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— Retail Properties Quarterly — February 2018

Investment Market

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he availability of capital

for most retail centers is

strong, despite all the nega-

tive headlines in the media

in 2017 about retailers clos-

ing stores, filing bankruptcy due

to overexpanding, and declining

sales from online competition and

changing consumer trends. There is

a herd mentality in retail more than

other property segments because

this property type has experienced

the most change over the last few


For example, the retail equity

and mortgage investor herd was

spooked when Amazon announced

it was acquiring Whole Foods last

year. Suddenly everything retail

seemed to be in turmoil. This cre-

ated an even darker cloud and

triggered more conservative under-

writing, particularly for retail cen-

ters occupied by junior or major

tenant(s) with flat or declining

sales attributed to competition

from e-commerce. As we enter 2018

though, the herd mentality is slowly

shifting, and there’s a realization

that online sales could likely hit a

cap of retail total sales.

Many retail industry experts have

estimated that we’ll reach a cap

of 20 to 25 percent online retail

sales as a percentage of total sales.

They’re projecting bricks-and-

mortar retail properties are simply

going through an evolution phase.

Some suggest we have too much

big-box and mid-sized bricks-and-

mortar retail due to overbuilding

over the past few decades. Many

national retailers made a mistake

by overexpanding and created way

too much supply as their demise.

A big portion of

those that filed

for bankruptcy

last year were

overleveraged and

failed because

they overexpanded

and missed the

demand in a short

period of time ver-

sus a slow bleed

from online com-


The National

Retail Federation

reported that retailers had their

best holiday season since 2010, and

total retail sales in November and

December were up 5.5 percent over

the prior year. However, department

store sales were down 1.1 percent in

December. Sales at nonstore retail-

ers, which mainly consist of online

retailers, increased 12.9 percent.

The bricks-and-mortar retail sales

growth is reported to be driven by

building material stores and restau-

rants. Most big-box retailers, many

in Class B malls, skewed the total

bricks-and-mortar sales increases


Consumer confidence has been

strengthening and the recent pas-

sage of the new tax legislation is

estimated by many economists to

result in a spending spree as cor-

porations are anticipated to spend

tax savings on rewarding employees

with salary and bonus increases in

a tight labor market. Recent articles

in the Wall Street Journal men-

tion the savings rate of American

consumers is at an all-time low

and when we get more cash, there

has been a direct correlation with

increasing retail


The cloud over

retail since Ama-

zon acquired

Whole Foods

appears to be lift-

ing, especially

considering the big

picture of bricks-

and-mortar sales.

After seeing a few

commercials on, the

online pet food

retailer, one might

think PetSmart and Petco stores are

going to consolidate and downsize

the average store size; however, it

turns out PetSmart just announced

it’s buying, which could

give the company an advantage of

stocking pet food at bricks-and-mor-

tar stores with same-day delivery.

Amazon bought Whole Foods to gain

an entry into the grocery market,

but also bought Whole Foods for the

excellent locations and logistics of

the bricks-and-mortar stores. Tra-

ditional bricks-and-mortar retailers

like PetSmart are figuring out how to

execute “omnichannel” marketing by

increasing their online sales.

Another interesting theme as we

enter 2018 is the changing lender

sentiment toward fitness tenants,

grocery stores and restaurants.

Lenders didn’t like fitness tenants

10 years ago because they had high

tenant improvement build-out costs

and they were perceived to lack the

consumer visits that is created by a

grocery store. Today’s reality is that

some centers with a 60,000-square-

foot fitness center formerly occu-

pied by a grocery store are drawing

more customers on a weekly basis

because fitness customers typi-

cally visit more than once per week.

Accordingly, some destination res-

taurants and entertainment con-

cepts are viewed as good replace-

ment tenants in enclosed malls that

can be redeveloped vs. traditional

mall anchors like Macy’s.

For the most part, underwriting

standards and financing terms for

quality grocery-anchored centers

and infill neighborhood strip centers

haven’t changed. Most of these cen-

ters are internet resistant because

the majority of tenants provide a

convenient service or amenity to the

neighborhood. Strip centers with

a strong occupancy history with

tenants like a drop-off dry cleaner,

liquor store, corner gas station/con-

venience store, nail salon, fitness

tenant and some local restaurants

have become more of a preferred

property type as they have infill

locations surrounded by residen-

tial rooftops that can’t be replaced.

There is no delivery service or

drone that can pick up a 12-pack of

Heineken and my dry cleaning faster

than I can go down the street.

Retail centers with grocery

anchors that have a top-three mar-

ket share usually have the same

type of inline tenant line up as strip

centers, but with more national

franchisee tenants. Insurance

companies as lenders will offer

the lowest rates on these types of

properties for fixed-rate terms of

five years or longer at an average

loan to value of 65 percent. Current

Investors’ herd mentality is beginning to shift

Peter Keepper


principal, Essex

Financial Group,


Michael J.


Vice president, loan

production, Essex

Financial Group,


Please see Keepper, Page 26