Seven Takeaways from the ICSC New York Deal Making Conference 2018

ICSC’s annual New York Deal Making conference got underway at the Jacob K. Javits Convention Center this week, with industry insiders in attendance claiming the months-long streak of retailer bankruptcies and store closings is tapering out and the retail sector should have a stable year in 2019. Here are some takeaways from Wednesday, the first day the trade show floor was open.

1. After more than a year of very few non-distressed sales taking place in the regional mall sector, class-A and -A+ malls started to trade again in 2018, leading to much-needed price discovery for investors and lenders, according to Richard Latella, executive managing director, retail practice group lead for the Americas, with real estate services firm Cushman & Wakefield. Cushman & Wakefield’s appraisers forecast that over the next year, cap rates on top-quality malls will average in the 4 percent to 6 percent range, with some mall valuations potentially coming in below 4 percent. “We’ve seen institutional capital attracted to that space, and we’ve seen demand for that product type, there’s just not a lot of product trading,” Latella says.
2. In spite of investors’ returning appetite for class-A malls, the regional mall sector overall continues to be divided between the haves and have nots with the top-tier, often REIT-owned malls performing well, some smaller malls in secondary and tertiary markets on the way to inevitable demise and middle market malls that could go either way, depending on their access to capital, Latella notes. “We went through a period in the last 18 months when it was difficult for malls in the middle sector to get capital. It’s loosening up because it’s getting clearer who’s going to make it,” he says. Many of these middle market malls now have stabilized occupancies, though they may never again reach 95 percent, in Latella’s view, and are being helped by municipalities that are bringing in public, non-retail uses such as schools and hospitals to fill up empty spaces in order to keep the malls as centers of the community.
3. Outside of the regional mall sector, single-tenant net lease assets and strip centers with three to five tenants tend to be the most popular acquisitions among private investors, according to Scott M. Holmes, senior vice president, national director of the retail group, with brokerage firm Marcus & Millichap. As some investors exit low-yielding properties in other sectors, most notably coastal multifamily assets, they view single-tenant net lease retail as both less management-intensive and offering yields that can be 200 to 300 basis points greater than those brought in by their exit from multifamily plays, Holmes adds. Investors’ least favorite product type right now (outside of regional malls) are power centers, but, “there too is a very good opportunity, it’s almost a contrarian play, many times they are able to buy at a cap of 7.5 percent, even an 8, with very good credit tenants,” he says.
4. The positive news for the power center sector is that the big-box bankruptcies are likely coming to a conclusion, notes Theresa Johnson, senior vice president for retail investment sales with real estate services firm Avison Young. Johnson predicts the following 12 months will bring a “good retail run” for the sector. “From the Southeast perspective, what we are seeing in cap rates is that things are pretty stable right now,” says Johnson, who is based in Atlanta. “We have not seen the impact from rising interest rates. And the debt markets are still surprisingly robust.”
5. Retail tenants are reconsidering where they want to open stores. Many retailers are focusing on class-A real estate in prime locations as they try to optimize their store portfolios, according to Brendon Famous, chairman of the global retail occupier executive committee with real estate services firm CBRE, and Melina Cordero, global head of retail research. “Demand is going up for A locations, but there’s very little supply,” Cordero says. “So, what that means is that rent has been going up for many quarters.”
6. The expanding retailers in today’s market are the “F’s”, according to Brett Sheets, senior vice president of leasing with Vereit, a real estate operating company: fun, family, fitness, food and fashion discounters. In many cases, entertainment concepts, mom-and-pop restaurants and gyms are coming in and taking up space left over by recent big-box bankruptcies. Many of the Toys ‘R’ Us boxes, for example, are being picked up by TJ Maxx and Ross, as well as by grocer Sprouts, notes Marcus & Millichap’s Holmes. “They can actually take the whole [space], you don’t have to split those stores up,” Holmes adds. “Those retailers have not been able to find good sites for their expansion, and this opens up those spots.” Another major trend for emerging retail concepts in the current market is the integration of the omni-channel experience, notes CBRE’s Brendon Famous. “The expectation is that five years from now you’ll never have to stand in line,” he says.
7. Attendees at the New York-based conference also touched on the unusually high number of vacancies on the city’s famous retail strips, normally some of the most coveted spaces for retail brands looking for exposure. The local market is undergoing a correction after rents had gone way above what tenants were willing to support, driven in part by the high prices investors and developers paid for properties in the city, according to Howard S. Aaron, senior director, and Jonathan Krivine, director, in the retail division of Avison Young. “Savvy tenants are a little nervous about paying high rents, and [with higher vacancy] they have more choices,” says Aaron. “People are cautious, and many are making low-ball offers on stores. But, “I actually think the New York market is starting to get a little better, I see it with the phone calls and with the offers coming in.” There is also the issue of unrealistic expectations on the retail landlords’ part, according to Krivine. In most other property sectors, the market quickly dictates what the correct rent should be, he notes. “Retail is a whole other animal because landlords are dreaming that there’s someone out there who will pay 50 or 100 percent more” than what they can get today.