Retail Conversation Is All About ‘Rightsizing,’ Says Lee & Associates Principal
LAS VEGAS — At RECon, the world’s largest retail real estate trade show held last week in Las Vegas, REBusinessOnline sat down with veteran Chicago broker Rick Scardino of Lee & Associates. A principal with the Chicago office, Scardino spearheads the retail division at Lee & Associates of Illinois.
Discussion topics ranged from backfilling vacant space to local, independent grocers and the movement of online retailers embracing brick-and-mortar locations. What follows is an edited version of that conversation.
REBO: According to Mid-America Real Estate Corp.’s Shopping Center Report, development has tailed off about 5 percent year over year. Is that a surprise or not?
Scardino: This has been going on for a few years. It’s well known that the United States is the most over-developed retail country in the world by far. It’s all about rightsizing, simple supply and demand. I don’t see it as a bad thing.
Certainly existing landlords who aren’t developing are thrilled to see less new competition coming online. There really hasn’t been a need for it. Mellody Farm in Vernon Hills, Illinois, is one of the few new projects with Whole Foods Market, REI and Nordstrom Rack as anchor tenants. Regency Centers Corp. is the developer. The REI has the Des Plaines River in the back where people can test out kayaks. The Amazon factor makes stores cautious. You need unique locations.
REBO: Now you see some online retailers such as Warby Parker open brick-and-mortar locations.
Scardino: At the end of the day, people still like to see, feel and touch. It’s not a huge secret anymore that there are two to three times more returns with online shopping than someone walking into a brick-and-mortar store.
While there is free shipping and free returns for the customer, it’s not free for the retailer. They’re still trying to figure that out. It’s a multi-billion-dollar question that still hasn’t been resolved. I guess they’re hoping the consumer gets smarter and learns how to buy better online without causing such a high return factor. Apparel, furniture and shoes are some things that look one way online but the appearance is different in person.
People love the experience. Shinola [Detroit-based watches, bicycles and leather goods manufacturer] has done a wonderful job with their brick-and-mortar stores.
REBO: How big is the supply overhang at this point? When might development pick up?
Scardino: I don’t think it’s bottomed out; I think we’ll muddle along at this pace for a number of years. Just because stores are occupied doesn’t mean they’re doing terrific, because there’s still severe competition out there. The old adage that you had to get a wheelbarrow-size of groceries at Costco isn’t true anymore.
Companies like Kohl’s are downsizing and Aldi will backfill the remaining space, for example. They must see synergy between their customers. Aldi has been in Chicago for a while. Germany-based Lidl was supposed to be a strong competitor to Aldi, but it hasn’t done as well as hoped.
REBO: Landlords must continue to be creative to fill big box spaces. CBRE writes on the Five F’s: fitness, food, fashion, fun and furniture. Do you concur with that assessment?
Scardino: Sure. It’s funny because years ago nobody wanted health clubs near their centers because they brought too much traffic. Well, what are shopping centers looking for today? Health clubs now have figured out how to successfully use two-story properties. Dave & Buster’s has done great. Even community libraries have backfilled space in malls.
I think you’ll see a portion of these spaces turned into food halls. Malls have had pretty generic food courts, whereas food halls are a lot more innovative and bring local talent to the table. Millennials will pay a higher price for higher quality.
REBO: Does it give you hope when you see an online retailer like Warby Parker building brick-and-mortar stores? Have we gone full circle?
Scardino: In many ways, the Internet is still nothing more than an electronic catalog. When you walk into these high-quality stores, it’s just not something that can be replicated online.
Competition Ramps Up for Restaurants
REBO: Rocket Brew is opening in Orland Park. Is this casual dining segment getting oversaturated in metro Chicago or is there more room for new restaurants with quality of food at the right price?
Scardino: I think the casual dining segment has been a little oversaturated in the marketplace. But that whole segment has been hit and is down. TGI Friday’s never really reinvented itself. People are a little more health conscious now. Max & Erma’s just didn’t have the legs to keep up with the competition. When you have five or six concepts all fighting for the family dollar, there’s going to be fallout.
Red Robin is still holding its own. Chili’s and Applebee’s have about 1,800 units whereas Red Robin has a third of that. Chipotle has nipped at its heels. Chicago is known for strong independents; chains don’t do that well here.
REBO: What about Portillo’s? (The restaurant chain specializes in serving Chicago-style food such as hot dogs.)
Scardino: I’ve always admired Portillo’s for its systems and controls and quality. I think it’s slipped a little with new ownership, but it’s a strong company with its own genre and niche. It doesn’t have table service, so that helps with costs.
Grocery Segment Continues to Grow
REBO: Pete’s Fresh Market will open in the former Dominick’s space at Madison Plaza in Madison, Illinois. What is your assessment of the state of grocery-anchored shopping centers today throughout Chicago?
Scardino: Madison is southwest of the city. Pete’s and Tony’s are two of the strongest independents in the market. They expanded cautiously. They carry more SKUs than most grocery stores and they dive deep into selections and variety. Because they’re independently owned, it’s much easier for them to model their selection after the demographics that are in their stores or trade areas.
Chains haven’t given enough autonomy to local store managers to quantify the selections to demographics in the market. You need to know your customer base.
REBO: It’s been a few years now since Kroger absorbed Mariano’s. Will Mariano’s keep rolling out or has development slowed?
Scardino: I think it will continue to grow, but certainly more cautiously. Mariano’s locations are expensive to build out. I don’t know what the returns look like on that. There is always a long line of people looking to buy those stores the second the shovel goes in the ground.
REBO: Who is shopping at Mariano’s?
Scardino: They’re similar to a Whole Foods customer. The stores are very attractive, with pianists playing on the weekends and fresh juices, a gelato bar and sushi bar. People have a lot of choices today when it comes to food.
REBO: Even in the grocery space, it’s no longer enough. They used to say grocery-anchored shopping centers were golden.
Scardino: They called it recession-proof. I don’t know if that’s the case anymore. We certainly still have a sizeable market that chases ownership of grocery centers.
Inventive Buyers Fill Vacant Space
REBO: You represent a regional company with five dozen lumber yards that’s considering taking vacant space from Kmart and Walmart stores. What’s that company and its strategy?
Scardino: RP Lumber is based in Edwardsville, Illinois. It’s an opportunistic company. Everybody talks about store closings, so it’s good to know that there are some companies who are opportunistic who will look to buy those closed stores for a fraction of replacement value. They’ll still put millions into retrofitting the stores depending on the condition they’re in. Communities are receptive to seeing these stores backfilled.
Interestingly enough, the housing market across the country has the lowest inventory it’s had in the last couple of years. Last quarter, Lowe’s and Home Depot hired 30,000 people. What you’re seeing is people aren’t moving as often because they’re either underwater on their housing value or they can’t find what they’re looking for elsewhere in the marketplace so they’re fixing or remodeling, thus the increase in jobs in Lowe’s and Home Depot.
The natural disasters in Houston, Florida and Puerto Rico drew a tremendous amount of labor and materials to rebuild those communities. However, concrete, lumber and steel prices make it hard to afford new construction. It makes it costly to do renovations as well.
REBO: Who is RP’s customer, mostly commercial clients or homeowners?
Scardino: Both, but a large portion is commercial contracts.
REBO: What do you think is the big story in retail since we last spoke last year?
Scardino: More emphasis on Amazon and the “woe is me” factor on that. I think food halls are a much bigger topic than they were a year ago. For years, restaurants have been the hottest category to expand and add excitement. Shopping center [owners] will continue to look for entertainment, fitness and restaurants to add some excitement and experience to their center.
REBO: In the industrial sector, it’s been a big surprise that no one could have foreseen Amazon and all the fulfillment centers it would build. Do you think there’s something to come for retail that maybe we’re not aware of yet that would change the sector for the better?
Scardino: If there is, it doesn’t immediately come to mind. Certainly the live/work/play lifestyle is in demand. If you’re living within walking distance of shopping, there’s more of a tendency to get out and see new merchandise.
REBO: What about Chicago’s population growth?
Scardino: It’s well known that the market has shrunk a little bit over the last few years. Every spring you hear this whoosh into the city. It’s thousands of kids graduating from the Big 10 schools all rushing to the city, which is probably the most livable and enjoyable big city in the country for millennials.
The city is on fire. There are all these hot neighborhoods and a tremendous number of restaurants. Wrigleyville is now more of a year-round facility. Sterling Bay is talking about massive new projects in the city. Metro Chicago on a map is 5 percent of the land mass and 85 percent of the population.
REBO: The government seems financially strapped, though. How does development work if they can’t pay the bills?
Scardino: For years it’s been a heavy union state. Just because there are checks in the checkbook doesn’t mean there’s money in the account. They haven’t figured out how to fund these pensions. There needs to be pension reform and adjustment.
REBO: How’s business going for you? How’s this year shaping up?
Scardino: We had a record year last year in terms of deal volume. We have a tremendous platform. I love what I’m doing. When you’re around people who are passionate about what they’re doing, it’s wonderful.
— Kristin Hiller and Matt Valley