IRVINE, CA—Retail's current run has turned a lot of attention to the sector this year. And while the internet continues to upend the old ways of doing things, the sector has also seen renewed interest as an investment class. That's according to Donald MacLellan, senior managing partner at Faris Lee Investments. GlobeSt.com met with MacLellan to get his read on what's been working in retail, what hasn't, and what to expect for 2016.
GlobeSt.com: What are the strengths for retail property investment for 2016?
Donald MacLellan: Demand. We will continue to see a strong demand next year for retail investment property from domestic as well as international players. While many international markets are seeing instability, the US is a gold standard for real estate ownership. Second, I believe long-term interest rates will remain low. The Fed may raise short-term rates slightly by the end of 2015, however, this should not have a significant impact on long-term rates. Third, 2016 shows no signs of a significant amount of new development. With a lower supply, the demand will be favorable. Finally, as the stock market rises and falls, a retail asset can offer stability and income growth that the stock market can’t match.
MacLellan: The primary weakness is retailers themselves. There are two areas that we have seen continued upheaval – grocery and department stores. Next year, I believe we will see more fallout than this year. On the grocery store front, Haggen, which has been struggling since it launched in Western states markets, recently announced it is filing Chapter 11. This will create more vacant anchor boxes. It will come as no surprise to anyone if Fresh & Easy, a junior anchor retailer, shutters the rest of its stores over the next 12 months. Department stores are also taking a hit as online competition takes their market share. Department stores such as Macy’s have announced they will be closing stores. And we expect Sears & JC Penney to eventually follow suit. Forever 21 has also announced that the larger format stores aren’t as profitable per-square-foot as anticipated and is looking to downsize its larger format stores.
GlobeSt.com: How will vacancy be filled?
MacLellan: Overall, many markets simply have too much retail per capita. We are also seeing the need over the last several years for less overall shop space both in terms of square footage and as a percent of the total GLA in neighborhood centers. In Southern California specifically, owners have had to strategically reposition their retail to adapt to changing needs of the consumer. Restaurants, entertainment, and other experience-centric concepts are replacing obsolete and older retailers. Another concern is that in trade areas with lower income demographics, there has been a heavy expansion in the discount/value-oriented retailers ranging from the dollar stores, grocery and soft good users. An overabundance can make it more difficult to re-lease junior anchor boxes.
GlobeSt.com: How are you advising your buyers and sellers?
MacLellan: More than any other commercial real estate sector, location is crucial for retail assets. Density, traffic counts, and barriers to entry are all key factors to be taken into consideration when looking to acquire property. Just as important is the retailer mix. Retailers that provide daily needs and are immune to the internet effect make for an ideal tenant. Often times it is just a matter of a strategic business plan to anticipate changing consumer demands in order to create the optimum tenant profiles and shopping experience for the trade area. There is a finite list of the typical shop uses such as nail salons, dry cleaners, cell phone stores, quick service restaurants, and coffee houses in retail centers, however, urgent care, trade and charter schools, and medical users/operators have been expanding and take sizeable square footage in these neighborhood centers. They have been backfilling vacancies and we will see that trend continue even more fervently in 2016.
It’s an exciting time for retail and one thing is for certain, despite the shake-ups with tenants, retail investment should continue to provide a solid investment alternative in 2016. The demand and strength of the market are poised to be strong, paired with historically low interest rates.