around.

GlobeSt.com: Where do you see the market headed, and what do you see as its biggest strengths and weaknesses moving forward?

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

Tenants are still trying to recalibrate themselves to the dynamics 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—and many stores were between 25,000 and 40,000 square feet. Now, Big Box retailers are reformatting into 10,000to 15,000 square feet and cutting down on inventory because of the space. But at the same time there's growth in information about what is selling and what isn't, so they can recalibrate into a smaller format and generate good sales in that format. Retail is now entering a different cycle of intermediate and even smaller-box formats.

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

Sullivan: Online sales certainly takes market share from total retailing dollars available, but we want to be proactive about it, and we absolutely believe it'll grow over time. To that end, there's a difference between commodity item purchasing and experiences and service. They're completely different retailing buckets. Commodity purchases can be replicated online, but the experiences and services bucket is relatively immune to online activity. Hair salons, cleaners, the movies, dining—these areas are not very impacted by online sales. At the same time, commodities are highly susceptible.  I'm a San Diego Chargers fan and needed a new hat for the start of the season, but I didn't look to the traditional bricks and mortar options like Dick's—instead I went right to the Chargers on-line store. One click and the exact hat I wanted will be at my front door in 48 hours.  Taking these shifts into account, our real estate investments tend to gravitate into either the service or the gratification bucket, which includes food, prescription medications and the necessities of life.

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

Sullivan: Our overarching strategy is to follow the consumer trajectory and apply that to our retail strategy. Right now, the “appetizer analogy” I mentioned earlier applies, as does the experiences and services/gratification strategy. We're purchasing on tenants that offer those types of situations: grocery, services and those who operate on a smaller plane. Property sizes typically range from $3 million to $30 million. That's where we're investing right now. The consumer continues to roll along. We're still gun shy of the power centers that flourished during the last cycle.