Retail Experts: Lay of the Land is Different Now

NEW YORK CITY-“It seems as though we're back in 2007, except with no product,” Marcus & Millichap's Glen Kunofsky, EVP of investments and senior director of both the National Retail Group and the Net Leased Properties Group, observed in brief opening remarks at Thursday evening's “Pulse of the Market” panel discussion at the Penn Club here. To that point, Mark Manheimer, SVP of Spirit Realty Capital, which operates about 1,200 net-leased retail properties across the US, said his company's acquisition pipeline currently is strong but may soon become challenged as more capital chases a limited number of opportunities.

The well-attended discussion, presented by the Marcus & Millichap French Retail Team and the NNN Pro Group, followed through on the underlying theme of Kunofsky's observation: as the recovery continues, the lay of the land is different. As an example, a retail complex anchored by a leading supermarket was considered the safest of safe bets during the downturn. Today, “It's no longer a no-brainer to buy a grocery-anchored retail center” unless the investor knows what the local competition is and knows that sales are increasing nonetheless, said Todd Bassen, senior director—acquisitions at Invesco. Supermarkets' margins have been eroded by a variety of competitors, from online merchants to Wal-Mart, he pointed out.

For grocery chains such as ShopRite, the consumer is in the driver's seat in terms of how the stores do business, said Alexander Arancio, senior real estate representative for Wakefern Food Corp., the corporate and distribution arm of ShopRite. However, for the consumer, the driver is the economy.

With that in mind, Wakefern launched the select-assortment PriceRite brand. Arancio said the stores, which run to about 35,000 square feet, are more value-oriented than their full-assortment siblings.

Another select-assortment player that has made inroads both regionally and nationally is Aldi Inc. The company's director of real estate, LeAnne Wheeler, noted that underserved New York City neighborhoods outside of Manhattan have been a growth area. “You can't make too many missteps in the outer boroughs,” said Wheeler.

Under-stored though the boroughs may be, Josh Podell, president of Podell Real Estate Advisors, counseled wariness when it comes to so-called “destination retail” centers. He cited the example of the 400,000-square-foot Shops at Atlas Park, which opened with a high profile in 2006 but sold for just $54 million to Macerich Corp. in a foreclosure auction five years ago. Although an attractive property, its location was not conducive to drawing retail traffic, Podell said.

Location may be irrelevant to many younger consumers, who are accustomed to shopping online anyway. Panelists expressed differing opinions about the impact e-commerce has made on brick-and-mortar retailing, although they agreed that its prevalence has grown dramatically recently—some years after a predicted growth spurt failed to materialize. In the case of apparel, Podell said, “You can't see stitching online,” although he acknowledged that electronics retailers face a far greater challenge from Internet channels.

Also up in the air was the question of whether we'll see more sale-leasebacks. Manheimer noted that when retailers can borrow at 3% to finance growth, engineering a sale-leaseback at 7% or 8% didn't seem quite as appealing. Kunofsky said it depends largely on the individual retail chain and its management style.

One aspect of retailing that drew general agreement among the panelists was mergers and acquisitions: they're bound to continue. Bassen noted that when private equity firms or larger grocery chains acquire smaller, family-run operators, they may lose the stores' customer base to homogenization and a dropoff in service. He proposed “a reverse takeover,” in which the key executives of the smaller operators take over management of the larger chain.

Wheeler noted an upside to the shakeout of locations that M&A deals often produce: more expansion opportunities for chains in growth mode, such as Aldi. Moderating the hour-long conversation was Thomas Dalzell, associate director with the French Retail Group