Next Realty CEO and Managing Principal, Andy Hochberg , was a guest panelist at a commercial real estate forecast conference produced by RE journals. The following article blends together some of the highlights of that panel discussion along with reflections on current market conditions.
It’s Baaack!?
At the Forecast event, Hochberg agreed with the other panelists in emphasizing, “It’s Back, It’s Back, It’s Back.” While optimistic about the state of retail, he also emphasized that the sector continues to face challenges.
One of those challenges, according to Hochberg, is the reliance on rent growth to increase property values. There are markets, including Chicago, where rent growth is increasingly more difficult. To be successful, property owners must consider creative new strategies, embrace new tools like AI to evaluate opportunities, and look more closely at new markets that are pro-business and have strong population and job growth.
On Investing
Hochberg frequently cites a quote from Howard Marks’ book, The Most Important Thing, “Investment success doesn’t come from buying good things, but rather from buying things well.” The quote is as relevant today as stubbornly high interest rates continue to produce a significant differential between buyer and seller price expectations. It further demonstrates that investors like Next have to exercise patience while waiting for the right opportunity and agility to execute when opportunities arise.
The Social and Entertaining State of Retail
The presence of a younger consumer demographic is having an impact on the retail sector. Hochberg attributed this in part to a general feeling that during the pandemic people missed being able to interact with other consumers and products. “It has made social outlets—shopping and entertainment-related venues even more popular, especially for the younger consumers,” he said.
As the retail industry evolves and changes, there have been many opportunities to re-tenant vacant spaces, including big box spaces. It’s possible to fill some of the big box spaces with non-traditional uses, like pickleball facilities and other social or entertainment options, Hochberg noted. Securing these tenants has proven to be a successful strategy for Next.
Hochberg added “We recently backfilled a big box space with an Urban Air Adventure Center, and their reception in the community has been great. Some were skeptical, but their performance has been very strong.”
The State of Leasing and Lease Terms
Panelists offered their perspectives on the state of leasing as the moderator asked which is more prevalent, three-year, five-year, or seven-year lease terms. In a light-hearted moment, Hochberg replied, “Yes.”
He explained that the length of leases varies from situation to situation, from tenant to tenant and from property to property. It is difficult to increase value without rent growth, which in turn is dependent on increased demand and sales.
Hochberg said that Next’s own analysis of lease terms found that while face rent may appear higher, that isn’t always the case for effective rent. It’s important to evaluate the impact of rent abatements, tenant improvement allowances and lease commissions on effective income.
Toughest Spaces to Lease
According to Hochberg, the spaces that can be the most difficult to lease are spaces that may be the result of carving up a vacancy to accommodate a valuable tenant/prospect. That action may result in creating a space that may be challenging to market, because of its odd shape or location. An owner must make the critical decision to lease partial space to an attractive tenant while working on creative plans to lease the remaining space or decide to wait for a different tenant to lease the entire vacancy.
AI’s Place
Speaking to his days as an executive with Sportmart, Hochberg reflected that the sporting goods retailer “was an early AI leader.” Sportmart used its Frequent Buyer Program to collect data about purchasing habits. If a patron purchased running shoes, for example, they soon may have received an offer to buy other complementary merchandise.
The panelists noted that one of the differences with current AI is that data is often available in real time. Not only can retailers track purchases, but with data collected from cell phones, they can send messages and coupons to consumers while they are in the store or vicinity.
“The privacy side is a big debate,” Hochberg said. “Yet AI’s integration is something everyone in the industry must get behind. It’s an important decision-making tool.”
Conclusion
Navigating the spread that exists between buyer and seller expectations along with positioning a property to achieve rent growth and enhance property values and returns remains a challenge. According to Hochber
long as the industry stays open to new concepts in tenants, and we remain creative in upgrading and filling existing centers.
