It seems as though business news stories of late have been focused on the trials and tribulations of retail, from Toys ‘R Us declaring bankruptcy to Amazon buying Whole Foods. Connect Media chatted with Richard W. Chichester, President and Chief Executive Officer of Faris Lee Investments, to dig a little more deeply into the current retail scenario.
Q. From your perspective, what national influences are impacting the western retail market?
A. Now more than ever before, the fundamentals of retail real estate are important. It goes back to the mantra of location, location, location, along with physical design; demographics and good tenant mix. Good real estate is getting better, and some marginal real estate will probably get re-purposed. We clearly have an oversupply of retail as well as some projects that were simply poorly conceived. The benefit to western US markets is that it has some of real estate’s best demographics, and the best consumer momentum of any of the markets in the country. Some of the best properties are on the West Coast, with the greatest limitations for new development. In addition, new retail concepts are typically launched in these markets before being rolled out nationally.
Q. What are the greatest challenges for retail buyers and sellers?
A. There is a disconnect between buyer and seller expectations. The seller has had the benefit of rental growth and absorption over the last few years from a recovering economy. But for the buyer, it’s just the opposite. We’re long in the tooth in this cycle, and underwriting is taking that into consideration. Due diligence is taking longer, and there are fewer buyers in the market today. The buyer pool is far more constrained and limited. Moreover, much of what we see on the market today is non-traditional retail in secondary markets, which suggests that sellers are trying to rebalance their portfolios. These assets, while viable in many respects, are being underwritten by buyers as a go-forward risk both at the property level as well as in consideration of the late- stage economic recovery. The buyer now needs to look at a property and ask, “If I own the property during another downturn, can the property withstand loss of income and still perform?”
Q. How do you see the impact of Amazon on retail of late?
A. Amazon has its fingers in every business sector, yet the overall percentage of its market share isn’t as significant or threatening as some believe. Bear in mind, it isn’t unusual for retail to undergo constant change. Amazon has in many regards perfected e-commerce, and we have to acknowledge that online shopping is clearly impacting and changing consumer behavior. Having an online presence and an omni-channel distribution is important, but for many retailers’ they will face challenges integrating these two facets of retail and will be at risk of remaining relevant. Some will survive and thrive, while others will move more to experiential. So, Amazon and e-commerce are important, but not as dire as what’s being written about. When you examine the retailers who are closing stores, their problem isn’t solely e-commerce, but overall customer relevancy and balance sheets. Many are carrying far too much debt, and public companies were driven to expand too fast and too much. Online has a significant influence on retail, but many other factors are creating challenges as well.