In this episode of Leaning In, host Terry Montesi sits down with Conor Flynn, CEO of Kimco Realty, for an in-depth discussion about the evolution of retail real estate, the future of mixed-use development, and the trends shaping consumer behavior. Conor shares lessons from his two decades at Kimco, detailing the company’s strategic shift toward grocery-anchored shopping centers, its multifamily expansion efforts, and the advantages of scale in today’s REIT landscape. The conversation also explores how technology, capital markets, and macroeconomic uncertainty are influencing decisions across the retail and development sectors.
They discuss:
- Lessons learned from a career built within Kimco Realty
- How grocery-anchored centers became the foundation of Kimco’s portfolio
- The company’s multifamily strategy and use of joint venture partnerships
- Navigating today’s capital markets and managing risk amid uncertainty
- Emerging retail trends, from off-price and grocery to health and wellness
- How technology and consumer behavior will shape the next generation of shopping centers
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Transcript
Conor Flynn: The rents have to go up another 30% from here in order to really justify that return because the costs have gone up so much. The cost of land, the cost of labor, the construction, all the materials, everything that’s gone into constructing a shopping center has gone up faster than the rents that have gone up. And so that makes existing assets worth more, and that makes existing opportunities more palatable for retailers that want to expand today.
Terry Montesi: Hello, I’m Terry Montesi, CEO of Trademark Property Company, and welcome back to Leaning In.
On this episode, I’m joined by my friend Conor Flynn, CEO of Kimco Realty. Conor has spent more than two decades with Kimco, rising through the ranks to lead one of the largest and most influential retail REITs in the country. In fact, they are the largest owner of outdoor retail in the country. We’ll talk about Kimco’s strategy, the state of the capital markets, the role of necessity-based retail, and what the future holds for our industry. So, with that, let’s lean in.
Hey, Conor, welcome to the show.
Conor Flynn: Thanks for having me, Terry.
Terry Montesi: I know a lot about your background, but why don’t you tell me about your background? And I know also that you’ve been with Kimco for a long time, starting in asset management, and you’ve got family connections. So, tell everybody about your background.
Conor Flynn: …and thanks for having me. I guess the way I would put it is I’m an old school company man. I’ve only really worked for one company and that’s Kimco Realty. So straight out of college, I did do a summer internship as an investment banker at Merrill Lynch back then and quickly realized that my dream of investment banking is not the reality. So, I wanted to do real estate and quickly learned that the summarizing or running financial models of what could or could not occur was not as exciting as seeing the before and after of a real estate project come to life.
That’s where I got my start at Kimco and started in the leasing asset management function. I was very fortunate to work under some great people at Kimco. My first two bosses, actually, David Lukes and Jeff Olson were running the Western region at the time, great mentors. One was an architect, one was a financial analyst, so very different backgrounds, very different ways to look at things. And I realized very quickly that you can look at things a hundred different ways, that it’s good to actually look at things in a number of different ways to make sure you analyze it correctly.
And both of them were great mentors, and at Kimco, you got the opportunity to grow. They continued to grow and they dragged me up along with them as they grew in the organization. And I was very fortunate of that, to run the West Coast for a while, which was a combination of leasing, asset management, construction, development. And when both of them left the organization, they actually both left to become CEOs of other publicly traded REITs. David Lukes left and Jeff Olson left. And so, by the time our CEO Dave Henry retired, there was nobody left other than me. I think it was better to be lucky than good.
So that was sort of the transition over time, East Coast and West Coast through the course of my career. I went to grad school while working for Kimco as well for a master’s in real estate development, but I’ve always been a real estate junkie. Everywhere I go, whatever I do, I’m always looking at real estate. It always seems to make me happy. It keeps me engaged, keeps my brain firing.
And my father was at Kimco as well. Back when we were private, he helped Milton Cooper and Marty Kimmel, the two founders. So Kimco is Kimmel and Cooper. Milton always makes the joke, we couldn’t call it Cockham. And so Kimco is how we launched. And Milton is obviously the founder of the modern REIT era. He took us public in 1991, which was at the dawn, like sort of the beginning of the equity REIT model. Now it’s over a trillion dollar industry. Kimco was very fortunate to be sort of the founding cog in the wheel, so to speak, of what the REIT industry is today.
Terry Montesi: That’s great. Thanks for sharing that with us. So, as you look back at your time at Kimco, what are some of the lessons you learned early that still influence how you think and how you run your business today?
Conor Flynn: Oh, gosh, so many. So, I think the cool part about real estate, the cool part about our business is, as you know, Terry, it’s very much a relationship business and you get to learn a lot and meet a lot of people along the way. But the other thing you learn is that you’ve got to make sure that you recognize that people are going to change jobs, change roles, change industries, and to keep connected to all those people, because in time, all those connections will probably be a benefit in your career or to your company’s success longer term.
And so, like for retail lawyers, especially, it was very apparent to me, like when I got close with some of the retailers and their leaders of real estate, there was a lot of movement among retailers and real estate leaders. And you could help them, you can recommend them for new roles or positions that you saw opening up. So the industry as a whole, even though it’s quite diverse and quite dynamic, there’s sort of a pool of talent that seems to be constantly evolving and constantly on a flywheel. That was one of the big ones. I always tried to keep everyone in my network and in active communication regardless of if they were in or out or what they were doing.
The second piece that goes alongside of that is just, it doesn’t cost you anything to be nice. In a lot of industries, I think there’s a lot of sharp elbows, people get stepped on on the way up. The team mentality at Kimco has always been part of our DNA, has always been part of our culture. But that also goes with the landlord retailer relationship. And so to forge bonds, to forge partnerships, even when you’re negotiating, I think is super important for a business like ours, because in essence, every deal is different. There’s always challenges. There’s always opportunities. But there’s always going to be a next deal too. So, those are some important things.
I also think it’s super important to know that deals fall apart and it’s not necessarily your responsibility. So when you get to a point where you start to manage people and you’re hard driving, you’re trying to get your numbers, you’re trying to execute, and things fall apart, to go through that process and to know how much you’ve worked on a deal and it fell apart because X, Y, and Z, maybe something happened on their side, something happened on your side, something out of your control, those are super important lessons to learn that sometimes things are just not meant to be.
And so, all those things combined with a whole host of others I think are helpful in my career. Because in essence, our business hasn’t really changed all that much in decades. There’s still a lot of technology that’s coming to try and disrupt, to try and evolve the industry. And we’ve seen it in our careers, of like e-commerce and how the retail dynamic has changed with omnichannel and how people utilize the store as last mile fulfillment centers. But in essence, it’s still very much a people business. It’s still very much a sitting across the table negotiating and hopefully creating a win-win situation.
Terry Montesi: Yeah, and good merchants win. People that are under leveraged win. There’s some great old-fashioned lessons. And you and I have the passion for building places and passion for real estate as a hard asset in common, for sure.
Conor Flynn: Absolutely.
Terry Montesi: So, help everyone understand how you define Kimco’s position in today’s retail real estate landscape and your mission.
Conor Flynn: Sure. So we’re very fortunate at Kimco. We’re the largest owner of open-air shopping centers. We’re 86% grocery anchored, and we’ve had a massive transformation of the portfolio to get to that point. We used to be about 50-50 power centers, 50% grocery anchored. And we had a strategic direction about five years ago to really move the needle towards the grocery anchored shopping center.
Our mission is really place making and understanding what goes into that and how to unlock the highest and best value of your real estate. And so strategically, we thought that putting the portfolio in a geographic position where it’s first string suburbs of major metro markets creates that barrier to entry, meaning that there’s really no new development that’s going to out position your real estate.
And then looking at how to unlock the value of that real estate, identifying that typically a shopping center is like a hole in the donut. Things have gone up around us, whether it’s an apartment tower, office tower, you name it. And so typically the shopping center, as the hole in the donut, is the most underdeveloped parcel in a commercially zoned area. And so what can you do with the parking lot, with the asset to create more value over time? And so, we went on a mission to unlock that value and targeted 12,000 apartment units to be secured across the portfolio. So, we just crested that last quarter. And we also had an 85% grocery anchored target. So we crested both of those. So we’re in a position…
Terry Montesi: You now have more than 12,000 apartment units?
Conor Flynn: Entitled, yeah. We’ve only built about…
Terry Montesi: Entitled, not built.
Conor Flynn: Correct. Yeah. We’ve built about 3,500. So we’re on our way. As you know, entitlements take a long time just to get the right to build. And then the projects to activate take about a two year cycle as well. So we’re well on our way to unlocking that value for our shareholders. And we continue to think long and hard about how important the balance sheet is.
You mentioned it earlier. Another strategic direction was to really get the balance sheet in the best shape it’s ever been in. And for us being public, we thought getting the rating agencies to give us an A-minus was really the North Star. And actually just this past week, S&P gave us an A-minus rating. So we’re one of only 11 REITs across all the different REIT categories, office, industrial, you name it. There’s only 11 of us that have A minus.
Terry Montesi: Congratulations.
Conor Flynn: Thank you. It’s a big milestone for us.
Terry Montesi: That’s happened since I’ve seen you.
Conor Flynn: That’s right. That’s right. Exactly.
Terry Montesi: Five days ago or whatever.
Conor Flynn: It’s a fast moving business.
Terry Montesi: It sure is. Well, I’m really proud of you. That’s great. That’s great to see you set those goals on multifamily entitlements and getting your rating to A minus. That’s a big deal.
So, what are some other things that you say would set Kimco apart in the retail REIT and retail ownership business?
Conor Flynn: Yeah. So, I think, Terry, scale is definitely an advantage. So, when you have relationships across the entire retail spectrum, you’re able to take a tenant that’s looking to expand and identify if there’s geography that they’re coming into that they haven’t been in before, sit down with them and show them a dozen assets that could potentially fill their needs for store opening plans. The same goes with purchasing power.
Kimco as a whole, we’ve really focused on efficiencies of scale, taking costs out of the business, spreading costs across the whole portfolio. And now we’re really trying to turn the dial to advantages of scale. So they can go across the whole spectrum. So, it could be our cost of debt, which today we could probably raise, in the bond market, easily 500 plus million dollars in 24 hours under 5%. Those types of opportunities are rare. We have a $2 billion line of credit that’s got nothing on it.
So, we’ve got access to capital. We’ve got the ability to connect to retailers, both large and small. I think technology is a huge piece of the puzzle as we go forward and see the advantages of scale, we’re looking at what we can do with generative AI, taking a lot of costs out of the business where we can. We’ve done a lot with solar. We’ve done a lot with irrigation controls, common area maintenance, sustainability goals. But people still are, I think, the biggest advantage you can have of an organization like Kimco. Our tenure of our employee is quite long, and we look at that as a shining star that we are clearly focused on investing in our people and giving them the opportunity to grow. And that continues to give us the ability to push Kimco into new directions.
Terry Montesi: Thank you very much. That’s great. So, with occupancy at historic highs, let’s talk about the industry and go macro a little bit. What’s driving that demand side and how sustainable is that? And what do you think unfolds from here regarding upward pressure on rents and occupancies and ultimately driving the addition of new supply?
Conor Flynn: Yeah, it’s an interesting dynamic now because in our careers we’ve seen a lot of change with supply and demand. And this is an interesting time because there’s virtually no new development, so 13 year low of new supply coming online. And that’s been the case now for five plus years where there’s been virtually no new supply coming online. And then the demand has been significant where the new stores that are opening are well capitalized and are continuing to grow. That’s what’s causing that pricing power, that ability to push rents to show the new leasing spreads that we’re putting up of 30% plus. Retention rates are over 90% at near all-time highs. Your occupancy rates are very, very high across the board for retail today.
That being said, the rents still haven’t gotten to a point that really justify a wave of new supply or new construction. Because development in retail, typically, you look for a spread of your return on cost to your exit cap, what you could sell the asset for, of about 200 plus or minus basis points. We still see markets have to, the rents have to go up another 30% from here in order to really justify that return because the costs have gone up so much. The cost of land, the cost of labor, the construction, all the materials, everything that’s gone into constructing a shopping center has gone up faster than the rents that have gone up.
That makes the existing assets worth more, and that makes the existing opportunities more palatable for retailers that want to expand today, and you’re seeing that. That’s why even if there’s bankruptcies like in Joanne’s or Party City, those boxes are getting gobbled up really quickly because TJ Maxx, Ross, Burlington, all the grocery stores, Dicks, you name it in terms of different categories, they’re all looking to expand physically because the margin that’s really strong in their stores is really where they’re looking to put working capital to grow their fleets.
Terry Montesi: You talked a little about your expansion into multifamily. Tell us about that. Are you doing that in joint ventures? Have you hired a team in-house and you develop it all yourself, a combination? Tell me about that.
Conor Flynn: Yeah, so we look at it as really sort of a natural extension of a redevelopment program. And so, our redevelopment program was always focused on really repositioning the real estate to see how we can unlock value. And typically, that was either adding GLA to expanding a box or maybe putting a pad building out in front of the parking lot.
And in time, we found that the retail parking ratio was really overwhelmingly, it was so out of whack that the four per thousand that is really mandated per municipalities does not mean that that’s really what a shopping center should be built with. When we looked through the multifamily opportunity, we saw that mixed use, if done correctly, enhances each other. So the apartments will drive traffic to the retail sales, and then the retailers provide the amenities to the apartments, which will drive premiums to those apartment buildings. And so, the 3,300 we’ve built, that thesis has played out, where the apartments are pricing at a premium, and the retailer sales are growing faster because of that…
Terry Montesi: And have you built those with your in-house team?
Conor Flynn: So, we look at it a couple different ways. So, the way we did it first was just ground leasing. And so that’s really sort of the hands-off, wrist-off approach. Take your land and just have someone else come in, build it, construct it, manage it, lease it, and they just pay you a ground lease, the fee income stream. And so that’s the way we originally started the program.
And then we started to look at, okay, that’s a relatively flattish income stream because ground leases, in essence, are relatively flat. So now we’re starting to evolve it and say, okay, we’ve added the entitlements. Let’s get credit for that by contributing the land plus the entitlements into a joint venture with the multifamily expert and have that be our capital alongside them as they put in their capital to build it, construct it, lease it, and manage it.
And so that’s how the programs evolved over time. We’ve got some wonderful joint venture partners there on the multifamily side that are experts in it. And we’ve learned a lot through the process and continue to learn. So, it’s an exciting time at Kimco because we feel like we’re evolving but yet at the same time taking a CapEx light approach of putting our land in as our equity so that we don’t take on too much risk in terms of the development cycle.
Terry Montesi: I think that’s a very wise step two. You may take step three at some point.
Conor Flynn: Maybe. And you asked about our team, we do have some multifamily experts in-house as well. So that was part of it. As we’ve evolved, we’ve staffed accordingly to make sure that we have a counterparty with a multifamily expert developer, but then we also have in-house expertise to make sure we counterbalance that.
Terry Montesi: Great. So, let’s talk macro. And I know you have to spend a lot of time thinking about this. And last week, we talked about it a lot. So, everybody’s watching the economy. There’s a lot of uncertainty in the economy. We don’t really have to talk much about where that comes from. Rates are finally starting to tick down. Inflation feels a little sticky.
So, as you’re looking at acquisitions, redevelopments, how are you thinking about rates? How are you thinking about uncertainty, capital markets going forward, inflation? Help us understand your thought process and what your sort of planning forecast is right now.
Conor Flynn: Yeah, it’s tricky. I mean, as you said, there’s a lot of different forces at work right now in the macro, and that’s impacting our cost of capital. So I mentioned on the debt side, that’s in really good shape right now. We’re A-minus rated. We can access the bond market very quickly. Our spreads are probably the tightest they’ve ever been over the 10-year. So, in essence, we would probably say 10-year bond, probably just below 5% today. So that’s really good debt that you can access very quickly.
The issue is that our equity is not trading at a point where we feel like we can aggressively acquire externally, meaning like on the open market, because where Kimco is trading today, it’s north of a 7% [?] cap rate. And if you think about all of the assets we own of over 500 assets and in the major markets that we are, every one of those assets would probably trade today with either a five or maybe a very low six cap rate handle.
So, the difference between where private pricing is versus where Kimco’s pricing is, is very dislocated. And so, when you have that dislocation, it doesn’t make sense to go into the open market and pay a cap rate that’s so far below what you’re trading at, just because your cost of equity doesn’t allow you to grow.
Terry Montesi: It’s that negative arbitrage; that doesn’t work too well.
Conor Flynn: Exactly. The dilution would be real. And so what we’ve found is that we have 150 million of free cash flow after dividends of CapEx. So that’s sort of our lowest cost of capital. And that allows us to continue to reinvest, to continue to look at the portfolio of ways to grow the NOI. Because even though our equity is out of whack, our NOI is growing, our occupancies are growing, and cap rates are compressing across the spectrum for all different product types of retail.
And so typically when that happens, at some point it flows through to the public markets where there’s a privatization of a publicly traded REIT that showcases, hey, this is where private market valuations are. And a private equity shop comes in and takes somebody private and showcases that, hey, that spread is real, we’re going to take advantage of it. We haven’t had that yet. ROIC was the last one to go private from Blackstone. There are a lot of capital formations going on for the space. As you know, there’s a lot of new buyers that are showing up on the private side that are driving pricing.
So right now, where are we investing? We’re investing back into the portfolio. So the redevelopment returns in essence are double digits. So the return on invested capital on those are typically around 10%. We also look at mezzanine and preferred equity, which is a structured investment program that allows us to invest in the capital stack of a shopping center that we would like to own.
So, in essence, we do it on assets that we already know, we already love, and feel very comfortable in the loan to value of that capital stack, where it typically goes from somewhere in the 65 to 75 to 80% range. And that we can get double-digit returns on. And we get the right of first refusal on those investments because, in essence, it’s not a loan-to-own program, but it’s a loan-to-ROFO program, so that if they were to sell it, we get the last look to see if it matches our cost of capital. And so those are the big pockets of opportunity that we see.
And then we continue to look internally, and the organic growth is quite strong, same site NOIs is over 3%. This will be our second year in a row of really producing earnings growth of over 5%. And the dividends are all covered and in a position for growth. So we’ve been in these situations where retail is out of favor, the stock market is not rewarding publicly traded REITs. And we know how to handle it. We know how to manage through it. And we know how to generate growth; even when you can’t grow externally, you have to grow internally.
Terry Montesi: Interesting. So back to a last comment on macro, kind of your planning forecast. And as a CEO, obviously we talked about a lot of uncertainty in the political and economic environment and with inflation, the Fed, et cetera, when you think of your planning forecast, how are you guys looking at all that as you look at the future?
Conor Flynn: We try and budget, so to speak, for the future, where we feel like our business is essentially based goods and services. So even if we were to have a drawback to the economy and have a recession, so to speak, we take a look at who is on our watch list, who would be the ones really to fall out and to have that play out across the portfolio.
And the nice part is our watch list is the smallest it’s ever been. Post COVID, that wiped out a lot of the watch list players that didn’t have balance sheets to weather the storm. And then this year, Joanne’s, Party City, Big Lots, all of them combined were relatively small, but it did wipe out a whole bunch of names that people were watching. And so I’m not sure if you saw, but Michael’s just came out and said they had a very good quarter. They’re taking market share, obviously, that was lost from Party City and Joanne’s.
And so even those tenants that have been on the watch list are in relatively good shape. Same with Kohl’s. Kohl’s is delivering 900 million of free cash flow. They own a lot of their own real estate. They need to get their comps and they need to figure out their strategy going forward, but their balance sheet is pretty in shape. So, of the names of the retailers that are out there that we think are relatively near-term risk, most of them have actually pretty good balance sheets and pretty good business models.
So, when we look at what could change going forward, we try and do it by an asset by asset level, demographic level, by a retailer level. But we feel pretty good, obviously, about where the balance sheet is, where the portfolio is, and where the risk profile is today.
Terry Montesi: Well, good transition for the next category.
Conor Flynn: Terry, how do you look at it? Because obviously, from the private side, you look at your capital stack a little differently and then you plan ahead probably just like we do. But when you look at all the issues or all the swirling winds in the macro environment, how do you position? How do you plan for the year ahead?
Terry Montesi: Well, it’s as hard as it’s ever been. Capital markets are, if you take the period like right after the GFC out, the periods where we’re actually doing business and not just completely frozen, this is as difficult a period as ever. So, what we’re doing in our planning forecast is to plan for uncertainty. So, if you’re planning for uncertainty, you have to have more margin for error.
And so, if we’re building a ground up deal, even if it’s grocery anchored, we want an extra 50 basis points more than even just 18 months ago than we might’ve done. And on a non-grocery anchored, we want, and you mentioned a 200 spread, 200 spread, absolutely, but we really want to build it to where we got a shot at a 300 spread.
Conor Flynn: Exactly. It used to be 300, hard stop.
Terry Montesi: But if times are good, yeah, we’ll have a 300 spread, but in tight times, we hope to have a 200 spread. And just being more cautious on everything. Because the uncertainty, a lot of that obviously comes from the nation’s capitol and we don’t need to talk politics, but at least for the next couple of years, it looks like the cause of that uncertainty is likely to still be around.
Conor Flynn: Yeah. No doubt about it.
Terry Montesi: And so, I think just have to be more cautious, have more yield than you would have had to have historically and just be real careful on what you work on and try to avoid situations where there’s going to be a lot of competition.
Conor Flynn: Yeah, I agree with you. I think for us, we really don’t see ourselves getting back into the development cycle with this much risk in the air. We used to develop a whole bunch, both merchant development and build to own longer term. We continue to think that the risk adjusted returns for that don’t really justify what could or could not happen.
Whereas like, you can buy something today for maybe a six handle and have some value add component that you could sort of feel good about the execution process there. Whereas if you’re taking on lands, entitlements, construction, development, leasing, all that risk at a time where it could change very quickly, it’s a different risk profile, but that’s why you need that 300 basis point spread to feel like it’s worth it.
Terry Montesi: Exactly. Welcome to my world. And I think it would be crazy if I didn’t acknowledge that my first institutional partner was Kimco. Do you remember that?
Conor Flynn: Yeah, absolutely.
Terry Montesi: Dave Henry and Jerry Friedman and Dan Slattery. And so, our first, we did for years, I guess from ’92 to about ’99, we were still passing the hat, but the deals got so big that I didn’t have a hat big enough to pass. So, our first institutional deal was a power center in Burleson, Texas, called Gateway Station that Kimco provided the equity through a, I don’t know if it was a subsidiary or whatever KDI was, but an entity that was owned by Kimco that funded equity for developers.
And then a couple of years later in ’02, y’all did a big deal with us, Market Street Woodlands, Dave Henry and I talk about every time I see him. It worked out great for both of us. And that’s how you want it. Dave and Jerry were super happy and Trademark and our people were super happy. So anyway, Kimco has a special place in my lineage and in my heart.
Conor Flynn: That’s great. That’s great. Not all those deals always work out.
Terry Montesi: No, fortunately, the two that we’ve done together worked out beautifully.
Conor Flynn: But you know what, that partnership would be the same even if they didn’t work out. That to me is, I think, just as important as understanding that it’s great when things work out, but a partnership is really tested, I think, when things don’t work out.
Terry Montesi: No doubt. And I hope we don’t go through that together. But if we do, I figure we’ll figure it out.
Hey, so on the retailer side, what categories are you most bullish on from today forward? And are there some particular tenants that you’ve learned about the last year or two that you’re starting to get excited about?
Conor Flynn: Well, our business is relatively simple. So, if you think about the grocery anchor, that’s still sort of the sweet spot or the heartbeat of what drives the most recurring traffic. And so that to me still continues to be a shining star. It’s sort of surprising that all segments and all grocers continue to do well. Usually in those sectors, you have one or two stubbed their toes and maybe Amazon is that one, where they bought Whole Foods, then they launched Amazon Fresh, and now they’re trying to retool and trying figure out what to do.
But it is interesting how every category of grocery is doing well. So if you look at it from that perspective, the discount grocers, Aldi and Lidl from Europe are doing very well, expanding rapidly. You’ve got the specialty grocers, so the Trader Joe’s, Sprouts, Whole Foods, again, very strong operators, doing quite well, all doing big numbers with new stores.
Terry Montesi: And hey, Conor, do y’all own the Aldi, Lidl anchored centers also?
Conor Flynn: We do. Yeah, we do. They’ve actually been great because when you think about the 86% grocery anchor that we now are, some of that came through acquisitions and dispositions, but a lot of it came through leasing. And so, Aldi and Lidl are the smaller operators that can go in to Party City boxes, Joanne’s boxes, all these spaces that if you didn’t have a grocery anchor before, guess what, there’s no restrictions there. And usually they can Swiss Army knife into a box and make it work. And so those have been great to continue to evolve the portfolio on the leasing platform side.
Traditional grocery is still doing well. We’ve got a couple of deals working with Kroger, [?] Delis, Albertsons, and then the big box side of it too. If you think about what Walmart’s doing, Costco, Target, BJs, it’s really remarkable. It seems like every single category is blowing and going, which is nice to see.
And then you combine that with the off-price sector, and that’s really sort of been the co-anchor choice for our centers for a very, very long time. And they continue to take market share. They’re running out of market share to take, in my opinion. I think they’ve almost put department stores six feet under. They’ve taken all the market share you possibly can from department stores, but yet they’re still comping and doing quite well because even in good times or bad times, it seems like off-price is able to provide value to the consumer.
So, TJ Maxx and all their concepts, TJ Maxx, Marshalls, HomeGoods, Homesense, Sierra Trading Post, all in super offensive growth mode. Ross and Dd’s, their two concepts growing. Burlington’s growing. Nordstrom Rack’s growing. And those are great because those are what we call treasure hunters. And typically, you go into a store once, and if you don’t buy it that time, that same item is not going to be there again. It’s that handbag or that piece of clothing or whatever it is, that’s the it brand and it might not be the color, but it’s a color. It’s one of those situations where if you don’t buy it that time, it’s going to be gone the next time. Again, it drives that recurring traffic pattern that we love.
Then we fill in around it with some of the specialty, the services, the quick service restaurants. And that’s really where we’ve seen a lot of new concepts come in. And so that’s where I think it’s been remarkable to see the strength of the small shop business because COVID in a lot of ways wiped out the pure mom and pop, so the one-off business, the family-run restaurant. If you didn’t really have a balance sheet, you couldn’t really weather the storm. And now what we’re seeing is this huge wave of new businesses coming into small shops.
And that’s what’s driving Kimco’s small shop occupancies to all-time highs because it’s medical, it’s health and wellness, it’s services, and it just continues to evolve to where services now is like 80% of our new deal volume. And it’s great because services, again, get you out of your chair and your home and into the shopping center. It’s usually something you can’t do online and it drives a lot of traffic. And so urgent care, pediatric, pediatric urgent care. We always had the dentists. Now we’ve got physical therapists, all the health and wellness concepts, the medi spas, you name it. It continues to just roll out where like what can’t work in the shopping center. And so those are the new uses that I get really excited about because it just continues to be about value and convenience.
But if you think about where you live, where you work, where you play, usually the shopping center in that little sweet spot is the most convenient spot. And so, if you can offer things that drive value for consumers, that’s where, and I’m surprised by this, where traffic continues to compound up. This is post-COVID, post back to work. I always thought there was going to be this reversion where people were working from home a ton, we were getting more traffic to our shopping centers because people were using our coffee shops and our restaurants as their quasi-office spaces.
Terry Montesi: Then they’ll go back to work.
Conor Flynn: Then they’ll go back and we’ll see a lull in traffic and things may… But every single time, it’s been up and up and up. And I think there just is more reasons to go to a shopping center today than there has been in the past.
Terry Montesi: You reminded me of something I want to ask you. So, we are building a couple of ground up centers, as I mentioned to you, and the rents have to be high. The tenants are paying it. And so, the tenants are the junior boxes, mid 20s-ish. And then the shop tenants, 45 into the low 50s. And some institutional folks say, hey, I know they’re a great credit tenant. It’s a great concept. And I know they’re willing to sign a lease. But I’m just unsure that they can pay it, and I think there’s a lot of risk there. What do you have to say about that?
Conor Flynn: So, it all depends on occupancy costs. If they can justify the sales, then I think that rent is fine. I think the tricky part is you’re probably building to sell it versus building to hold it. And so, when you go to sell that asset, you’ve got the rents and the NOI and everything is capped on that value. And if people believe the tenants are doing well, they could pay it going forward, you’re going to get full value for it.
If people think that those rents are inflated because of the cost of the building, because of all the improvements you’ve had to make, and they see that the sales are not there to justify it, then it’ll impact the pricing. It’ll take it off the cap rate. Those are the dynamics at play where the face rent is great as long as the tenant can pay it through the term on their lease and hopefully exercise their options. So, it all depends, I think, on if that retailer is going to be successful because they’re able to drive the traffic and drive the sales.
Terry Montesi: Yeah. And I get that. And these are a lot of nationals, virtually every one you have in your centers. And these people are willing to sign the leases. And it sure seems to me that they have enough data, we’re in such a data-driven world, that they have enough data, they know the demographics, they know what kind of online sales they might have if it’s not a restaurant, and they know the demographics, and they have so many analogs that it comforts me that these people who have multiple units who are very successful companies, if they’ll sign a high 40s lease, that they have pretty good odds of success because they have so much data. Does that make sense?
Conor Flynn: Yeah, no doubt about it. And again, 10 years from now, who knows, who knows what the new concept is, who knows what the new technology is, who knows what those occupancy costs will be. So, it’s going to be very hard to project years four and five, let alone nine and ten. And so usually those leases are 10 years of firm term with options on top of them.
So, I think the risk profile is more of at year 10/11, what is the market rent in that area? So what do they have the ability to say, okay, across the street is more expensive, or is it less expensive? And like, is my asset, my lease an asset, or is it a liability relative to where the market is? So it’s like, okay, if it’s above market, I can renegotiate and not exercise the option and come back in and say, look, market is down here. But if you have their sales and say, well, your occupancy cost is actually quite healthy. So that’s the dynamic at play, where that market will be 10 years from now. And that’s the debate of getting a market rate rent today and what it’ll look like in years 10 and 11.
Terry Montesi: Yeah, that’s one thing I mentioned to you earlier. That’s why I’m really focused on trying to develop into places that don’t have a lot of likely competition in the future. Because if there’s a center on every corner like there used to be when we were developing back in say 2005, you really do worry about that. But if you’re building somewhere where there’s not going to be any competition, you’re a little insulated from it. Thank you for your feedback on that.
How do y’all think about national tenants versus local tenants? So many people think it’s important to mix in locals and regionals for lots of different reasons, just for character and to connect with the local community. But then we all love national tenants for their credit. They’ve got more sustainability. How do you guys look at it?
Conor Flynn: We like to have both. I think both are an important part of making a shopping center special and connected to the local community. Clearly the anchors are usually national. So those are the ones that usually bring the brand awareness. They usually bring the platform, the ability to bring in their consumer because they know like they’re already in their rewards program. And so, the nationals I still feel like are a critical piece of the puzzle.
And then usually the small shops is where you can add a little local flavor. And that’s where you can find out through all the different tools we have today of understanding what really is successful in that trade area. Do you attract them to your center by giving them a nice space, or do you bring them in as a second concept to keep their existing store? I do believe that there is still very much a place where the local little league can come in and have their picture on the wall and they can showcase that, hey, that place is super important to the community. If you have that place in your shopping center, there’s going to be more gathering, there’s going to be more dwell time, there’s going to be more cross shopping, and that to me is still super important.
Terry Montesi: Yeah, more goodwill with the local community.
Conor Flynn: Oh, totally.
Terry Montesi: So Conor, looking 5 to 10 years ahead, what do you see as the biggest shifts in how people shop, how centers will be built, and how we as owners create value? And how do you think Kimco might look different 5, 10, 15 years from now?
Conor Flynn: Yeah, that’s a good one.
Terry Montesi: Did you bring your crystal ball today?
Conor Flynn: I know. I actually am fascinated by all the technology that we’re actually seeing today and what that’s going to look like 5, 10, 15 years from now. We already have driverless cars. We already have the Waymos, the Robotaxis, all these things are already just a bit dawned on being launched today. What does that do to our shopping habits? What does that do to our delivery habits? What does that do to the cost of delivery, the cost of the…
Terry Montesi: Parking needs.
Conor Flynn: Exactly. The parking ratio requirements is something that I’ve been harping on for a long period of time to say, hey, look, there’s going to be more entitlements that we can get because there’s no reason to have all these parking stalls if in essence, they’re just robotaxis being driven around, they never really park. I think that’s a win for good real estate, that you can utilize it in more ways than one.
The metaglasses I’m super fascinated by, those are the ones where, the Ray-Ban metaglasses, where now you can pretty much get pure price discovery on anything you can see through the glasses. So if you’re walking through a store and if your business model is based off of not having price discovery, you’re in trouble. So there’s going to be pure price discovery just by walking through with those glasses on. So, what does that do to retail? How do people change…?
Terry Montesi: And tell folks what that means. So you’re looking at a product and it’ll tell you what you can get it for on Amazon?
Conor Flynn: Exactly. You used to do it… Everybody used to do it at Best Buy when you used to walk in for like flat screen TVs back in the day when they were just coming out. You could see what you could pay at Best Buy, and you could see what you could pay online. And they were the first to say, we’re going to match anything you can find online. And that’s, I think, the big reason why they still exist today is because they recognized that they were being cross-shopped to death and price discovery. So like, you have to…
Terry Montesi: They were being used as one of the only showrooms where you can actually go see the picture.
Conor Flynn: Yeah, exactly. Exactly. So, those are the really interesting things. I think the e-commerce physical brick and mortar partnership continues to evolve. I think you’ve seen sort of the growth of e-commerce as well as the growth of physical brick and mortar. So, I don’t necessarily think one versus the other. I think there’s going to be more technology driving the e-commerce and the physical together.
So in essence, drones are being utilized now in test modes to deliver things from the box that’s closest to where people live. I don’t know if people are going to want a swarm of drones in the air where people live. I don’t think I would be super excited about that.
But I do see a lot of technology changing the way people shop. And home delivery is part of that. And usually the store that’s closest to your home is the cheapest way to get the good to you. I don’t know how distribution will change and how the stores will be used, but I do think that typically that last mile distribution space is usually the store, and I think that will continue to evolve to be more profitable for the retailer, so that it should anyway be more a big piece of the puzzle going forward.
What does Kimco look like 5, 10, 15 years from now? Scale is an advantage. I think we lean into our scale. I think we continue all the public REITs combined only own 10% of the shopping center space. So, that’s a lot of white space to take in, whether it’s public or private. And so, I think there will be advantages with the technology layered on top of a really good platform to do more and be more operationally efficient. And so I think that that’ll be a continuation. And you’ll see us activate more multifamily. You’ll see us activate more entitlements. What those entitlements could be, you could think about what uses could go into a shopping center. You’ve seen it now with all these mixed use projects where it’s not just apartments, it’s hotels, it’s office, it’s everything. And so, I think that’ll just continue and it may accelerate.
Terry Montesi: Well, last question quickly, but I think you and I, we owe it to our audience and to the young folks. When you look at young professionals thinking about entering retail real estate today, what advice would you give them? What would you say to encourage them to get in our business and anything you think they need to be able to bring to the table to get a job and to be productive?
Conor Flynn: I love this business, so I really encourage all young students that I go and talk to, to dive in headfirst. I think the best part of our business is every day is different. The speed at which things change, technology and retail are constantly changing because the consumer is constantly adopting new ways to experience it. And so, I think there’s a tremendous opportunity to continue to jump into this space and learn quickly, because if you’re a new adopter of all the technology coming out, Terry and I are going to be learning from you on how to deal with all this stuff and what the future may hold.
So, I think it’s always a good idea to start from the lifeblood of the business, which in my opinion is the leasing side of it. Like if you can get experience on understanding how a lease is structured, understanding how to do a deal with a retailer or vice versa, being a retailer and doing a deal with a landlord, that to me is still critically important. All the other pieces I think are important as well. It’s literally like if you want to be a leader, you have to be able to understand how to compose and produce everything together. How all the pieces fit together, you can learn along the way. But I always think that getting your foot in the door on the leasing side is what I did, so that’s the way I would sort of pitch it.
Terry Montesi: Great. Well, thank you so much, Conor, enjoyed hanging out with you. I know you’re on a tight schedule, so I’m going to let you hop. But I really appreciate you doing this for me. And it was great seeing you last week, as always.
Conor Flynn: Good to see you, Terry. Thanks for the time.
Terry Montesi: Hey, thanks for joining me for this conversation with Conor Flynn, CEO of Kimco. I always enjoy hearing from leaders who are shaping the future of retail real estate. And Conor’s perspective on necessity-based centers, the capital markets, and today’s retailers is especially relevant. If you liked this discussion, I encourage you subscribe to Leaning In and check out past episodes with other great industry leaders. Until next time, I’m Terry Montesi, and thanks for listening.