TUSTIN, CA—A lot has changed in the retail real estate market since Chris Hite, president of Tustin, CA-based real estate services firm Coreland Cos. founded the firm with Patrick Galentine in the spring of 1990. Walmart rose to dominance, recessions have come and gone, and the Internet is now a driving force in the industry. Throughout that time, the commercial real estate services company has served clients throughout greater Southern California. With the annual RECon show in Las Vegas only a few weeks away, we spoke with Hite about the trends he is sees in the current market and how things have (and haven’t) changed in retail real estate.
GlobeSt.com: You guys have been in the business for about 25 years. How has the industry changed? I assume you’ve seen a lot of shifts in retail real estate?
Chris Hite: Back when we started, perhaps with the exception of some larger dominant mall properties, neighborhood-community strip centers were all very cookie cutter. It was typical to have a white stucco grocery- or drug-anchored center with shop space and uninspired red lettering for signage… that was the extent of the design quality.
By early 2000s, you started to see developers and architects focus on creating new retail “places.” It became more than just about getting in and getting out. It became about getting people to stay for an experience. You started seeing expanded food courts, fountains, stone, and all of the related embellishments that really created a community environment. That has all evolved and provided a unique experience that you can’t get on the Internet. It has fostered a lot of creativity which has been better for retail as a whole.
GlobeSt.com: So you think the brick-and-mortar retailers have adapted well to e-commerce competition?
Hite: It’s an ongoing evolution. The unfortunate thing is that retail has faced a double whammy—the evolution of online retailing and the downturn in the economy. This crushed a lot of retailers. Now we’re coming out of this recessionary period and the focus is all on positioning our centers to remain competitive with the Internet. If you’re sitting in a lifestyle center with a bookstore next to an electronics store, next to an office-supply guy, you really have to ask yourself what you’re going to do when these spaces become available.
GlobeSt.com: I have heard some people talk about concerns in the apparel sector, especially with the Coldwater Creek news. Do you share those same concerns?
Hite: Some of the old-guard retailers that have not adapted to this post-recession internet environment have struggled, but that has also created opportunity for new retailers. Even as I read about retailers like Coldwater Creek, one of our brokers is now representing a new-concept Japanese apparel retailer looking to make a strong push into the Southern California market. There is always a new breed of retailer looking to break in, so while one concept is on the way out, others like Aki Home and Daiso are just getting started.
GlobeSt.com: Due to a lack of new development and retailer demand, do you think a lot of vacancies out there now will become backfilled?
Hite: It depends. The core centers, by and large, are doing very well. They have been able to backfill vacancies and sales are trending upward. But operators of ‘B’ centers dealing with vacant boxes have realized that they might not be able to fill a 30,000-square-foot space and will have to subdivide it. They might add a popular fitness tenant, like Planet Fitness or UFC, and fill the other half with a value chain, all at lesser rents.
Overall, owners are continually adapting. For example, there are many ‘C’ centers being repurposed because they probably should not have been built as retail. This is where you are seeing some conversion to medical-office or housing.
GlobeSt.com: How is all of this changing how operators lease and manage their centers? Are they more aggressive or creative than before?
Hite: We are seeing the most dramatic shift in ‘B’ and ‘C’ centers where owners are getting out of “safe mode.” Through the downturn you might have been coddling a tenant with short-term or month-to-month renewals because you needed the cash flow. But finally, leasing demand is strengthening and owners are realizing they have the ability to push. An owner who is not highly leveraged now has alternatives. They might take some risk and lose a tenant, but they’ll likely be able to backfill closer to market rent.
GlobeSt.com: What kind of due-diligence services are you providing now to potential buyers?
Hite: There’s a set process that a client would engage us in for due diligence, such as abstracting leases, building budget models, and CAM (common-area maintenance) models through which we forensically try to understand the operation of the center. We look at prior years to identify areas where there might be efficiencies or inefficiencies that might indicate there was a problem operationally. Our brokerage group also contributes and consults with clients so they get a clear understanding of the market we’re seeing.
We’re working with a variety of institutional owners located throughout the U.S. who want to get into the market but are hesitant because California is so segmented. This is where we can be of greatest service. The local expertise of our brokerage and management teams can assist an owner navigate through this process. We adapt to the client’s needs, remain flexible, and fill in the gaps, while looking out for the best interest of the property.
GlobeSt.com: Is flexibility the key to being successful in shopping center operations nowadays?
Hite: It’s an important component. You have to be able to listen and really understand your client’s goals. A number of buyers that came into the market over the last couple of years are now turning around and selling properties. They weren’t interested in 10-year roof and parking lot plans. They basically came in wanting to lease a space or two and exit. That’s a very different owner than an institutional owner that wants to hold an asset for 10 years, and really understand how to operate it over that time.
You have to adapt your management and leasing plan to meet the objectives for the property, and you also have to be willing to be realistic. We had a client that was dealing with a lot of vacant shop space in a difficult center. In our opinion, they weren’t going to lease it at the rates they were asking. We recommended an alternative solution and the client appreciated it. In this particular case it meant recommending another specialty brokerage team. If we aren’t the right company to execute, we don’t hesitate to bring in firms that might be a better fit.
GlobeSt.com: So how do you see Southern California retail holding up compared to the rest of the country?
Hite: My general gut tells me that Southern California is certainly stabilized. Overall, vacancy rates are shrinking. Our brokers are as busy as they’ve ever been and we’ve had an exceptional first quarter… and my colleagues and competitors are all saying the same thing. It’s the broader institutional CRE segment that’s finally finding favor. Now pension-fund advisors have been instructed to start buying retail as an allocation to balance their overall portfolio, and California is seen as a core, stable market. That’s an encouraging thing to see.
Everyone talks about interest rates going up and having a polarizing effect on values, but if you look at comps, pricing is still very strong on retail assets. Jury’s out on CMBS maturities. We’ll see if the market provides a lift for the refinancing of the huge tranche of loans maturing in 2015, ’16 and ’17.
GlobeSt.com: We started this conversation with how the industry has changed over the last 25 years. How has your business changed specifically over that time period?
Hite: My business partner Pat and I started the company based on a business plan we drafted in our apartment back in April of 1990. We hired someone to create a name and a logo, charged everything on our credit cards, and drove to our first ICSC conference to meet people. We walked around with a stack of business cards so poorly printed that the ink was rubbing off as we handed them out. Obviously we have evolved from that two-person bootstrap entity!
We have made a conscious decision to stay focused on retail, and we intend to maintain our expertise in this discipline. Despite the industry’s dramatic evolution, there is still no substitute for old-school blocking and tackling. Even with all of the advancements in technology to market properties, our brokers remain market experts who focus on maintaining strong relationships that allow them to be successful year-after-year. Our management teams remain focused on engaging good vendors, keeping costs down, analyzing expenses regularly and making sure that CAM reimbursements are as efficient as possible. Our focus and commitment to each property remains the same and with every year we add another level of experience.