Real Estate Rebound

As a nation, and a world, of retailers watch for any and every sign that the economy is improving, there are plenty of experts that express cautious optimism that a turnaround is in the making.

Chain Store Age talked with Ivan L. Friedman, president and CEO of New York City-based retail real estate advisory firm RCS Real Estate Advisors, about the indicators he is seeing that support an economic lift in retail real estate.

CSA: The news is filled with mixed signals about where we are in terms of an economic rebound. Are there indicators that retail real estate is rebounding?

Friedman: I would say retail real estate is cautiously rebounding. We’re seeing the moderate to upscale retailers opening stores at a much slower rate than we’ve seen in past years. They are gradually returning to the market and being very selective about their real estate. On the other hand, value retailers are robustly opening stores and continue to expand because they’re seeing the highest levels of comp sales increases. Since the end of 2009, they have been taking advantage of the good real estate that’s out there at good prices and the willingness of landlords to consider reasonable rents.

CSA: What are the most telling indicators of the current state of retail real estate and how would you summarize where we are right now?

Friedman: Right now, outlet centers have stronger comp sales than traditional malls. The outlets are getting more interest from retailers looking to expand. Landlords are raising rents in the outlet locations to try to offset the lack of interest they’re getting for traditional mall spaces. I would say that where we are right now is in a holding pattern. Until we see how the holidays go, we won’t really know where we are or where we’re headed.

CSA: What should retailers be focused on for the rest of this year and first quarter 2011?

Friedman: Retailers should be focusing on their renewals. This continues to be an opportunity to optimize occupancy costs for any remaining portion of their portfolio that is underperforming.

CSA: What about landlords? What should they be focused on right now, and how can landlords and tenants most effectively work together?

Friedman: Landlords need to stay focused on keeping tenants and not be too emboldened because of retailers’ improving profitability. Retailers have set occupancy targets, typically based on a percentage of sales, as a function of their business model. While we’ve seen sales rise slightly in the first half of the year, we have to remember that sales decreased last year by double digits. The increases this year have not come close to making up for the decreases retailers suffered. So, I think it’s important that landlords be realistic about just how much retailers can afford in rent. Retailers just aren’t going to sign up for more than they can reasonably afford.

CSA: Looking ahead, do you think the recessionary climate of the past 18-24 months will reshape the retail real estate landscape and, if so, how?

Friedman: For the foreseeable future, there’s not going to be a lot of development. We have enough space in existing regular-priced malls for more tenants. There might be a few new developments here or there, but nothing significant will be happening. So, I think that we’ll see landlords evaluating their poorer performing malls and investing in general upgrades of both their tenancy and their facilities. From the retailer side, I think they’ve gotten pretty good at controlling their inventory, payroll and occupancy costs so we’ll see them continue to run lean.