Another ICSC Western Conference in the books and this year I had a very specific goal: to meet and talk with as many retailers and tenant reps as possible. Unfortunately, these days I don’t get as much of an opportunity to interact directly with retailers and their brokers so ICSC presented a perfect opportunity thanks to the “Retailer Central” section of the show.
For purposes of this blog, I consider a “retailer” any user of retail real estate even though they may not technically sell anything. I spoke with over 30 real estate managers and many tenant rep brokers representing a variety of retailers including Big 5, AutoZone, Broken Yolk, Hibbett Sports, Dollar General, Farmer Boys, Goodwill, The Learning Experience, Sherman Williams and Sports Clips. Here is a summary of my takeaways:
- Finding Franchisees is Critical to Certain Brands: One of the first questions I asked each real estate manager is whether their expansion is being driven by corporate stores vs. franchised locations. A substantial number indicated that they are franchise driven. My next question was “which is more challenging, finding good real estate or finding good franchisees?” For the most part, it was finding good franchisees, but it was clear that this is a conundrum for most franchisors. They see good real estate, but then they don’t have a franchisee or they have a really good franchisee, but then can’t find the right piece of real estate.
- Most Retailers Are Relying on Tenant Rep Brokers: There seems to be no reversal of the trend toward using tenant rep brokers. Retailer staffs are skinny with many handling huge geographies. In addition to finding new sites, they deal with requests from owners of existing locations, renewals, expansions, operational concerns, and much more. As a result, I noticed a substantial dependence from many on their tenant rep brokers further emphasizing the importance of having great relationships with these brokers. It has never been more important for landlord’s to hire brokers that have these relationships.
- Fear of Cannibalization is Significant: For those retailers with a long presence in the Southern California market, there is great concern about cannibalizing their own stores with new stores. This is especially true when dealing with franchisees as cannibalization of franchisees can easily result in a lawsuit and none of the franchisors need the press of a franchisee suing them. But even the corporate operators were very sensitive to this issue even if the net result was the potential for a substantial increase in sales and profits.
- Expansion is Being Done Cautiously: I don’t think I spoke to any retailer that gave me the sense that they were under pressure to do new deals which would result in their doing a bunch of bad deals. This is very different from the last cycle. Up until this cycle, I have always believed that every retailer will expand to the point of expansion being a detriment to the company. Fortunately, this mostly appears to no longer be the case.
- Site Approval Has A Lot of Inputs: Franchisees, Franchisors, Operations, Finance, Marketing, Competition Models, IRR Models, Private Equity Investors/Owners, and the dreaded Real Estate Committee, are just some of the parties that give input into the approval process which is why getting deals done can be so challenging and why deals can and do die on the one yard line.
- Hotels Are Expanding: Marriot, Motel 6, & Choice Hotels all had booths. They all indicated a lot of potential for growth and a significant appetite by their franchisees to open new locations in the right markets. Hotels clearly have the most analytics to understand the potential success of a new location.
- Gas Stations Are Expanding: You would think that all the talk of electric vehicles and self-driving vehicles would put a damper on gas station growth, but high margins, strong convenience store sales, and aggressive financing seem to be propelling the growth.
- Car Washes Are Also Very Active: Quick Quack, Bliss Car Wash, Quick N Clean, Sonny’s Car Wash, and Tommy’s were all present and very aggressively seeking new sites. The competition for new car wash sites is fierce as these self-serve concepts are all trying to take advantage of the fact that full-service car washes may be challenged in the future with rising labor costs. The quick service model shifts substantial amounts of labor from the business to the consumer while also saving the consumer money.
Overall, It was a lot of fun and very productive spending the time mostly talking to retailers and learning about new concepts, established concepts, site selection, site approval processes, and so much more. There is no doubt that my appreciation for all aspects of the business increased as a result of those interactions and will be very beneficial to the Progressive Real Estate Partners team as we work with our clients to help them achieve their retail real estate goals.