IRVINE, CA—Investor interest in the retail sector is surpassing one of the strongest periods in recent history, Rick Chichester, president and CEO of Faris Lee Investments, tells GlobeSt.com. In anticipation of ICSC Western Division next month, we spoke with Chichester about the trends he’s seeing in retail real estate investment and where he thinks the smart money is going.
GlobeSt.com: Rick, tell us about what Faris Lee is seeing in the retail investment world these days.
Chichester: The level of interest and activity in retail investments is as strong as it was during pre-recession time. It’s similar to 2006 and 2007, but there’s more capital in the market looking for retail opportunities, and the financing market is more robust and dynamic than it was.
Retail real estate is being recognized as a great risk-adjusted investment alternative to other investment options. It’s providing stable and predictable yields—in many cases, long-term yields with growth potential—though the ownership cycle of the investor. The overall returns are certainly higher than if you owned a bond or a treasury, and it’s better than what you’re getting at the bank today.
Overall, real estate is a highly regarded investment choice, and low interest rates in the lending market are incredibly attractive. For some time now the finance market has been driving real estate, but the fundamentals of real estate are beginning to catch up with that.
GlobeSt.com: What’s your estimation of the retail sector as a whole?
Chichester: Retail is really significant to the health of our economy. Close to 70% of our economy is driven by consumer spending, and retail is where most of that happens. Higher-end retail has experienced strong fundamental growth, as have many discount and dollar formats that cater to the lower end of the consumer spectrum. Retailers in the middle are in many cases more challenged, working to navigate through changes in the marketplace, online competition and even their own business models.
Midmarket retailers need to ask themselves: How are we providing value to the marketplace and to our customers? What is the experience we offer? Do we have an omni-channel strategy that covers both bricks-and-mortar and the Internet?
Many of the larger midmarket retailers like Target, Best Buy and REI are reducing their footprints, focusing on a more experiential environment and/or using some of their existing retail space as a warehousing or distribution channel to be used in conjunction with their Internet business. One of the benefits in-place retailers have over Amazon is the ability to make the store a destination for in-store pick up from Internet sales, or to offer an alternative to their online store through a “find it in a store near you” feature if an item is out of stock online. These are some of the ways they’re managing the challenges of a changing retail landscape.
GlobeSt.com: Which retail investment sectors are showing the most significant gains, and which are still struggling?
Chichester: Virtually all sectors are strong. That’s a big change over the last 12 to 18 months. Not long ago, core was really strong, and gateway cities were fairly strong. Secondary and tertiary markets were considered high risk, and many investors wouldn’t go into those markets. But pricing gaps between those markets have really narrowed, and there’s not a big spread in cap rates anymore. The reason for this is that there’s so much capital chasing so little product.
I’d say the most challenged asset class is the mall. As generational shopping and socializing habits have changed, malls are searching for ways to reinvent themselves and stay relevant. In terms of other products, strip centers and grocery centers are in high demand, as are single-tenant, triple-net assets. In these asset classes all markets are experiencing high valuations and compressed cap rates due to lack of supply. Add historically low interest rates and an improving economy into those circumstances, and you have a very strong environment for retail investment