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Karly Iacono
Welcome everybody to what’s in store. The show where we discuss hot topics at the cross section of retail and real estate. I’m Karly Iacono, senior vice president at CBRE and I’m joined by Chris Ressa, the CEO of DLC welcome, Chris. How are you? Today, great to see you.
Chris Ressa
I’m doing well. How are you?
Karly Iacono
Just amazing. It is a lovely winter day in northern New Jersey and happy to be cranking out some business. So no complaints.
Chris Ressa
I’m with you. Did they cancel school by you?
Karly Iacono
They did not. No roads are.
Chris Ressa
Last night we got a text school cancelled before anything even happened.
Karly Iacono
Dry. We’re good next time.
Chris Ressa
I was mind blown.
Karly Iacono
That’s only because we’ve had no snow days, so everyone’s getting desperate. So if there’s talk of snow, they’re going to cancel. That’s my theory anyway. No, it’s been smooth sailing for us.
Speaker
OK.
Karly Iacono
So for everyone listening, we have three very interesting retail topics we’re going to cover today. We’re going to talk about why store closures should be, could be a good thing. We’re going to talk about the overall health of retail and retailers in particular, and then the merging of healthcare and retail. So want to squeeze all of that into an. Action-packed 20 to 38 minute episodes, so we’re glad you could join us and let’s dive in. So #1 store openings versus store closures, course I put out a research report very recently just in the last few weeks that there were about 1800 store openings predicted for 2023 and only about 525 store closures. So I know you might have a different. Slant on this, Chris, than most people. Why could store closures be a good thing?
Chris Ressa
A couple things I’m going to back up for one second on the store openings and and and closures. I think the store openings we talked about this last time, but it it’s good to hit home the store openings are going to be more impactful than people think in 2023 because in our industry. There’s a tail. And so last year, if we had all these record lease signings. With supply chain issues, municipal backups, construction delays. Essentially, if the store was like for, you know, real interior remodel. If the store was. Signed lease. After May 1, it’s not easy to get that store opened in that same year because most of the retailers, they don’t want to open between the holidays, they have to draw the plans, get permits, actually do construction. So we had a record industry. Year last year for leasing space. This is the year where a lot of those. Tenants open. And so I think it makes those shopping centers, those retail properties. Even better than they already were and there. Was a lot. Of momentum from 21 into 22 already. The store closures, I think one of the things that’s happened and we’re going to talk about. This a little later. Is there’s no available space in America. And we can’t. Build at the same rate of return that we once could have because of construction costs, and I say can’t you can, but it’s more challenging to build at the same rate of return that you once could have and so. Some of this loosening up of space is providing runway for retailers who simply can’t find the right opportunities today and I think. You know, as some store closures happen for retailers whose businesses aren’t what they once were. I think. There’s a little bit of a churning like all these retailers who from post pandemic got stronger and stronger and stronger. They’re continuing to expand. They’re continuing to fortify. Retail real estate in America. And then there’s some other spaces that are aren’t as productive as they could be. And these strong potential tenants for these in retail, retail service, healthcare are. Lining up to gobble up many of these spaces and so which will just continue to make this. Asset class stronger and stronger and and I’ve been saying for a while that the over if you take a 30 year period I think and you started in like the great financial crisis in the 08 O nine I think between then and like 2019. That would be, in my opinion, you could argue was going to be the most turbulent of the times. We had so much retail that was turned over that. And and that is behind the industry now and now it’s a lot of these growth companies, a lot of mature successful companies that have strong financials, good, you know, good balance sheets are growing sales and relevant to the consumer that’s really helping retail I you know we we always have store closures. None of I don’t think the closures and we haven’t had any mass store closures or any bankruptcies that have moved the needle in retail real estate. In quite some time, since pre pandemic or in the in the 2020 year.
Karly Iacono
I think the numbers. Sorry to to jump in there. I think the numbers there were 50% less closures in 22 than in 21. So I mean that’s a big shift and and just to reiterate some. That you were touching on the closures are are almost welcome now because our vacancy is at historically low levels. If it was at a time at different time in the market. Store closures could be disastrous for a property if they were widespread, but we’re really in such a period of time for retail that there’s no availability. We have a lot of tenants expanding, so all of this confluence of fact. Is making a store closure would say like even a bed bath and beyond that was just announced or something that maybe is a larger square footage almost welcome because it it allows a landlord to kind of breathe new life into that center. So could be a good thing.
Chris Ressa
That’s, you know, said more concise in a more concise. Manner than I. And I had said it.
Karly Iacono
Just a summary.
Chris Ressa
I think that you were spot on that at the end of the day. If there was widespread closures, hundreds of thousands, right, well, we’re talking something different, but the the last point I was hitting on is. Where I don’t believe we’re going to get to the closures of that period, post grant financial crisis. These are some just businesses that didn’t work in the normal course of business that are churning through the retail ecosystem, which always happens. But it’s a lot less number I think. Will play out than has been in in in prior time period.
Karly Iacono
And another thing I would touch on some of these store closures about them. Beyond that, I just mentioned being an exception here, but some of the store closures are not because the retailer is not healthy, they could just be pruning their portfolio, shifting their focus. It’s a sign of active management of their brand. So gap is a great example. They’re closing a bunch of stores, but they’re mostly in malls that have seen less foot traffic. Or maybe you’re in a process of redevelopment. And they’re opening more Athleta stores and Old Navy and parts of their brand that are very, very productive for them. So I think it’s misleading when you see just a headline saying, OK, gap closing X number of stores, they’re just doing terribly when some of that is is smart, it’s active monitoring of their brand and their portfolio.
Chris Ressa
Right and. You said this app before. How many? What did Coresite say? How many stores will close this year?
Karly Iacono
525 Closing 1800 opening.
Chris Ressa
And how many? And how many closed in 21 and 20? Two does it set?
Karly Iacono
Just had 50% fewer closures in 22 from 21. And another interesting breakout stat from that report was apparel. Retailers led the closures in 22, making up 30, almost 30 percent, 29% of total closures.
Chris Ressa
Interesting well.
Karly Iacono
Big chunk.
Chris Ressa
I think that for me, the punch line at the end of the day. Is when we’re sitting here in 2024. I think. The retail ask retail real estate asset class and the and the the retailers in those are actually stronger than they are today which. To me is. A hard thing to say because fundamentally. It’s pretty strong.
Karly Iacono
And coming into a recessionary period, coming into a time in the financial markets are so challenged and there’s so much volatility to have this be I think sort of a hidden gem is a fantastic sign for retail, right? We have wonderful underlying asset values. We have more tenants who want to expand and we have space. We have limited construction pipelines. As it’s been constrained due to high costs over the last few. So that leads to historically low vacancy. So all the fundamentals for existing properties keep getting stronger in a time when economically the world is getting more. So I know we agree on this, but I think retail is really a bright spot for the next few years relative to other asset types. Do you want to touch on any further about the health of retailers of a few interesting stats to share on that, but I I know that’s what we talked about before.
Chris Ressa
Yeah, so I think. I think the. As I was mentioning like we got through this churn. Of these retailers that no longer exist in that period, post great financial crisis and then. Coming out of COVID, these retailers were able to stockpile cash and, you know, had really strong years. A really strong year that year and the the year after. If you look and and to me in particular in the value retail space. One, let’s just those are the retailers that which are primarily in the open air retail space, those are the retailers that do the best during recessionary times. And if you just look at one of the things I’m always looking at is the consumer staples mutual funds. And if you look at their growth over the last five years. They’re all double digit compounded. You know, I I forget which one it was. You know, when I was looking, I think, you know, Vanguard’s Consumer Staples index is like you. Know up 25% I think something. Like that over five year period so. To me, and and. And that’s modest growth for on an annualized basis during that time I’ve recognized that. But the point is. Through the entire, you know, spectrum of different economic climates, consumer staples like, they don’t go that they do pretty well during recessionary times and they and they still people still need them during the good times and to that end if you think about the retailers. In open air retail. A lot of these consumer staples are challenged to sell online because there’s no profit in selling them online and they’re in all the stores that we shop in, in an open air place and so. I think it’s a good proxy to leading into the underlying. Fundamentals of the real estate are. Really strong. And when you look at. Let’s call it cap rates rising. Or said differently, prices values of properties coming down.
Speaker
You you might.
Chris Ressa
Think that the underlying real estate might be cracking, but that’s not the case. It’s getting stronger. The under the credit profiles of tenants are at scale improving the traffic. At certain properties, is doing really well. The retailer sales have grown. The properties physically look better. Landlords across the country invested in these they weren’t doing all this new construction and development. They poured into existing real estate and you look at that, you would just look at a snapshot of the value of real estate. You think there’s, like cracks in real estate when it’s really so tied to interest rates. And not necessarily the core fundamental real estate, which I think is the golden opportunity.
Karly Iacono
I think so too, and it it’s hard to really convey that right to people who are not in the industry day today, that’s exactly what you said. They see values coming down, cap rates going up. The asset type is falling apart when in really the fundamental reality, the fundamentals are much, much stronger. The longevity of the assets. Sort of future. Proofing and stability of them is improving monumentally. It’s just the the returns are very much driven like you just mentioned by the feds monetary policy, which is constraining a lot of things right now. So exceptionally important distinction about the quality of the asset versus monetary policy. Completely great this data. Wanted to bring up before we move on, I think it’s a fascinating 1. S&P came out with a report this week where the the most recent reports that the median probability of default for all publicly traded US retailers fell to only three-point 3% this month. And that was a drop of 70 basis points from the end of last year. So to me that’s a pretty big. Improvement in a short period of time and a really low #3.3% probability of default. Again, these are only publicly traded retailers that that they were monitoring.
Speaker
For yeah.
Karly Iacono
But I think that’s a fantastic statistic and they break it down further to say that the highest probability of default with Internet and direct marketing retailers at 9%. So they are outsized. So the probability of default is the highest in Internet.
Chris Ressa
It is.
Karly Iacono
And direct marketing retailers. Well, I mean that’s. What we’ve been saying all along, but it’s nice. To have SMP. Back us up. Right. Thanks guys.
Chris Ressa
That was that was. That’s a really powerful stat.
Karly Iacono
It it really? Is very interesting, so I I think you know bricks and mortar again here to stay and the the tenant quality is certainly improving like we were just saying. So wanted to share. That, yeah, let’s move on to our last topic for today, which is the merging of healthcare and.
Chris Ressa
That’s a great start.
Karly Iacono
Bill, so I posted an article yesterday on LinkedIn along with the poll about Dollar General sort of foray into healthcare services now, not healthcare products. Actually in 2021 they started a new DG Wellness initiative that’s just over 3000 stores. I think right now where they’re carrying more healthcare products in their. For this is different. What they’re piloting right now in Tennessee is mobile clinics to offer vaccinations, lab work, lots of healthcare services, primary care services, not just, you know, basic vaccines. So an expanded array of healthcare services connected to their stores. I thought it was an interesting angle and the poll showed that everyone who voted was pretty split between 1:00. This is a huge mess. It’s way off their brand. And what are they doing? 22? We need more access to healthcare in rural areas and retail is the best closest point to the consumer to get that. You know, to them to the people who need it. So I I think that’s an interesting dichotomy. Does this fit with the brand or does it really matter if it fits with the brand or not? We are already close to the consumer and why not add the service on and? I know Walmart’s trying this. Kroger is trying healthcare services. Of course, CVS and Walgreens are expanding their healthcare services. So I don’t know what are your thoughts on? Non healthcare retailers dipping their toe into healthcare.
Chris Ressa
I mean, Amazon bought one medical, which is a whole urgent care business as well in in last year, so. And I don’t put them in as a healthcare retailer in the same vein as CVS, so I think.
Speaker
Right.
Chris Ressa
You know what? I think big business is trying to do generally. And I’ll put both Amazon and Dollar General is continually tap into opportunities to gain higher share of wallet from the consumer. I think the first thing I think about when I think about things like this is. Do you buy a business? Or do you start your own? So that that that’s. The first thing I think about. So to me, it’s the question of healthcare from a retail perspective and the on brand and all that piece like Dollar General is pretty sophisticated. At delivering product, you know delivering value to consumers. When I think about them, whether they do. That through toothpaste. You know, you know a wire for my cell phone where they do that through a. A vaccination. Not sure that it necessarily matters as long as they provide, you know they can continue the premise of really providing value to their consumers, where where I go, where my head goes is you know. Do they partner with someone? Do they acquire a business to scale it? But I think. The reason that the the the acquisition for Amazon of 1 medical when they were working through that made more sense at the time for them. Was because. The the difference in physical locations, so I agree there’s a huge opportunity to get access to healthcare in rural areas for Dollar General and they have the physical real estate to make it easy and there’s probably a lot of synergies and like it’s a traffic driver, right. I don’t. It’s like 15 to 20% of all GDP is spelt spent on healthcare in America. So if. You’re going to go get something, you know, primary care. You know facility picking up the Gatorade at Dollar General after probably makes a lot of sense. I think it’s a way to continue to drive traffic to their sites. I think it’s a way for them to provide more value for their consumer than they were doing before and they have a competitive advantage over a lot of people that they have physical real estate in rural areas which the economics are sometimes. Challenge to do because the cost of an HVAC unit doesn’t change no matter where you are, and so building that infrastructure is not easy. So getting providing a value untapped opportunity in. Rural areas and this cross selling this traffic driving to their stores, I think it could be interesting. It will be easy to execute. I can tell you I don’t know anything about it. But I know it’s not easy to. Execute, but I think it’s an interesting opportunity. I don’t think they’re, you know, they’re out in that field here.
Karly Iacono
So I think for the pilot, they’re partnering with a company called Doco. So they have mobile services. So it’s not in the Dollar General store, which is a distinction from what Walmart and Kroger are trying. To do sure. So it could be a phase one like you said to partner or do you build it out yourself?
Chris Ressa
Got it.
Karly Iacono
And maybe that’s where the change happens and maybe this is just a partnership and it stays outside the store and then people come in after it would certainly be easier to roll out or maybe use existing square footage. I think what will be interesting in this space in the next five years, let’s call it, is the competition, right. So we’re going to have a bifurcation of healthcare services. Vaccines and you have a standard cold. What do you do? Like very base level services to more advanced right you have diabetes and you need monitoring which is something that this mobile clinic said they could do as. Well, so I think you’re going to see a lot of companies going to sort of. The the low hanging fruit, the vaccines, right. Your nurse, easy to dispense. And we saw that during COVID. Everyone was offering vaccines and lots of different. But how far do retailers take it and when does it stop being synergistic and become too complex? And then where do people go for those other other medical services? So at what level does retail stop being the answer? I think it will be an interesting thing to watch.
Chris Ressa
I think it’s just getting started, so I I think that that that is a long time away, Carly, because one healthcare has made a pitch they want to. Be closer to. The consumer. And that’s for everything that’s not an overnight stay in a hospital. They want out of the hospital. It’s cheaper, closer to a consumer. And so that’s typically retail real estate. That’s the closest real estate to the consumer. I think one you’re going to find continue to find healthcare services in retail properties that’s here to stay for a long, long time. As far as retailers running them?
Karly Iacono
Well, that’s, that’s different though. Right, that’s different. So within the properties, you might have a dentist who has a space, right that’s different than dollar.
Chris Ressa
Sure. And that’s and.
Karly Iacono
General being your dentist.
Chris Ressa
That’s where it’s going as far as retailers running them. I think a lot of the retailers that are working on this, one of the things they have is this huge scale and. I think. They have an untapped opportunity to provide a value to their customer in an industry that has just had a historic, you know. Historic reputation of not providing a value and been just so price heavy and if if they can, if they can work their way through and and to bring the economies of scale to healthcare that they’ve brought to their industry. Whether it’s Amazon, Walmart, Kroger which I think they’re. Like economy, all of them are amazing. At this, if they can do that to healthcare. I think just the opposite. I think you’re going to see it explode versus decline if they can actually provide a value to the healthcare industry that we haven’t seen and and and the size of these groups, how they are at bringing down prices, period. It could be really compelling.
Karly Iacono
I think one of the keys there and again I’m not a healthcare expert, but it seems like one of the keys would be standardizing services. So if you can have you know, vaccines again, very easy. You come here. Your options. Here’s how much it costs. It’s a straightforward service. So if you can make whatever other healthcare procedures and monitoring are required. More standardized. I think that’s how you could scale more easily just the general physical with all the follow-ups might be harder for retailers to execute, but I guess we’ll see how sophisticated.
Chris Ressa
We’ll see what services they provide.
Karly Iacono
They become.
Chris Ressa
I think one of the things that they both have is like all the companies we talked about are like. Have massive amounts of data on consumers. You know, they know everything about about the consumer. So I think that’s going to be a real advantage to someone who doesn’t have the same level of information.
Karly Iacono
Now that’s a great point, especially as AI continues to advance and analyze that data. But we will. Save that for another episode. But I think the use of data is fascinating and we’ll give them a competitive advantage. You’re exactly right. I’m glad you. Brought that up, I.
Chris Ressa
Would add one more thing. We we, you know to your poll .1 of the things. I’m all about. Laser focused and I get it and this could seem off brand to the people who posted like this is so off brand. What are they? Doing blah blah blah. Whenever like some business gets in trouble. All that the naysayers ever say is these guys didn’t innovate, didn’t try anything new. They just prove the business into the ground.
Karly Iacono
Right, they were stale.
Chris Ressa
Dollar General, who’s like taking some shots?
Karly Iacono
Right.
Chris Ressa
They’re trying new things. Here’s Walmart and Kroger, and these guys are innovating. Amazon gets so much credit for doing this over the last 20 years. And so many of them not working out well. I am excited that the retailers. Are taking shots some? Of them won’t work. Maybe the mobile clinics? Don’t work for Dollar General. At a minimum, I’m pumped that retailers are taking more shots. Dollar General has been really taking shots. They opened up pop shop, whole new concept. They’ve scaled that. We’re ready. I’m a proud landlord. They have. They they’re trying this mobile clinic for healthcare. But this is a company who’s not sitting around and waiting for, you know, to be the next, you know, victim. So for that, I hats off.
Karly Iacono
Applaud, agreed. Good point. All right, we’ve covered a lot today. I hope everyone enjoyed this episode. Be sure to tune in next month for more hot pressing retail real estate concepts. Chris really appreciate your insights. Great to see you as always.
Chris Ressa
You too.
Karly Iacono
And to everyone listening, that was what’s in store. Can’t wait to see you again next month. Take care everyone. Alright, that’s great. I think that’s good. We always pull it off somehow.
Chris Ressa
Are we off?
Karly Iacono
It’s still working, right?
Speaker
Or it’s.
Chris Ressa
Recording and you’re going.
Karly Iacono
But it’s not live.
Chris Ressa
To edit it right.
Karly Iacono
Yeah, yeah, yeah. So we’ll probably push it out tomorrow, and I know you guys do it. It seems like a little later, but we’ll send you the files.
Chris Ressa
Yeah, send us everything.
Karly Iacono
Like we normally do. And yeah, I think we can. We already have next months on the calendar. So anything you wanna that you think about even if it’s just during the? You’re like this would be good start.
Speaker
I will.
Chris Ressa
I’m going to do that this month. That’s a good idea.
Karly Iacono
Just like a running topic list, we could even have a shared doc where we. Just kind of write.
Chris Ressa
That’s a good idea.
Karly Iacono
Like as you’re going about your day and.
Chris Ressa
Then let’s do that. I love that.
Karly Iacono
And then we can pick from each month.
Chris Ressa
I really love that. I love that.
Karly Iacono
OK, cool. Good idea. All right, let’s figure out lunch. Be great to see you. And catch up I. Was waiting for my lights to turn off. I was trying to text Rachel. Come, move, you know, lights. But I didn’t want. I couldn’t. I couldn’t do the text without look. Just made it.
Chris Ressa
All right.
Karly Iacono
All right, we’ll figure out lunch soon.
Chris Ressa
Sounds good. Thanks Carly. Bye.
Speaker
Thank you.
