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CapStack Partners’ CEO, David Blatt, Addresses Current State of Retail Real Estate

Of all the property asset classes, retail real estate continues to dominate media headlines—and for good reason. Over the past two years, we have seen a number of high profile retail bankruptcies and restructurings including Payless ShoeSource, hhgregg, The Limited and RadioShack, among others. We have also seen once dominant department stores like Sears, Macy’s and J.C. Penney close hundreds of stores to cope with slowing sales.

Fair or not, the term “anchor tenant” has been redefined. Once associated with stability, the term now carries a negative connotation for mall operators and the in-line stores that rely on these anchors to drive foot traffic and sales. However, perception is not always reality. As Kimco Realty’s CEO, Connor Flynn, accurately highlighted during a recent CNBC appearance, retail is being painted with a broad brush. Many factors must be considered when evaluating whether a landlord or retailer is well-positioned for long-term success.

The full story as to what’s happening in retail is much deeper and more complex than most realize. Geography, brand concepts and property types (e.g. enclosed malls vs. open-air centers), among a variety of other considerations, all factor into the equation. Accordingly, the predicted demise of an industry—especially one that has proven incredibly resilient over time—should not be predicated solely on recent headwinds impacting a select universe of well-established retail brands. The fact is that the retail industry is dynamic, and experienced property owners are able to evolve as trends shift.

In our view, retail real estate is far from dead considering that brick-and-mortar stores remain very important to retailers’ omnichannel strategies. In fact, as noted by Mr. Flynn and many other retail executives on the most recent wave of earnings calls, department store downsizing presents a significant opportunity for landlords with well-located real estate. Getting prime retail space back in supply constrained markets allows landlords to explore adaptive re-uses or re-tenant—at significantly higher rental rates—with growing experiential shopping, dining, and entertainment concepts.

From a debt perspective, there will continue to be defaults on loans backed by enclosed malls and open-air shopping centers. This will only fuel the stale “retail is dead” narrative. When these defaults occur, pundits will erroneously refer to the “wall of maturity” when in reality it is only a “few bricks of maturity.” That said, landlords who are facing defaults need to find a viable solution to their financing problem. For instance, we have structured workouts such as securing bridge financing so that a borrower is able to re-lease vacant space. We have also lined up permanent financing with earn-out features, and even a straight sale that satisfies the lender.

Successful landlords and investors remain resilient because they change with the times. However, this evolution is certainly made easier when you own real estate in fundamentally strong markets. It is a reminder that real estate is still very much a local game.