Meet the Expert
Chris Kostanecki
Managing Partner, Capital Pacific
- 25 years in Commercial Real Estate
- Founded Capital Pacific which has sold $5.2 B in commercial properties
- Specializing in roll out strategies to build new stores; monetizing existing facilities; estate strategies around real estate; 1031 exchanges; Joint Venture Capital; Forward Funding; shopping center and strip center sales; NNN leased property sales; single-tenancies around real estate.
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Risks and Opportunities for Investing in Brick-And-Mortar Retail Real Estate
Managing Partner, Capital Pacific
Key Trends
- Competition from online shopping is changing how brick-and-mortar stores operate.
- E-commerce is having a large impact on bricks-and-mortar real estate. Brick-and-mortar is not going away, but retailers are learning how to manage their online and retail stores more effectively.
Generally, we find that retailers are seeking efficiency and there is some contraction going on with space. You don't need as much space because you don't need to store everything in your store as you use more just-in-time shipment and drop shipment. Because of this GLA – the gross leasable area – is contracting.
Some companies have responded by aggressively getting into same-day delivery. A lot of the retailers are finding that customers want to come in and do a showroom. They want to test, they want to feel, they want to try something on. And then, they'd love to get that product delivered to them that day. Others are trying things like a drive-through kiosk where your goods are brought out to your car. They open up your trunk and they put the stuff in and off you go. - Population shifts are changing the commercial and retail real estate market across the country.
- When you look at the national real estate market, the market is hottest in those places that are becoming job meccas. Texas, for instance, is a candidate for being the job-growth poster child. Florida is really starting to grow again. There is a real movement of population. New England generally is very flat while the Southeast and energy belt are showing growth. Of course, California has growth.
Some cities also are leading job-related market growth. Portland and Seattle are examples. These are places that companies want to be. It's where a highly educated workforce can be found for major employers like Microsoft or Nike. That kind of growth spurs a lot of the younger or new ventures.
Also in relation to cities, many large retailers are pulling back from the suburban sprawl model and are more interested in coming back in toward population centers. Retailers are looking for an urban footprint where they know they might have 1 million potential customers within a 5-mile radius rather than 100,000. These urban stores are laid out differently, their size is different, and what they're willing to pay is different. - Environmental regulation and energy costs are going up, driving compliance needs and a desire to save money to stay competitive.
- Operating retail space more efficiently is a growing concern. So, green LEED (which stands for Leadership in Energy and Environmental Design) energy-efficient buildings can be a significant way for retailers to improve their bottom lines. They can lower their occupancy cost, or their cost beyond the brick-and-mortar itself, by reducing their heating, cooling and light bills, which can become very substantial.
The landlords who aren't adopting and understanding how important this is are asleep at the wheel. That's because more people are going to come in and look at the kind of workplace they're providing, and the costs to operate there.
Legal requirements are coming, too. California, is the first state to mandate and report an energy score on a building. The rest of the country may think California is crazy, but this is the way of the future. - Retail is concentrating more on providing experiences and value.
- As a retailer, you have to deliver something your customers want. That usually will be either an experience or a value. If you deliver neither, you're in big trouble. So it's a very competitive market.
If you deliver experience, you want your customers to say, "Wow, this is so cool. I'm willing to pay five dollars for that scoop of ice cream.” In this case, you're not delivering on value; you're delivering on experience. If you're going to get ice cream for the whole graduating class of your high school, you're probably going to go for value at Costco or some place like that.
The nature and location of the space you are considering for your own retail operation can be dictated by the business choices you make. - Commercial real estate is on an upswing.
Commercial real estate, like any business or economic sector, is subject to business cycles. Values and income streams can move up and down as the economy changes. The current trend is up for many types of real estate.
As an example, as the economy turned down in the recent past, the travel industry suffered terribly. Businesses were doing everything they could to avoid business travel. Hotels felt the bite and they became devalued. But now, hotel values are rebounding because business is expanding and people are traveling, whether it’s for vacations or for business travel. Occupancy is on the rise. Likewise, sales of strip centers spiked 27 percent as part of the recovery.
To a great extent, fear and greed drive the market. Owners become fearful when their properties are plunging and there are no buyers. But at some point, the herd starts recognizing that real estate actually is undervalued and it is a pretty good deal. It’s that kind of a period that we are entering into.
Risks and Opportunities for Investing in Brick-And-Mortar Retail Real Estate:
Key Trends
Expert Topic