“Bar none, this is the most exciting time ever in retail,” Philip Voorhees, EVP of CBRE in Newport Beach, California, tells SoCal Real Estate. A far cry from the predicted death of this sector.
According to Voorhees, change is good, particularly in a transactional business like retail investment sales. “The oppressive negativity about retail that dominated the headlines after the 2016 holiday season and for all of 2017 is subsiding. No surprise to us all, but retail remains relevant to nearly every American, even if they order from Amazon or other online retailers.”
The future of retail in the Southern California market looks especially bright. Voorhees points out that in SoCal, we enjoy a nearly perfect climate desirable to most everyone. “The career opportunities that exist in major coastal cities both attract and produce highly educated, and more affluent consumers,” he says. “Population density and growth along the coasts historically exceeds that of inland markets, and Southern California’s freeway and transit infrastructure — challenged as it may be — still permits the populous to quickly cover 50, 60, or more than 100 miles regularly.”
Voorhees also notes that due to the existing population density, supply constraints, barriers to entry, and the split in retail to lower-priced, “value” focused retail or higher-end specialty retail, new retail development may not be economically feasible. “All of these factors make existing retail projects more valuable, and correspondingly attractive to investors.”
Furthermore, with most traditional retail projects covering only 20 to 25 percent of the site area, it’s inevitable that today’s retail center could be a covered land play in the not too distant future, particularly, with more ride sharing and services and driverless cars (and car services) on the horizon, he notes. “If/when the mandatory five or 10 parking spaces per 1,000 square feet of leasable retail area becomes unnecessary with fewer customers driving, retail sites will be ripe for increased density and redevelopment,” Voorhees says.
Some of the projects to come out of the trend toward decreased parking are likely to be mixed-use projects, including retail, multifamily, medical, and school uses, he notes. “The emphasis on convenience and experience seems here to stay for the foreseeable future.”
Voorhees says he also expects omni-channel retail will continue evolving, with brick-and-mortar retailers finding online sales outlets (either independently branded or via portals like Amazon.com) and Internet retailers establishing brick-and-mortar locations as well. “We also expect smaller, local, and specialized business to thrive in bricks and mortar as customers seek authentic experiences and a connection to the area in which they live. All of this is very positive for consumers and owners of retail properties alike.”
There are some caveats, however, particularly in the area of projects dominated by “box” tenants selling commodity products, says Voorhees. “Most box tenant categories are down to just one or two tenants, and many of these tenants are focused on a discounted, value-focused sales proposition and thus cannot pay significant rents. Until industrial rents reach the bottom end of retail rent for box spaces, power centers with significant box tenancy will face headwinds.”
On a brighter note, as SoCal Real Estate recently reported, hospitals and medical uses are discovering that being close to and convenient for patients pays dividends, according to Voorhees. “And, these tenants typically invest heavily in tenant improvements, are higher in credit, and are also capable of paying larger rents. We expect the line between traditional retail centers and medical centers will be substantially erased in the next three to five years.”