Retail's Two Biggest Challenges

Those would be: Serious shortage of product and overly complicated leases. Experts at Bisnow’s Third Annual Retail Summit laid it all out for us yesterday morning.

Weingarten COO Johnny Hendrix says his firm has been reworking its portfolio since 2008 by disposing of non-core assets. (Most retail REITs are doing the same.) It's sold $2.1B since then (including its $700M industrial portfolio) and plans to sell $250M more in 2014. Weingarten wants to be capital neutral, but he's not sure he'll be able to find that many quality acquisitions next year to backfill the portfolio. So it may have to get its growth by redeveloping existing product and bumping rents.

The Retail Connection local prez David Stukalin plays on both sides of the fence--the firm is primarily a tenant rep but has been acquiring and developing properties lately. (We're told this is what inspired Jameis Winston to want to be a two-sport star.) David says it's definitely a landlord's market, but retailers are still finding a way to get deals done; his transactions are up 30% this year. He expects we'll see significant development from next year through 2016. One example: His firm has a 175k SF development kicking off this summer that's already half committed.

But Evergreen Commercial Realty prez Lilly Golden says the search for space has gotten so intense and rent increases have been so tremendous in the last 12 months that some retailers have given up. They also are facing very difficult leases and landlords that aren't willing to offer things like exclusives anymore. (Johnny says almost every shopping center today has some lease violations because they've gotten so complicated.) Lilly's hoping spec development will pick up soon and that land prices remain reasonable enough for increased retail leasing activity next year. Lilly's most interesting college activity was almost cheerleading at the Rose Bowl Parade for the University of Michigan... but she overslept and missed it!

Our moderator Kane Russell Coleman & Logan prez Raymond Kane says challenging leases are moving beyond impacting tenants and landlords—they also affect the ability to close investment sales. And lenders are actually reading leases again. Fun fact about Raymond: In college he was a deputy sheriff and night jailer, so he's stockpiled a few mug shots from his friends' drunk and disorderly arrests... and isn't afraid to pull them out now and then. (While leases may be too complex for us, we understand leverage.)

Marcus & Millichap regional manager Dave Luther (here with colleagues Matt Mignerey, Nate Newman, and Julian Vulliez) says he reviews all leases when he lists properties, and complicated leases definitely affect their valuation. He says lots of investors have been wanting into the single-tenant NNN space. Cap rates on those properties have been compressing and pricing is way up. Dave, an AC/DC fan, tells us he worked his way through SMU at some of the diviest bars in Dallas.

First American Title's Carol Bernard and Neva Patty showed off the software our sponsor is rolling out, MyFirstAm.com. It's a customer service property profile search. It's all about getting you all the info you need to successfully close deals.

We snapped our sponsor Waste Connections, which is about to celebrate its 17th year. It does waste management for commercial projects, including construction sites. You're in good shape pretty much no matter where you are in Houston--it covers everything inside the Grand Parkway and up north of Conroe.