January 14, 2020
By Dennis Kaiser
Connect Retail West is just around the corner on February 13 at The Resort at Pelican Hill in Newport Coast, CA. Leading up to the event, Connect Media asked Retail industry leader, Patrick S. Donahue, Chairman and Chief Executive Officer of Donahue Schriber, to share insights leading up to his planned keynote conversation at the event.
Donahue joined Donahue Schriber in 1979 and has been engaged in nearly all of the 32 million square feet of retail space in which the company has been involved. We will go behind the real estate and talk about his career, growth, and how he innovates and leads today. Check out a preview of that discussion in our latest CRE Q&A.
Q: What keeps retail alive today, given all of the sector’s challenges and detractors?
A: What keeps retail alive today are the things that always have: giving the customer what they want and need at a fair price. Clearly, we are over-retailed, having delivered nearly 125 million square feet per year to the sector for 30 plus years. However, for the last nine years that number has been less than 20 million, so while demand is muted, there is still demand and very little new supply. So, that is the main reason, in our opinion, our fundamentals and those of the public companies we track are outstanding.
The main issue now is the narrative has gotten in the capital markets, and now we are not only over-retailed but “over allocated to retail” in the capital alternatives. This is creating all sorts of issues with the institutions that play in the sector. I don’t think anyone would ever have fathomed that industrial would be the darling of the primary CRE sectors.
What’s driving industrial is E-commerce, of which half of that is done by brick and mortar retailers. It is a very strange time indeed. We are seeing strong sales in our retailers and subsequently good growth in our rents. Our fundamentals are at or near all-time highs. Again, that lack of new supply bodes well for those that own good quality retail.
Q: What are some of the ingredients to creating successful retail properties? How has that changed over time?
A: I don’t think it has changed much over time. I think we may have gotten away from the fundamentals in an effort to create widgets instead of centers that provided the highest and best use of that site. The location has to be strategic, including ingress, egress, and parking. A property must have a reason for being: whether that be convenience, atmosphere, community gathering, need, food and beverage, or local goods. To me, that all sounds like a marketplace from 2,000 years ago. I just got back from Switzerland and some of its Christmas markets. You can learn a lot about what makes retail tick by studying those markets. They have atmosphere, they are in a prime location, people love to gather there, there’s good food and beverage, with local goods to buy. It is a very simple formula that continues to work today provided it is done right.
Q: What impact and adjustments have you seen in the retail segment as a result of Omnichannel, e-commerce, digital shopping, etc.?
A: The major adjustments for our portfolio is a general shift to things you can’t do on the internet – food, fitness, health and beauty services, medical uses for both humans and pets. Retailers are doing roughly half of all e-commerce sales. That is positive for our business although you need to guess right on the trends for store size and numbers of locations. But any sale at any of our retailers is a good sale.
Q: What advice do you have for those in the retail sector today?
A: Be a student of the game. You learn a lot by studying the narratives and cutting the commentary from the facts. The best centers are getting better. We think retail is going to be very fundamentally strong for the next three to five years. Good operators will adjust course and with no new competition, and we don’t see any, you should be in a good spot with a quality portfolio.
Q: What do you see as the most interesting opportunities and what are some challenges you see on the horizon in 2020 to address?
A: This over-allocation in retail by the institutions is going to create some potential opportunities to buy centers and infuse capital.
The number one challenge we see to the industry is the replacements for vacant boxes; The midsize boxes that have gone out with OSH, Toys and Babies R Us, as well as some of the fast-fashion category. They are the only real issue we see, and it will take capital and relationships to replace those. But if you have well located, well merchandised centers, those boxes will re-lease with better performing retailers.
For comments, questions or concerns, please contact Dennis Kaiser