I am pleased to share that ten of the Progressive Real Estate Partners team have just returned from a few very intense days at the ICSC Las Vegas Conference which is the largest annual gathering of retail real estate professionals. Our team estimates that we shook hands, hugged, fist bumped, and of course talked and met with at least 700 participants including retailers, property owners, city officials, and vendors. Although the conference is certainly an opportunity to discuss specific deals, it is more an opportunity to strengthen relationships and obtain industry information.
After conferring with the team, the following are 9 of our takeaways from this year’s conference.
1. Tenants Are Paying Their Rent: We met with numerous property owners and one of the questions we like to ask is whether they are seeing an increase in delinquencies. Across the board, the answer was “no”. There are always isolated situations where vacancies occur, but currently vacancies are not being created for economic reasons. There was certainly concern about the future. Many that we spoke to have been through a few cycles and they recognize that when it seems too good, it sometimes can be, but overall the retail market from a rent payment perspective is healthy.
2. Shop Space Development May Be Mostly History: Rising construction costs was a constantly repeated theme. These rising costs are substantially impacting the potential for new development. It appears that new shop space is costing at least $600/SF to build including land, buildings, common area improvements and soft costs. To justify building in today’s interest rate/cap rate environment, rents have to be $4.00 to $4.50/SF/month, plus triple net charges to justify new construction. Yes, there will be some isolated shop space built as a part of larger projects and there may be some small, high profile shop buildings built to accommodate a few high-volume restaurants, but otherwise, expect that the days of building multi-tenant strip centers in Southern California will be rare.
3. 99 Cent Only Spaces Are Big Question Mark: 99 Cent Only’s bankruptcy and decision to close all of their locations was a source of discussion amongst many. Of the approximately 370 stores, about 160 are in Southern California. I spoke to someone from Dollar Tree and was told that Dollar Tree is going to end up with over 100 of the locations. I also heard that a lease was purchased at a location with only 18 months remaining of term (no options). During the past month any tenant that takes approximately 15,000 to 30,000 SF has been pouring over the portfolio. How this all shakes out is being very closely watched and popular opinion is that a substantial majority of the locations will either be purchased through the bankruptcy process or will lease fairly quickly once possession is returned to the landlord.
4. Landlords & Tenants Pushing Risk to Other Party: Landlord and tenant negotiations have always been about who bears certain risk, but despite this fact, historically there seemed to be a more accepted set of rules and norms for who is responsible for which part of the process. These rules are certainly being rewritten based upon each party’s availability of capital, expertise, and motivation. Tenants who would almost never consider taking a property in “as is” condition and putting all their own money into a deal are doing so for the right location. Landlords and developers who would typically handle much of the entitlement process at potentially significant financial risk to themselves are trying to push some or all of this responsibility to the tenant. Developers who are frequently burdened with negotiating a rent today based upon certain construction costs and exit cap rates are trying to give themselves the ability to get out of a deal if 2 years later when the entitlements are obtained, the deal no longer pencils.
5. Members Voice Concerns About Conference Costs: By its very nature the retail industry is customer focused making it ironic that the organization that dominates the real estate side of the business seems at times to be disconnected with its membership. Many questioned the rising costs to attend the conference while simultaneously shortening the duration. There is significant worry about this trend pricing younger people out of the opportunity to attend. This concern was not exclusive to the Vegas conference, but also applied to the regional events as well. There is a growing sentiment that ICSC’s actions aren’t always member-focused enough and I hope the leadership addresses these concerns.
6. Learning to Navigate in a Higher Interest Rate Environment: Acceptance is the 5th stage in the stages of grief. This follows the initial stages of denial and anger. It appears that many in the industry are accepting the fact that we are going to be operating in this higher interest rate environment and that our business plans need to be modified to reflect this reality. This does not mean that there aren’t a lot of owners who may want to be sellers that are still in the denial and anger stage (we all go through grief at our own pace), but overall, the industry professionals that attended the conference recognize this new environment.
7. Diversified Tenant Mix on Trade Floor: One of our team members made the observation that it seemed like a couple of years ago, food users dominated the trade floor. This year there was a lot more diversification of “retailers” including many family-oriented entertainment uses (i.e. pickleball, indoor playgrounds, indoor activity centers), childcare operators, hotel operators, grocery stores, and numerous other concepts were present.
8. Buyer Seller Price Gap Continues: Whether it is buyers and sellers of investment properties or land for development, there remains a disconnect between buyers and sellers. This relates not just to the cost of debt due to higher interest rates, but it also relates to the cost of equity requiring higher returns as well as the fact that lenders are being more conservative which means expensive equity is becoming a larger part of the capital pie. As a result, those that can transact for all cash are the parties that are capitalizing on this market.
9. Overall Inland Empire Cities Considered Business Friendlier: This blog goes out to a lot of SoCal Inland Empire municipal officials, and we don’t want #9 to make them overly confident, BUT there were numerous tenants and developers that voiced that if they were going to do business in Southern California, their preference is to do business in most Inland Empire cities. The consensus was that they are more business friendly than the coastal counties. Kudos to these cities for earning this praise.
Overall, our team found this year’s conference very positive and productive. It is definitely the people and relationships that make the retail real estate industry thrive. There is no substitute for the value of connecting in-person and we easily see new opportunities coming from the many people that we met with and the new connections that were made.