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Thread: REITs wrecking retail?

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    REITs wrecking retail?

    Michele Reeves has written a good argument on how REITs and similar investment outfits foster unsustainable retail development in [link deleted]

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    Cyburbia Administrator Dan's avatar
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    Cyburbian
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    I have to disagree with the premise of this thread. Regional malls - perhaps the most important retail REIT asset in terms of revenues - are basically cash cows, but, new development has mainly taken the form of expansion strategies for existing properties. There hasn't been a new regional mall developed in nearly two decades in the US (or Canada, for that matter). For all intents and purposes, the main consequence of the rise of the REITs in retail has been a virtual end to the new greenfield development of the type of retail assets they own (fast growing assets, like standalone big box stores, are in sectors with low-to-no REIT participation). Profitability (as measured mainly by EPS contribution to the REITs' bottom lines) of other product types, like the power centers so commonly developed in the 1990s, has consistently underperformed existing portfolio assets, so, increasingly, the REITs are under no great pleasure to facility development of more of the same (yes, they expand, but expanding with diminishing EPS is the surest road to investor damnation).

    Where new REIT development goes, the focus has mainly been on expansions of existing portfolio assets, such as the just completed City Creek Center in Salt Lake. These have mainly focused on adding mixed-uses to existing malls (housing, hospitality, offices, F&B hubs, cinemas, even some leisure and recreation, alongside relatively modest expansions of base retail capacity), as the REITs look to diversify their cashflow streams and capture additional value from things like surface parking lots and air-rights. The REITs have found that diversifying cashflow streams with mixed use is their best path to increasing EPS, and hence increasing their attractiveness to investors.

    The reality is, the REITs know that there is too much retail capacity (and hence the risk of falling yields). Their focus has been to find ways to increase cashflows (including footfalls) on existing properties, and this has facilitated the type of development many of us like - mixed uses, vertical, denser, transit-oriented. They seem to recognize that with suburban growth slowing to a crawl, the principal source of new footfalls in their stores will be customers they can force-capture (because they live and work immediately adjacent or at least close by). If a typical mall customer spends 400 minutes a year in a mall, he's considered to be a good customer, but the customer living in luxury condos on top of the mall spends something closer to 2000+ minutes a year. He's a much better customer. This is also why malls have started to add things like grocery stores to their tenant-mixes, to serve those types of customers.
    Last edited by Cismontane; 11 May 2012 at 11:31 AM.

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    Cyburbian hilldweller's avatar
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    Maybe I'm missing some context, but "unsustainable retail" makes no sense and sounds like a misnomer. Consumer preferences are constantly shifting with technology and other factors, that is why we have dead shopping malls and big-box electronic retailers on life support. REITs are just chasing capital based on these factors which are beyond their control, they're not creating a new paradigm for retail (which is I think what Cismontane is saying).

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    Cyburbian
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    Quote Originally posted by hilldweller View post
    they're not creating a new paradigm for retail (which is I think what Cismontane is saying).
    Actually, I was trying to say that, in a way, by chasing profits, they kind of are.. they're facilitating the mixed-use conversion of their main retail portfolio product - the regional mall. Far from "wrecking" retail, they are arguably helping it go in a more positive direction. For clarity, I'm not saying this because I like REITs or Wall Street.. just making an analytical observation based on what's been happening over the last decade and a half.

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    Cyburbian ColoGI's avatar
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    Quote Originally posted by hilldweller View post
    Maybe I'm missing some context, but "unsustainable retail" makes no sense and sounds like a misnomer. Consumer preferences are constantly shifting with technology and other factors, that is why we have dead shopping malls and big-box electronic retailers on life support.
    We also have a declining middle class with less disposable income to waste on useless trinkets. The US has something like 9x the retail sf per capita than the next country. Sounds pretty unsustainable to me.

    .02
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    Cyburbian hilldweller's avatar
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    Quote Originally posted by ColoGI View post
    We also have a declining middle class with less disposable income to waste on useless trinkets. The US has something like 9x the retail sf per capita than the next country. Sounds pretty unsustainable to me.

    .02
    So let it die off and be redeveloped for another use. I don't see the point in any hand-wringing over the sustainability of retail.

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    Cyburbian
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    Quote Originally posted by hilldweller View post
    So let it die off and be redeveloped for another use. I don't see the point in any hand-wringing over the sustainability of retail.
    Agreed. Frankly, if half of American retail capacity went away, nobody would notice. Probably not even the retailers. That's how much of what we don't have we don't really need. 45 square feet of space for every man, woman and child in the country... More than 50% more than the next most retailed country and twice as much as countries like Canada and the UK.

    The problem would be making sure that all communities still have access to essential services, like groceries. This will take some doing, as some of the "failing" retail will be areas that have communities defending on it. But, as far as the stuff the REITs own, it shouldn't really matter.

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    Cyburbian ColoGI's avatar
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    Quote Originally posted by hilldweller View post
    So let it die off and be redeveloped for another use. I don't see the point in any hand-wringing over the sustainability of retail.
    I agree it'll be redeveloped, and apologies, I was confused by your "unsustainable retail" makes no sense.
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    Cyburbian DetroitPlanner's avatar
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    Observations

    1. REITS do more than just own retail outlets. Many own hospitals, offices, apartment complexes.

    2. The internet is killing the retail sector a lot faster than a landlord would. Landlords after all are going to be stuck with these properties without any other use, why would they intentionally wreck retail?
    We hope for better things; it will arise from the ashes - Fr Gabriel Richard 1805

  11. #11
    Cyburbian
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    Quote Originally posted by DetroitPlanner View post
    Observations

    1. REITS do more than just own retail outlets. Many own hospitals, offices, apartment complexes.

    2. The internet is killing the retail sector a lot faster than a landlord would. Landlords after all are going to be stuck with these properties without any other use, why would they intentionally wreck retail?
    Obviously, but I think the original comment was an argument that REITs are harming retail, and I was refuting that premise, not that REITs only invest in retail. There are many different types of REITs. Some are specialized in retail or even particular types of retail.

    Ecommerce fulfillment has harmed regional malls - probably the biggest retail REIT asset - less than it has other types of retail like big box stores and power centers.

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