May 24, 2019
By Dennis Kaiser
It is no secret the retail industry is undergoing a massive transformation. Yet, the sector is as complex as it is challenged. Connect Media asked Paragon Commercial Group’s Jim Dillavou to peel away a few layers to see what lies beneath the catchy Retail Apocalypse phrase. The co-founder and principal of an El Segundo, CA-based firm that acquires, develops and manages high-quality, value-add retail investments anchored by best in class retailers in high barrier to entry markets, is in a prime position to explain why the misguided analysis shouldn’t be applied to urban retail in our latest 3 CRE Q&A.
Q: The label “Retail Apocalypse” has caught on. Do you agree with the term and if not, why not?
A: The word “apocalypse” connotes fear. Whether due to its negative biblical origins or the morbid images from Coppola’s epic war film, the mere statement of the word creates apprehension. Putting the word “retail” together with the word “apocalypse” results in a catchy little soundbite beloved by the media that has taken on a life of its own (and even has its own Wikipedia page!). It gets spoken and printed repeatedly, and it makes investors run and credit officers cower. But while it may be catchy, it’s overly simplistic and largely inapplicable to urban retail.
The distinction pundits fail to make is that the so-called “retail apocalypse” is not ubiquitous. It does not apply uniformly to all retailers, nor to all types of retail, nor to all geographic markets. Indeed, the retail that is dying is the retail that should die (and that we want to die). It’s the retail that is weak, needs capital or has not evolved. E-commerce is actually doing something important and healthy for retail: it is forcing investment, improvement and innovation in a marketplace that has not changed in decades. “Renaissance” is a more appropriate description of the current evolution. An equilibrium between e-commerce and bricks and mortar retail will be reached, surviving retailers will be meaningfully stronger, and the entire retail sector will be fundamentally healthier. The only variable remaining in the equation is time.
Q: What evidence or anecdotes can you cite to support this counterintuitive investment approach?
A: Paragon’s business is entirely focused on fixing broken retail assets. As the retail world evolves and continues to come to terms with the new shopping norms, site design, parking needs and retailer prototypes are changing. The result is an increasing number of broken assets in need of capital infusion and repair. This is what we do. The most simplistic examples include the acquisition and redevelopment of assets containing obsolete retail boxes, such as Toys R Us, Sports Authority or oversized grocery boxes in need of downsizing. More progressive examples include leases we have signed with digitally native brands looking to open bricks and mortar locations. Indeed, JLL has reported that 850 such stores will open in the next few years targeting urban markets including Los Angeles. The value creation opportunity in retail occurs at the intersection of all of this transition.
Q: If retail faces headwinds for the next few years, why not focus on different product types with a tailwind such as industrial or residential?
A: Simple: barriers to entry into retail are the highest of any product type, the learning curve is lengthy and steep, and the current fear factor keeps the market thin. We believe these things allow us to create more value for our investors than can be generated on a risk-adjusted basis in the other product types.
*Pictured Escondido Valley Center in Escondido, CA sold by Paragon
For comments, questions or concerns, please contact Dennis Kaiser