Throughout his 32-year career, Fred Cordova has purchased, sold, financed, developed and leased more than 6.5 billion square feet of real estate. As the executive vice president of brokerage services at California-based Kennedy Wilson, Cordova currently specializes in the retail sector.
Western Real Estate Business caught up with Cordova at ICSC RECon in late May to get his thoughts on how traditional brick-and-mortar retailers can survive the current rash of store closures.
Western Real Estate Business: Can you clarify your role in the retail space?
Fred Cordova: Our brokerage service really specializes in the retail space, particularly in urban retail. We excel at leasing urban retail centers and properties, including the ground floors — the huge new wave of development of multifamily in an urban environment that has spread across the country like wildfire. We’re the ones who lease the ground-floor space. We also do infill retail shopping centers, many of which need to be repurposed.
Fred Cordova, Kennedy Wilson
On the capital side, we do a lot of sales of properties that are going to be repositioned — older properties that need to be taken down completely, or in some cases rehabbed. But in most cases those properties are razed to make room for a new mixed-use development. The investment side of my group specializes in identifying those properties and helping buyers and sellers transact them.
WREB: We see retailers making strategic decisions to close stores, and there seems to be a pattern, especially among department and apparel stores. Why are we seeing so many closures now?
Cordova: I don’t think it’s a bad time in retail. It could be a bad time for some. I see two things going on that are globally impactful. First, we’re over-retailed. The concept of dominating a market and putting a bunch of stores out there when you have a new concept is gone forever, and that causes over-retailing. And then you have the Amazon effect, which everybody knows about.
I was in Seattle two weeks ago. Amazon had 200,000 square feet of office space in 2009. They now have more than 12 million square feet and growing, and you can’t understate that effect. That’s just office space. They are literally creating industry groups in every single business — and retail is a prime target — to figure out how they can disrupt and provide products and services through their platform.
I firmly believe that retail is not dead. But those retailers – and to a more limited extent service providers — who are delivering products that can be purchased online have to be extremely thoughtful about how they position their brick-and-mortar stores.
What you’re seeing out there is people being very selective and targeting their locations. They will pay big rent for the right place, because it’s not just about that particular store making money; it’s about the overall visibility and presence of the brand, whatever that may be. They’re thinning out and leaning down their service-delivery model and preparing for what happens during the next recession. They don’t want to be overextended with stores and have that capital and debt weigh them down and take them out, so they’re being very thoughtful.
That said, there are a lot of properties that are mainstream — Los Angeles is a great example — and have retail that is very non-descript with nothing special about it. Those all need to be re-thought. They’re all going to be completely razed or repurposed or repositioned a bit.
WREB: Would you say that Class B and C malls are most vulnerable, or are Class A malls vulnerable as well?
Cordova: The competitive forces of the Internet and consumer tastes will put pressure at every level. How do you insulate yourself from that? Certain mall owners have taken the strategy of focusing on their Class A product to create engaging spaces. It’s all about experiential retail. There’s no doubt that in an urban environment that is going to continue to be strong and generate the most interest. But even in those places, there’s going to be turnover, winners and losers.
But someone like Rick Caruso (a billionaire mall owner whose portfolio includes The Grove, an outdoor mall in Los Angeles) will always be able to churn through that. If he loses a tenant, he’s got three more ready to take that space. Guys like that are always on the forefront trying to deliver the best retail experience. You don’t see any dark stores in their places.
The owners of retail space need to be a lot more thoughtful about how they merchandise their space and create more experiential retail to get people to come. And the retailers themselves need to deliver as well. Why would someone come into this store? Why would they come back? You need to constantly be thinking about what you’re delivering to them.
WREB: To what extent would you attribute these changes to demographics? Have the millennials really changed the game here, or is that perception overstated?
Cordova: The old line “necessity is the mother of invention,” comes to mind when I think about that question. Millennials have a lot of wants and caviar dreams, but they don’t have the financial means yet. They’ll look at the Gucci and Louis Vuitton purses in the store then go home and try to buy it online because they don’t have the money. The people with the money won’t do that.
My generation is very savvy online. (Cordova is a baby boomer.) I don’t think it’s exclusive to millennials. Baby boomers and others have caught on quite well. The other factor that’s really driving it is the reurbanization of America. People don’t want to get in the car and drive. They just don’t. When you consider all the time and hassle that goes into that, it’s easily smarter, more efficient and more cost-effective to do it online. So that’s a huge part of it — the whole getting around issue.
I remember when you’d do the Saturday morning shopping for the family and spend a few hours on that. Now you just go online and shop for what you need and have it delivered. I think that people are catching up with that concept. The biggest thing that’s really changed it is the phone and the mobility. Now, with apps and mobility, you can shop online anywhere, anytime.
If you’re Walmart or Target, how do you beat that? Do you need to be in a space that big anymore? Do you need to provide 10 different kinds of paper towels and 10 different kinds of detergent, or just have one or two that people can order online?
WREB: What advice would you give to owners of shopping centers?
Cordova: Every shopping center owner needs to look at the retailers in his/her shopping center. What are they doing that’s compelling and drawing people to the center? If it’s just the age-old, simple retailers whose products can be bought online, the owners need to ask themselves, “Is this center going to be here in five years? Does it need to be here in five years? Maybe I should think about having it repurposed for multifamily.”
I think you’re going to see a tremendous amount of that happening in retail. It’s a cleansing — a sectoral recession. Recessions are good because they allow you to come in and repurpose and rethink the business model.
You’re going to see a flood of capital coming in and going after these retail centers because a lot of them were purchased and financed in 2006, 2007 or 2008 with 10-year debt. That debt is coming due and the retailers are struggling. They want the rents to stay the same or be reduced. The lending market is extremely tough right now, so you’re going to have to right a check to get new debt or sell it or reposition it.
So, if you had a $20 million loan on a $25 million property, — which is not unheard of — you’ll never get that now. No chance. You’ll probably get a $15 million loan at best on that $25 million property, so you’re going to write a $5 million check to get more equity. You have to ask yourself, “Is that the right place to put $5 million?” In most cases, the answer is “no.”
One of the problems we’re seeing with real estate is that if you’re a retailer, does it make sense to build something and provide a distribution model for something that’s going to be completely different in five to 10 years? Take Payless ShoeSource. Would you build a center and put a Payless in there? Five to 10 years ago, you’d say “sure.” Now, you say, “I’m not so sure with Zappos and everything else.”(Zappos is an online shoe and clothing shop.)
The point is that the whole thesis of building a shopping center has to come into question if it’s not experiential and able to draw people in. You have to think about what does that. You can’t outsource physical fitness, so health will always be strong because the service-delivery component of health is very compelling.
For $20 to $100 a month, depending on what you’re looking for, you can have access to millions of dollars of equipment, trainers, etc.— things you can’t fit in your home. If you can’t fit it into your home, you’re not going to write the check for it. So that model is always going to be pretty compelling for a lot of people. There’s a saturation issue, but it will be compelling.
Health services, to a large degree, will also be integrated more and more into retail. I think you’re going to see MinuteClinics and places where people go to get fixed up or rehabilitated or even get a massage — though I think the app Soothe is going to crush the massage industry. (Soothe provides an in-home massage service.)
So, what gets people out? Food, of course, and foodies are still leasing space. Banks are still leasing space, but they have to be extremely purposeful and they have to be at the exact right location. The days of coming into a market and opening 50 stores, or of a new retailer coming in and opening 500 stores across the United States — those are gone. The retailers are going to come in and say, “Where are the two or three best locations where I need to be,” and they’ll go after those hard and pay up for them.
It’s an exciting time in retail because you’re going to see a lot of transformation and new things happening. Retail is not dead; it’s just undergoing a major transformation. It’s exciting to see how it plays out. But we’re all social creatures. We’re going to want to dine out and not order in all the time. I wouldn’t be surprised to see people constantly experimenting on the food side during the dinnertime hours. People want healthy, simple and fast for lunch.
We’re over-retailed. There’s too much retail square footage and space.
WREB: Here at RECon, we’ve heard one researcher say that bringing the supply of retail into equilibrium would require repurposing or demolishing at least 1 billion square feet of the 13 billion-square-foot U.S. retail market
Cordova: It doesn’t really matter what the exact numbers are — they’re right in the sense that as much as a billion square feet of retail needs to evaporate. I wouldn’t refute that number.
You’re going to see massive repurposing, especially in the big box space. Some big boxes will go away, but most will be repurposed into entertainment, recreation, health services. You may even see some get repurposed into distribution centers.
Think about taking the local Kmart and cutting 80 percent of it off and using it for an Amazon distribution center or some other retailer. Or imagine combining Uber and Lyft with last-mile delivery of certain products — that’s the kind of thing that’s going to happen. The cities will figure out a way to tax them.
WREB: Let’s talk about food halls. What’s your definition of a food hall, and what is driving their development?
Cordova: Food halls are exciting concepts that actually aren’t really new. My definition of a food hall is anywhere where you have multiple food providers in the same environment or same box. What the food hall is doing is taking restaurants, putting them in one box and creating efficiencies. You create a tremendous amount of cost efficiency when you open a food hall. The cost to the provider/restaurant comes way down.
You have common tables and eating spaces with just one group cleaning everything up and taking care of it, which allows the restaurateur to focus on delivering really high-quality food fast. You can also have a lot of individual chefs entering this business because the cost of entry is very small. One can provide Asian fusion, one can do French cuisine, one can do Italian, someone else can be the sommelier.
You’re going to see a lot more food halls because they enable people to do what they do best. And you can change them out in a heartbeat. So, nobody’s eating the chocolate waffles with the eggs on top and the peanut butter? Fine, we’ll get rid of that and pop somebody else in. And people will go there because of the diversity.
Food halls allow employees to focus on the quality of the food and its delivery. And they’re enormously profitable for the owner of the space because the restaurateur only pays for the space he’s using. Instead of having him pay $6 or $7 [per square foot] for a 3,000-square-foot restaurant, he’s paying $12 or $14 [per square foot] for 800 square feet. So it’s a win-win for everybody, and it’s exciting because it allows consumers in an urban environment to experience many different kinds of food.
I think food halls are absolutely here to stay and that they will evolve. It won’t be tablecloth dining, but the new dining environments will be pretty cool.
— Interview by Matt Valley. Compiled by Taylor Williams.