It’s no news that retail real estate is in a downward spiral. It started
slowly 10 to 15 years ago as timed constrained shoppers were getting tired of getting stuck in traffic and reduced their mall trips.
E-commerce accelerated the trend. Efforts at trying to make mall
shopping more experiential have fallen flat.
And stuffing brand stores into high-street urban locations has
run its course too—rents are dropping along the most coveted
shopping strips in the country. We’re at the top of the economic
cycle and the retail real estate tailspin is savaging NCREIF performance—the core index delivered only a 1% return in the second
quarter. So what happens in a recession when chain stores inevitably retrench further? The number of closings could be unprecedented.
All the ongoing disintermedia-
tion raises a crucial question. Can
institutions still consider bricks-and-
mortar retail investments core real
estate? Or have shopping centers
turned into a much too volatile,
high-credit risk component unable to reliably support income-
producing strategies with tenants vulnerable to going belly up or
reducing their footprints at any time in the economic cycle. Even
the once-seemingly impregnable fortress malls catch a whiff of
the unimaginable—losing brand names, cutting rents, shrinking
store formats, looking for non-traditional tenants. In the 1960s,
who thought Woolworths Five and Dime would ever disappear?
Now anchor department stores—whose ranks have been shrink-
ing for several decades–really look like dinosaurs and even once
seemingly insulated luxury purveyors, the province of the one
percent, go bankrupt. At strip centers local and regional grocers
have been eviscerated by Wal-Mart, Target and Trader Joes,
among other national behemoths. And in cities, do we really
need any more corner drug stores or Starbucks?
The rationales for owning retail properties have been capsized
in the rising tide of red ink. Markets need less of it and rents need
to recalibrate down. The shakeout will pick up pace in the inevita-
ble economic downturn and may continue afterwards as online
shopping becomes even more easy and accepted.
Once true-believers are in full retreat. Big institutional players
can’t look like they are panicking for fear of creating a fire sale,
but they want out. “We’re strategically selling” translates into let’s
try to dispose of as much as we can as quickly as possible before it
gets worse. But the reality is most players know they are going to
get caught with some real stinkers and writedowns will be increas-
ing as buyers grow scarce especially in the face of the economic
storm clouds. Everyone is looking at alternative uses—medical
office, apartments, warehouses—whatever will help cushion
against big losses.
Under the circumstances, many retail properties will become
value plays—buy at very low prices and reposition into something
you can sell off in an economic upturn. And that something may
not be retail at all. The idea of owning a 20 to 30 percent compo-
nent of retail properties in an institutional core fund has been
blown up whether we all realize it yet or not.
Those days are over. Like the Five and Dime.
The views expressed here are the author’s own and not those of ALM’s
real estate media group.
Is Retail Still Considered Core Real Estate?
By Jonathan D. Miller
Texas rises to the top due to the state’s diverse economies
that drive above-average incomes. For example, after adjusting for cost of living, Millennials living in Austin have up to a
$9,400 advantage in spending power over the US average.
“Austin continues to raise the bar in our offering to Millennials
considering relocating to the Capitol City,” Travis Rogers, JLL
senior associate, tells GlobeSt.com. “Austin is where robust eco-
nomic opportunity intersects a spectrum of lifestyle choices that
both younger and older generations have come to desire.
Whether you prefer a suit and tie or shorts and flip flops, once
you step out of the office and into the city, you’ll feel welcomed in
a place like none other. Maybe your passions are music, movies or
relaxing on the banks of Barton Springs. Maybe your passions are
sports, mountain biking or kayaking on Lady Bird Lake. Rest
assured, no matter where your career or passions may lie, Austin
has a place for you to grow and thrive.”
Houston also offers employment opportunities across a broad
range of industries including energy, healthcare, technology and
“In Houston, most Millennials are living their best lives,”
according to Lesa French, JLL vice president. “Our low unem-
ployment and favorable cost of living coupled with a competitive
business environment and thriving social scene make Houston
appealing to young adults new to the workforce and looking to
make their marks.”
An even lower cost of living can be found in San Antonio,
which also attracts Millennials to its city boundaries.
“San Antonio continues to attract Millennials through vary-
ing avenues: armed and medical services, in-migration from
South Texas, as well as from states with a higher cost-of-living,
university recruitment, and jobs related in the service and tour-
ism industries,” Robert Arzola, JLL vice president, tells GlobeSt.
com. “Despite the modest job market for working Millennials in
the city, the robust value of the Millennial salary and area-
attractions keep them in San Antonio. An average salary of
$70,000 for a Millennial in San Antonio feels like $80,000.
Employers experience these benefits in a similar fashion as the
national average salary for working Millennials is roughly
$80,000, as compared to San Antonio’s average salary for the
same is $70,000.”
That lower cost of living in Texas overall when compared to
other major markets, along with increased employment opportunities, creates a magnet for Millennial households looking to grow
careers and balance work with quality of life. —Lisa Brown ◆