Most intriguingly, RCA wrote that, “the fact that there are pockets of growth suggests that the slowdown in sales is not a sign of an
impending broader calamity. Rather, there are unique features for
each property type and deal structure influencing market trends.”
DIGGING INTO RETAIL’S FAILURES
Consider the example of retail. One theory for the lack of sales—
and RCA did cite this as one of the reasons—is that owners of the
best assets are reluctant to test the market amid the torrent of bad
news about the sector. Only the assets that had to sell went to the
market where they were promptly pummeled. Hence the conclusion that the retail sector is weak.
To be sure, it has structural issues, many of which still must be
resolved. But more insight can be had by digging into the reasons
for the many failures this year, says Sam Latone, co-CEO of the
Shopping Center Group.
The types of retail that foundered fell into two different categories, he explains. One was the retail chains owned by private
equity firms. Typically what they did was leverage the retail chains
up with massive amounts of debt and when the downturn came,
they couldn’t reinvest in the stores or the people. “It was a financial construct as opposed to an operating retail chain driven by
merchandising and customer service,” Latone says.
Another category of failed retailers, he continues, were those
chains that for whatever reason over the years failed to reinvest
and reinvent themselves in a way that resonated with the con-
sumer. “They have been doing business the same way for many
years and as retail evolved and consumer tastes and preferences
changed they simply failed to keep up.”
E-commerce, of course, has been pressuring brick-and-mortar
stores and the retailers that have been able to survive, Latone says,
are the ones that have blended their online and offline operations,
presenting a seamless front to the consumer. Consider Wal-Mart:
it’s become a cause célèbre of sorts as it did not succumb to the
Internet or Amazon but instead was able, after a fumbling start, to
marry e-commerce with its brick-and-mortar presence.
Recently Wal-Mart announced that it expects its US e-commerce
business to increase its online sales by 40% for fiscal year 2019.
That’s a formidable projection, considering its online operations
are now five years old, although perhaps not as much in light of the
fact that its online sales skyrocketed by 60% in this year’s Q2.
“I applaud Wal-Mart for recognizing that they need to take a
unified approach to their customer,” Latone says.
Another category in this space that is doing well are the experience retailers, such as Zavazone. Experiences—as opposed to
acquiring things—are also part of the changing consumer landscape to which Latone refers.
Recognizing this, more experience retailers are coming to market, Transwestern vice president Nathan Bortnick says. “The
retailer landscape is changing and there are new concepts, and
landlords are looking for the next great exciting thing.”
“DO I HARVEST MY EQUITY?”
The interesting developments in retail notwithstanding, transactions in this category are widely expected to remain slow. The bottom line is that the headline news, while misleading in many
respects, will still rule the day for the time being. As RCA stated in
its Q3 report, the torrent of bad news about retailers is limiting
Hotels are another category that are expected to see slow transaction growth in 2018, albeit for quite different reasons.
To be sure the industry will continue to have healthy revenues
and profits next year, says Tom Engel, principal of T.R. ENGEL
Group of Boston. “We’ve been on a pretty consistent roll now
since the debacle in 2009-2010 and there’s no evidence we can
see that people will be in a funk in 2018.”
As for fundamentals, he predicts a slowdown in average daily
rate—mainly because of new supply coming on line in New York,
Chicago, San Francisco and Houston—but not much of a slow-
down in occupancy. In short, operating results for 2018 should
continue to be positive—and that is the reason for the expected
slow pace of hotel transactions. “When profits have experienced
the kind of growth they have over the past four to to six years, and
you look to buy assets in that environment,” he says, “obviously
sellers want more and capitalization rates decline.”
For instance, Engel says that if five years ago, you were look-
ing at a hotel with a dollar of profit and an 8% to 9% cap rate,
that looked great. Five years later, that dollar is maybe now $2.50
and cap rates have dropped to 5% “All of a sudden as a buyer
you’re saying, ‘Why didn’t I do this five years ago?’ And as a
seller, you’re now confronted with the issue of ‘Do I harvest the
equity that I’ve created over the past five years, or do I continue
to ride a favorable storm?’”
There will always be reason
for hesitation. Each year we
find a new reason—the Dow
seems too high, we have a
new administration or
Newmark Knight Frank
Some retailers were doing
business the same way for
many years and as retail
evolved and consumer tastes
and preferences changed,
they simply failed to keep up.
Shopping Center Group