February 11, 2018
As a company, we spend our time making sense of the cash flows presented by sellers. Find where the seller may have overstated the cash flow. Find where they had missed opportunities. Basically, sort out the facts.
There were a couple of articles this week that made their way around Twitter an LinkedIn because they had sort of Clickbait headlines. The first was:
The premise of the article is that e-commerce will account for one-third of all shopping by 2030, so considering that it currently accounts for 10%, the losses will be coming from bricks and mortar – so a loss of 23% of sales. What the article does not present is that total sales – online and physical – will continue to grow. If those sales grow by 2.5% per year, total sales in 2030 will be 35% higher than they are today. If physical retail is “just” two-thirds of total sales in 2030, physical sales will have suffered no loss – physical sales will be essentially what they are today. However, as we continue to see, shopping centers are evolving. Restaurants, residential, office, entertainment, health and other non-retail uses are being brought in to bring the properties to their current highest and best use. If 10% of retail is converted to non-retail uses but in the same retail environment, then that two-thirds of sales in 2030 is being achieved with 90% of the space. That accounts for real increases in sales – just over 11%.
I do realize that I can poke holes in these numbers I have just presented. But the point is, the “sky is falling articles” have similar holes. They can ignore realities as did the second article:
This article ignores two facts. The first is that, through their evolution, malls (an open air retail) have had gyms and other non-retail uses as part of their tenant mix. Shopping centers have been constantly evolving. It’s back to that highest and best use. It must always be considered.
Quick little story – In 1991/1992, we were doing some work for Faison in North Carolina. It’s namesake founder, Henry Faison, had been developing retail properties since the early 1960s, and Henry happened to be one of those one generation of developers of regional malls, alongside of the Simons, DeBartolos, Taubmans, Hahns, Congels, Pasquerellas, Aronovs, Karps, Bucksbaums and handful of others that truly changed the landscape of the US. I was under 30, sitting down the hall from someone I considered a rock star of our industry (they weren’t online war rooms at the time. You had to physically be where the records were). Henry clearly loved what he did. Despite his successes, he was in the office early and stayed late (and drove a series of Ford Tauruses). He was all business. His assistant, Candace, had been working with him for years. I wanted to know the man celebrated a little. I asked her what he did when he signed anchors and knew he had a mall ready to come out of the ground. Did he do a little private happy dance? No, she said. He just immediately said, “Who are we going to put next to them? Is fashion going to be on the first floor or second?” It was all (in capital letters, ALL) about the tenant mix. It was, is, and will be all about the highest and best use.
The second fact ignored, or implied, is that mall (and open air centers) are not in financial shape. It ignored another article this week:
Retail is not in the tank as the media constantly presents. Much of what has been going on, with bankruptcies and closures, has long (let’s do caps again, LONG) been expected. There is no landlord with a Sears or Macys or Penneys or Bon-Ton that is the least bit surprised about an announced closure. They have anticipated and planned for these closures for years. In some cases, for more than a decade.
That planning is no exaggeration. There are 10+ year old leases that address replacing department stores with lifestyle centers. There are 10+ year old leases that address replacing retail with non-retail.
There are malls and strip centers that should no longer be retail. At the time they were developed, retail may have been the highest and best use. But, the evolution of retail has been a constant, and that evolution has been considered.
While less shopping and dead malls may cause clicks, there is much more to the story.