Q: How would categorize the state of today’s retail sector within the commercial real estate industry?
Richard Zahm: The retail sector tracks the larger economy, and at the moment the signs point to continued improvement – even if it’s fragile. Retail reflects the state of local markets. For a quick assessment, take a look at the parking lots of different shopping centers of different sizes. Some are filled with cars circling in a search for someplace to park, while others are empty.
It’s also getting increasingly segmented. Broad categories are being sub-segmented, and their role is changing. Some are becoming more showrooms, or pickup locations.
Q: What do you see as the major trends that will impact the retail sector in 2015?
Richard Zahm: The major trend now continues to be a move by retail chains to have smaller stores, closer to consumers, leveraging off of their distribution capabilities – Walmart, for example. It comes down to location and anchors, especially grocery centers situated in the midst of new multifamily/office communities. Shoppers can walk from their homes to the shops.
There will be fewer stores as well, as consumers turn to their keyboards for goods to be delivered to their homes and home offices. Store counts got ahead of market fundamentals, and the market is slowly absorbing excess space.
Q: Has e-commerce been a curse to the retail sector, or a blessing in disguise? Or is the answer something in between those extremes?
Richard Zahm: There’s no single answer to this. E-commerce can’t deliver everything to your door: a haircut, a dental appointment, a spin class, a restaurant. These businesses will continue to require retail space of some type. There is also the social nature of shopping – it’s an activity, a destination, a way to see-and-be-seen. There’s also the tactile nature of touching what you’re interested in buying – clothing, for example. And there is also retail as an interaction in itself, a combination of buying, learning and repairing – visit any Apple store.
Mom and pop businesses and small franchises that might earlier have been operated only from home are also appearing at the retail level: olive oil retailers, for example, and specialty beauty supplies.
The real winners are in the industrial sector. Distribution and fulfillment centers are expanding as their space requirements grow.
Q: With the residential real estate market still showing signs of instability, would it make sense for residential originators to consider getting into commercial real estate?
Richard Zahm: In slow times, residential originators often consider transferring their mortgage skills to the commercial side. But the differences between the two can be greater than the similarities.
Due diligence elements that are critical to commercial deals are non-existent in residential situations. There are a lot more moving parts: multiple tenants, multiple leases, different valuation methods. There can be an entirely different network of service providers – brokers, appraisers, attorneys – along with different loan document sets and lending criteria. For originators, there’s also the issue of developing relations with a host of different commercial lenders, each of whom has their own specialties and preferences.