Top Takeaways From ICSC

Over half-dozen of our originators were in San Diego last week for ICSC’s annual “Western Conference and Deal Making” event at the San Diego Convention Center and nearby venues. We spent several days connecting with principal/owner clients and colleagues active in investment sales, valuation, capital markets, and landlord/tenant leasing to get a gage of the state of the retail industry as we all see it from the ground. Here are our top takeaways from ICSC:

Retail is (relatively) healthy

Despite the constant barrage of analysts, influencers and media sources that like to declare the end of retail every few months, market fundamentals remain sound. Consumer confidence is at an 11-month high, with retail spend growth up 2.3% year-over-year (YOY).

Although larger spending growth is happening in the online space (14.1% YOY), Amazon still accounts for only 1.4% of total retail sales in the US, well behind traditional grocery, drug spend and Walmart, Target, and Costco.

Retailers are seeing continued growth in omni-channel distribution, while 2/3 of US GDP comes from consumer spending on goods and services according to ICSC.

Retail has new challenges and new opportunities

Active lifestyles are in, and activewear you can wear to work, gym and club continue to challenge the traditionally apparel-centric US department store segment to shift to smaller spaces and seek a more diverse product line-up. A shift to the “European model” (grocery, restaurant, home goods, sporting goods, etc.) may be seen, with more vacant mall anchors going to gyms and other alternative uses.

“Experiential retail” continues to be the buzz phrase of the day, with continued growth in both the smaller convenience-centric drug and strip-center segments and the lifestyle center concepts at retail’s upper end.

We expect a continued emphasis on restaurant, entertainment, services, medical/dental and anchoring retail around experiences like Top Golf to continue to be the trend for the foreseeable future.

Investments are strong

Driven primarily by a confluence of historically-low interest rates, economic unrest overseas, frothiness in stocks, commodities, investment-grade bonds, and alternative investments, pricing on retail investments remains at historic highs for most markets. Everyone seems to feel a general slow-down in cap rate compression along the coasts, with cap rates on non-investment-grade retail in secondary markets actually ticking up higher. Foreign buyers seem to continue to drive the market, and our previous prediction of a shift in foreign investors towards seeking smaller investments outside of gateway markets seems to have begun.

Retail investments continue to outpace the S&P 500, continuing a 5-year trend and keeping pace or leading other real estate sectors.

For an overview of cap-rates on all the main food groups in both top and bottom markets, check out REIS.

Written by
Cody Charfauros
Commercial Mortgage Banker
codyc@slatt.com