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Retail Sector is in Midst of Unprecedented Adaptation Cycle, Says Nadji

The evolving shopping center environment was the hot topic Monday during a ‘Retail Trends 2018’ panel discussion hosted by Marcus & Millichap at the Renaissance Hotel in Las Vegas.

LAS VEGAS — Hessam Nadji has a simple message for the shopping center community in a tumultuous retail environment: adaptation plus innovation equals opportunity, particularly in an economy with plenty of runway left for growth.

“If you take a look at the most dominant technology players that you can think of — Microsoft, Apple and Amazon — they are getting into brick-and-mortar retail every day. Why? Because physical space counts, physical location counts, presence in the community counts, foot traffic counts,” said Nadji, president and CEO of Marcus & Millichap, who delivered a forceful message Monday afternoon to a packed ballroom of several hundred attendees at the Renaissance Hotel in Las Vegas.

The event, titled “Marcus & Millichap’s Retail Trends 2018,” was held in conjunction with RECon, an event hosted by the International Council of Shopping Centers (ICSC) that has attracted approximately 37,000 industry professionals and 1,200 exhibitors to the Las Vegas Convention Center.

Apple currently operates more than 270 stores in the United States, followed by Microsoft with about 90 stores. Through its $13.7 billion acquisition of Whole Foods Market last year, Amazon controls about 479 stores in the United States and Europe.

Conversely, the graveyard of failed retailers that did not adapt to the changing environment is big and getting bigger, said Nadji. It includes Sports Authority Mervyn’s, RadioShack, Circuit City and Toys “R” Us to name a few.

Another observation from Nadji: “The further you go from infill [locations], the further you get into secondary and tertiary markets, the level of pain is higher.”

Economy’s Resilience Evident
The veteran real estate executive and researcher said that much of the media is still stuck on the narrative that it’s Retail Armageddon following several waves of store closures over the last couple years. “You get whiplash trying to read the headlines, and it’s like a negative onslaught,” said Nadji.

Though he acknowledges that the industry is “in the midst of an adaptation cycle like we’ve never seen before,” Nadji is quick to put out that the U.S. economy is firing on nearly all cylinders.

Since 2007, the height of the last real estate cycle, the U.S. population has increased by 24.8 million people. The nation’s economy has added over 10 million jobs and more than 10 million households. The unemployment rate has declined 110 basis points to 3.9 percent, the lowest unemployment rate since 2000. The 10-year Treasury yield, which currently stands at just shy of 3.1 percent, has actually decreased 100 basis points over the past decade.

What’s more, the economy has been expanding for 98 months, the third longest expansion on record, and corporate profits are up 68 percent over the past decade, according to Nadji.

The sweeping tax reform legislation signed into law by President Donald Trump in December 2017 has boosted companies’ plans to spend more money on facilities, equipment and employees. “In the first quarter, corporate investment was up 9 percent on a year-over-year basis. That gives us a lot of reason to believe that this expansion can last,” said Nadji.

Thirty-four percent of expenditures by millennials and 28 percent of expenditures by baby boomers fall into the “experiences” category (travel, entertainment and dining). That trend could have tremendous “profound implications” going forward, said Nadji.

Dispelling a Grocery Myth
Joining Nadji on stage Monday were Scott Holmes, senior vice president and national director of retail for Marcus & Millichap; Daniel Hurwitz, president and CEO of Raider Hill Advisors; Mike LaFerle, vice president of real estate and construction at The Home Depot; and Eric Termansen, president of Western Retail Advisors.

The conventional wisdom in the retail sector has long been that grocery-anchored shopping centers are golden, or at least recession-resistant. But the grocery business is especially complicated today, said Termansen of Western Real Estate Advisors. The traditional supermarket chains such as Kroger are competing with a variety of specialty stores and low-cost grocers such as Aldi.

“They all have their challenges right now,” explained Termansen. “The specialty guys have really struggled with a lot of price deflation (falling food prices) and are also working on how they can make a better experience. The specialty guys really think about the experience more than the needs-based and traditional grocers.”

Termansen said the grocers are trying to solve the “last mile” challenge — the efficient transport of goods from distribution hubs to individual customers. While grocers want customers to spend time and money in their stores, they would like to sell product online to them as well, he said.

Aldi, the discount supermarket chain headquartered in Germany, is aggressively expanding in the Western U.S. “It’s going to continue to cause more fallout in that bottom half of that traditional grocery segment,” predicts Termansen. In other words, traditional grocers that aren’t No. 1 or No. 2 in markets in which Aldi has a presence could face the prospects of deteriorating NOI (net operating income) as a result of the intense competition.

Hurwitz of Raider Hill Advisors said that not all grocers are created equally and that there will be winners and losers in this space. He believes institutional investors occasionally lose sight of that fact.

“The market sometimes takes great comfort in having a grocery-anchored shopping center without spending enough time understanding who that grocer is,” explains Hurwitz.

Similar to Termansen, Hurwitz predicts that “enormous price deflation pressures” in the grocery sector will lead to a significant amount of fallout. Compounding the problem is new competition coming into the sector at the lower price point.

“The American consumer likes value. That doesn’t mean cheap, just good value on the dollar,” said Hurwitz. “A number of those retailers are providing good value for the dollar, and a number of them don’t. And the ones that don’t will not survive because the consumer is smart. They know how to differentiate between the winners and the losers.”

Home Depot’s Rebuild
The retailers that adapt to change the quickest will be the most successful going forward, said LaFerle of Home Depot. In 2012, the company began to think long and hard about how it could use e-commerce to supplement its core business. “Unfortunately, at the time we saw it as two channels,” he recalls. “We saw it as online retail business, and the brick-and-mortar business. And today it’s merged into one.”

Eighty-five percent of Home Depot’s total sales have an online component, according to LaFerle. In other words, the customer has either searched for a product online while offsite, or gone online to compare products and pricing while shopping at the store.

The biggest challenge Home Depot has today is making sure the buying experience is seamless to the customer. “The consumer doesn’t really differentiate between online and retail,” said LaFerle. “They just want to be able to find what they want, when they want it at the best price.”

Since rebuilding its online platform in 2012, Home Depot has experienced tremendous growth in the e-commerce space. Online sales now generate $6.5 billion in annual revenues for the company, or about 6.5 percent of total sales. Online sales have grown over $1 billion in each of the last four years, and they’ve grown 24 percent in the last quarter alone.

“We’re going to spend about $1.5 billion over the next five years doubling our distribution footprint,” said LaFerle. That means the company will increase the amount of distribution space from 55 million square feet to approximately 110 million square feet.

“With our current footprint of stores and distribution centers, we’ll be within 10 miles of 90 percent of the U.S. population,” said LaFerle. “We think it really gives us an advantage with some of the other players out there to go head to head. Our goal is to be the most efficient, most cost-effective distribution point in the home improvement market.”

— Matt Valley

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