Page 12
— Retail Properties Quarterly — February 2018
www.crej.comInvestment Market
Brinkmann Constructors is dedicated to adding the most
value to every step of the construction process by providing
guidance and creative solutions that allow us to build faster
and offer real cost-savings to our clients. We bring a sense of
accountability and ownership to every project, making us a
trusted partner to our clients.
We have a solid portfolio of building retail stores and retail
development projects including site/infrastructure work
throughout the Midwest.
Let us become your trusted partner and
build your next retail project!
WE BUILD TRUSTED
RELATIONSHIPS
WITH OUR CLIENTS
ST. LOUIS
│
DENVER
│
KANSAS CITY
3855 Lewiston Street, Suite 100
Aurora, CO 80011
(303) 657-9700
AskBrinkmann.com◄
DICK’S SPORTING GOODS - Broomfield, Colorado
T
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
decades.
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-
petition.
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
downward.
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
sales.
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
Chewy.com, 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 Chewy.com, 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 shiftPeter Keepper
Managing
principal, Essex
Financial Group,
Denver
Michael J.
Salzman
Vice president, loan
production, Essex
Financial Group,
Denver
Please see Keepper, Page 26