Consumer Caution Belies an Increasingly Robust Retail Market

IRVINE, CA–The stock market is still taking us on a financial version of Mr. Toad’s Wild Ride, which if it continues, can impact consumer confidence. But as Rick Chichester, president and CEO of Faris Lee Investments, points out, the emotional gauge that is the stock market belies an increasingly robust retail market. Here’s his take on the subject: Generally speaking what’s the climate for retail investment as we begin to look into 2019?

Rick Chichester: The Holiday Season will be robust, however, as the consumer re-evaluates and re-considers the recent volatility of the market, there’ll be caution as we enter 2019 – as consumer confidence fluctuates so does spending. If the consumer uses the stock market as a gauge for consumer confidence it’ll be very unsettling. I anticipate the market to be volatile at least for the first quarter and most probably well throughout the year.

2018 saw good GDP growth by quarter of 2.2%, 4.2%, 3.5% and an estimated 2.5%. Although growth has declined from its mid-year 2018 high, 2019 might see an annualized GDP growth rate of low to mid 2%, a significant change that can lead to uncertainty. While it is not a negative, it can be unsettling. What was the ultimate impact of the tax restructure?

Chichester: The tax reform, although mostly appropriate at the corporate level, was ill-timed and did not deliver on the promises made by many of the pundits. The level of investment and capital expenditures into plants, equipment, research, technology, and infrastructure didn’t meet the expectation. Many companies simply invested in stock buy-backs, which enhanced valuations and enriched shareholders, but did little to expand business. So, how does all of this figure in the retail market?

Chichester: I expect many investors will rebalance their investment strategies and look more aggressively and more favorably into alternative investments. In times of market volatility and uncertainty, the CRE investment sector typically expands. Within the CRE product segments, Retail might provide some of the best investment opportunities. Most of its biggest issues are now behind us. Retail has adjusted and has been re-priced accordingly. The e-commerce/Amazon phenomenon has been overplayed. Toys R Us and Sears didn’t happen because of e-Commerce/Amazon. It happened because of operating and financial issues that prevented them from managing their businesses relevantly and competitively. Going forward into 2019, I see the rate of store closures on the decline. What happens to the empty boxes Sears and Toys leave behind?

Chichester: Good malls, like all good retail real estate, typically occupy the best real estate in the local community, and department stores like Sears, if not owned, generally have very low lease rates. This provides a unique opportunity to enhance the property with more compelling and meaningful tenants via re-tenanting, repositioning, or redevelopment. As for non-mall boxes, many can be well positioned for fitness, grocery, discount apparel, furniture, medical, and office. Retail is really the story of the haves and the have nots, and good retail is only getting better. Given that, what are Faris Lee’s best bets?

Chichester: Core retail generally represents irreplaceable real estate. It is still highly competitive and cap rates remain compressed. It will stay that way because of the limited supply.

Grocery Anchored remains the most in demand, but demographics, density, and store sales are paramount metrics in maximizing value.

In terms of opportunities, strip centers and convenience retail are the new opportunities going into 2019. The segment is highly internet-resistant and Investors are starting to understand and appreciate its value in a way they haven’t before.

On the one hand, high-quality B malls will see a renewed interest. As mentioned before, they generally occupy some of the best real estate in their community and as such there is potential value from a re-tenanting, reposition and/or redevelopment perspective…the new suburban town center and in some cases last mile distribution. On the other hand, B minus and C Malls will most likely need to be re-positioned into, other than retail; for example residential, industrial, etc. In many cases these properties comprise large land parcels that are meaningful to their local market, as such, municipalities and cities could be amenable to work with the ownership to maximize value.

Finally, single-tenant net leased will remain a relevant and robust asset class due to its stability, predictability, and ease of management. In essence, STNL is a bond wrapped in real estate, and as such it has become an investment of choice for generational planning purposes.

For all of these reasons, retail looks increasingly like one of the great opportunities for 2019.


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