The retail real estate landscape is evolving, and few people understand its intricacies better than Adam Ifshin, Founder and CEO of DLC Management. In this episode, Trademark CEO Terry Montesi sits down with Adam to discuss how value-driven open-air centers, omnichannel innovation, and institutional capital are reshaping the industry.
Adam shares insights on why open-air retail continues to outperform, how AI is poised to revolutionize retail operations, and why institutional investors are re-embracing retail real estate. He also dives into the impact of supply and demand dynamics, the future of apparel shopping, and the challenges of new development in today’s market.
With over 30 years of experience and a track record of transforming underperforming assets, Adam’s perspective offers a must-listen deep dive into where retail and retail real estate are headed.
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Transcript
Terry Montesi: Welcome to a new episode of Leaning In. I’m your host Terry Montesi, founder and CEO of Trademark Property Company. Today I’m joined by a great guest, Adam Ifshin, my friend, founder and CEO of DLC Management, and one of the smartest retail real estate investors that I’ve ever known. DLC is a leader in retail real estate investments, and Adam has been shaping the industry for over 30 years. In this episode, we’ll dive into the biggest trends shaping retail in ’25, from the evolving role of open-air shopping centers to the impact of AI and how it impacts investment decisions. We’ll also talk about the current economic landscape, changes in development, supply and demand on the retail development side, and where the best retail investment and development opportunities are today. It’s going to be a great conversation, so let’s lean in.
Adam, thanks for joining us today, and I’d like to start with you telling our listeners a little about your background and what led you to found DLC Management and what keeps you interested and passionate about our industry after 30 years?
Adam Ifshin: Well, first of all, Terry, thanks for having me. I’m a lifelong entrepreneur. I started my first business when I was 19 in my dorm room at college while I was also a two sport athlete.
Terry Montesi: What was that business?
Adam Ifshin: I was a contractor. I started as a contractor, coatings contractor, built a business while I was in college, started in 1985, and by 1987, we were doing about $350,000 a summer in revenue when I was paying for college and all of my living expenses plus. I was living pretty good actually on about a 20% margin, take home net. And I was living pretty good for a college student in 1987.
I sold that business because I didn’t want to be a contractor and went into the real estate business working for my dad and three of his partners in the residential development business, and I figured out about two years into that tenure that that business was highly likely to fail. I famously told my father that. He kicked me out. Six months later, he came back and said, hmm, you may have been right, I may be wrong, can you get another job? And I had passed famously job offers from Bain Consulting and Goldman Sachs to go to work for my dad for a massive pay cut from running my own business. And I said, I think that ship has probably sailed, and I’m going to stick around and try to figure out if I can help you out. So DLC was really started out of the combination of my entrepreneurial tendencies and desires and sheer desperation.
You know my wife for a long time. I started DLC on January 3rd, 1991, 34 years ago. Alicia and I had been engaged about two months. We were completely broke. The business grossed $109,000 in consulting fees the first year. We got married at the end of that year. I went back into contracting nights and weekends for a couple of crews on the street to help pay for the wedding. And that was really, that’s what led me to start it.
What keeps me going and motivated after 30 plus years, look, it’s come to be, obviously, much like yourself, it’s come to be an industry I know and love. I think I’m pretty good at what I do. But really the motivation now, Terry, is so much about the people. And I think if we go through some of what you want to talk about today, a lot of how I view what I’ve done call it in the last half of my career so far and what I hope to do in the next half of my career is more about people than it is about assets.
I love working with the people. I love the team that we’ve built. I love building the team. I love being, at the end of the day, the ultimate defender of the faith, of the culture of the organization. I also selfishly have an organization that’s fairly young. So, as you and I are no longer as young as we think we are, having a young organization, one that is just now sort of hitting its stride and started to hit having the impact in the industry that you and I remember going through as we came to middle age, that’s very motivational for me. I love doing that part.
My daughter is now in the business for eight years. She has her eighth anniversary of coming to DLC today. And she’s just one of a host of young people who are really, really talented, really, really motivated. And they keep me young. So, I have no less motivation to come in here and try to create great outcomes for all of our stakeholders, our team, our retailer clients, our investor clients. I have no less motivation and no less energy than I did 30 years ago.
Terry Montesi: That’s great. We started our company, started 33 years ago. So, we’re on the same track, and I love somebody who started their business around then saying they’re only halfway. I like your optimism. That’s kind of how I feel. Hey Adam, so how has your company evolved over the years, and what’s worked? What has stayed the same, and where are you going?
Adam Ifshin: I think there are a handful of core things that are part of our culture at its absolute center that have not changed. And then I think there are a huge number of things around that, that sun, if you think about a solar system, that have changed quite dramatically. So what has never changed? We’re entrepreneurial. We are immensely hardworking. The team, to me, is definition of a word my father used a lot, and as you know, my dad was in the business with me for a long time, which is grit.
We don’t not like to lose. We don’t hate to lose. We will not lose. We have come up against some very, very challenging times in the history and the arc of the company, and we have never lost. That doesn’t mean that we haven’t taken our hits here and there just like anybody has. If you’ve done 250, 300 deals, you’re going to take some hits in life. But we have immense determination to succeed. We have tremendous grit. Work ethic is central to the first set of things we look for in people when we think about bringing them on the team. So, all of those things have never changed.
We’re innovative. We’re collaborative. We’re highly entrepreneurial. I think the business has gone through, the industry has gone through these changes over time where entrepreneurship used to be a hundred percent correlated with development. Entrepreneurship meant you were a builder of new malls, new centers, new lifestyle centers, new mixed-use product. And we’ve never been that. We’ve always been, I think, as entrepreneurial as any developer, quote unquote, but we’ve never really been a new developer. We’ve always been a fixer of things where something had gone wrong. So I think those things have stayed the same.
Around us, a lot of things have changed. We started, as many groups do, raising friends and family, high net worth capital. We now almost exclusively raise institutional capital. We’ve formed five new institutional joint ventures in the last year. Those institutional joint ventures give me over $3 billion of buying capacity as we sit here, stand here today. So a lot of things have changed.
Did I ever think I would have an asset management department? I never thought I would have an asset management department. I have a very competent, very talented asset management department. And we’ve had to think about how to remain entrepreneurial and remain innovative and remain contrarian, and at the same time, make a very typical progression from non-institutional capital to institutional capital. That’s one thing that I think has changed dramatically.
I think you would agree with me, in some ways, the industry has come to our area of specialization. In a world with very, very little new development, and we’re going to talk later about what I see in the marketplace today, in a world where the gap between replacement cost and what you can buy existing assets for is wide as at any point in time in our mutual careers, that really, really bodes well for the core competencies that I’ve built on our team. Our best in class skill set is more skewed towards value add, value creation, redevelopment than it is new development.
And that’s really, I think, where the action is at the moment in the industry. The action has moved from mall to lifestyle to open air. And the action has moved from new development to redevelopment and to value creation. And we are seeing that. So I think that those changes actually are benefiting us dramatically right now. There’s no question that’s part of why we’re creating and attracting so much institutional capital. We’ve never lacked for capital, but the plethora of it at this point in time is, I think, a real difference.
And I think it sets us up well to continue to grow. We’ve always been a growth story in the industry, you know that. But I feel highly confident that that growth story will continue because the market dynamics right now really favor the real strengths or the skillset of the team. Value is very in. We’ve always believed in value. We’ve always done… The first anchor tenant deal I ever did was with Walmart, which is kind of crazy to think about, that at 26 and a half, I made my first anchor deal and it was with Walmart, but that is in fact true.
The reality is value is in. The middle-class is definitely under some pressure here after the run-up in inflation and everything we’ve talked about post pandemic. And as a result, we’re in a good spot right now, and I think we’re really looking to see how we can craft win-win solutions between ourselves, our retailer partners. I’ve never seen as much engagement from retailers with landlords in probably 15 years as I see today. And to me, that’s very exciting because, and you know this, because you’ve always been a tenant side guy, it was when the world was about give me a rent reduction to stay, or I’m going to go to this new development over here, or I’m going to close because Amazon’s beating me up, it was less fun to come to work.
I was in the headquarters of a fortune 50 retailer yesterday with their entire real estate team, their head of real estate, their head of capital allocation, etc., and we were talking about ways to do business that we would not have spoken about five, 10, 15 years ago. Can we help them shrink some stores? Can we recapture some of that space and use that space for other uses? Can we densify a site? Parking ratios have changed dramatically. Can we buy some of their real estate that they’ve kept on their books because they are now thinking about capital differently than they used to. So I think there’s more ways to do business with retailers than just leasing them a piece of space that’s vacant. And to me, that’s very exciting.
Terry Montesi: So, you alluded to value, outdoor. Anything else about your investment strategy and the why behind it that you could share?
Adam Ifshin: So, we’ve always been a believer that our biggest strength is as value creator in open air retail. So we’re a hundred percent focused on open air. We’re not a hundred percent focused on value, but we definitely skew towards value. Our biggest tenant relationships are with the Walmarts and the Targets and the Home Depots and the Lowe’s, the wholesale clubs, the big value oriented grocers, and then of course, our friends at Burlington, Ross, TJ and all their concepts, the Five Belows, the Sketchers of the world, the Boot Barns of the world, whomever it may be, and the names from time to time, they change, people come in and out of favor, you know that.
We are very, very focused on value at the moment because we believe that value drives everyday traffic, and value is taking share from, has been taking share for a long time, but is increasingly taking share from other forms of retail. Customers have far less aversion to barbelling their purchases. They could shop luxury and they can shop value in the same trip. Sort of the joke we talk about here is there could be a TJ Max bag and a Verm-X box in the back of the same car. Walmart reported last quarter that they’re doing more business with household incomes over $100,000 than ever in their history. I think, so value is a big part of it.
Fundamentals are very, very good. I don’t have to tell you that, but particularly in value, fundamentals are very good. Occupancies are high. We are resetting rents. We’re going to look at our third year in a row here where re-leasing spreads are double digits. And we count from last rent, not from no rent. So, we have a private company standard for that. So, our investment strategy is really centered around those three or four areas. We have been… I think geographically, we continue to expand westward. We’re in Denver now. We weren’t until very recently. We’re getting close to half a billion dollars of assets in Texas. We are very focused on continuing to grow in places like Texas, in places like Colorado.
But we continue to buy. We bought outside of Boston last year. We bought two deals outside of DC last year. Our bread and butter markets where we have real scale continue to be winners for us. As well as we’re very, very, very bullish on better secondary markets right now. We’ve always been, we’ve always played across, we’ve probably skewed our redevelopment deals to primary markets over the years. We love to buy in primary markets.
It’s very dependent on other people’s cost of capital. We lose a lot in primary markets when other people have a lot of cheap capital, and we win when capital is scarce. But we feel really good about secondary, a lot, not all, but many, many secondary markets right now. And I think you’re seeing institutional capital have a much greater affinity with a good operator to go to a secondary market.
And I think that that’s a big part of what our investment strategy is like right here, right now, not exclusively. When you have the amount of capital to put to work that DLC does, we’re operating, I just came out of an investment committee meeting where we talked about deals in top 10 markets, and in top 10 markets essentially from Colorado to Boston. And we talked about deals in secondary and even tertiary markets. We have two major acquisitions under contract as I’m talking to you here today in late March. One is in Metro New York and one is in a secondary Sunbelt city. And we’re very comfortable doing both at the same time.
Terry Montesi: Well, you and I, ICSC Trustees, lived through the pandemic, and we’re now in a pretty well post-pandemic era. We saw a lot happen during the pandemic, and a lot of changes in consumer behavior and retailer innovation. What’s your view on kind of what’s happened in the last few years and what do you see happening in the retail business the next few years?
Adam Ifshin: Well, first of all, the pandemic thing was fascinating, and you and I would occasionally have a remote drink together in the pandemic on these new toys like Zoom and Teams. I think the outcome of the pandemic for physical place retail is one of the most fascinating outcomes in American business that I have ever seen in my entire life.
I remember trying and failing to go to sleep in late March 2020, five years ago. Is anyone going to pay rent? Is anybody going to be open? I literally got up in the middle of the night virtually shaking one night, about this day five years ago, like that’s it. I’ve fought and I fought Amazon to a standstill for a decade. As you know, I led a lot of the industry’s effort in Washington to level the playing field with Amazon and others. I’m like, they’re going to win. They’re going to win.
And then this fascinating thing happens. A friend of mine called me up. He said, I have a box with one tomato in it. I’m like, what are you talking about? Then he goes, well, I tried to order $400 in groceries to feed my family from Amazon, and I got a box with one tomato in it. So I went to my wife, Alicia, I said, go down in the wine cellar, get the best bottle you want to drink. We’re going to survive.
And it’s fascinating. It’s fascinating. You’ve got everybody wanted to go back to the store. Everyone wanted to go back to the lifestyle center. People even wanted to go back to the malls. And by the way, it hasn’t worn off. It wasn’t like, remember there was revenge travel, and now travel, leisure travel’s off a little bit? It hasn’t worn off. Our traffic rebounded in our centers where we could track it pretty quickly. And then it has just gone straight up since.
Terry Montesi: And Adam, as you were saying that, it made me think about the Kindle and the bookstore. I remember I had Borders and Barnes in a number of centers a few years ago, and I thought, oh no, book business is dead. Dang, that’s a lot of pretty cool retailers that we like at our centers. They’re going to all be gone, and now Barnes and Noble is opening 40, 50 stores a year again. And I know nobody buying a Kindle.
Adam Ifshin: Nobody buying Kindle. How great is that store though? I know you’ve been in them. We’re about to build one. I mean, just a total sidebar, it’s smaller, it’s architecturally really great, it’s easily shoppable, it’s very inviting. But to your broader question, the more consumer behavior changed, the more it stayed the same. People want to be in stores. I think value was a part of that. Because it’s hard to shop value apparel online. It’s got a huge high return ratio. It’s very hard for the retailer, the online retailer to make money.
Terry Montesi: Terrible for the environment.
Adam Ifshin: Terrible for the environment. The five billion pounds of stuff that Amazon threw away a few years ago during holiday season alone. Look, you know this, I have a son who’s been in e-commerce, and so it’s this incredible juxtaposition. I’m in physical presence retail and he’s in e-commerce.
Terry Montesi: Y’all are hedged.
Adam Ifshin: It is super hard to impossible to make money – you’re right, I wish – in e-commerce. I think, one, we’re overweight one of those. Fortunately, at the moment, I think we’re overweight the right one. So, the retailers proved to be extraordinarily adaptable. Target fulfills 95% of their online orders in the store.
Terry Montesi: Yeah. We use that a lot.
Adam Ifshin: The store turned out to be the savior for omnichannel. It is the tip of the spear in the last mile. And if you are a retailer who wants to make money where someone orders, actually interfaces with you and orders on their phone, the way in which you make money is you get them to go to the store. You know all the data; for every hundred dollars they order online, if they pick it up in store, they spend another $167 on average, according to ICSC’s own research and some of the halo reports that we were involved in. There’s no question to me.
And by the way, the good retailers have made the store more inviting. They’ve made the store a better place. I look at, geez, we’re one of the top 20 landlords for TJ and all their concepts. There isn’t a month that goes by where we don’t get a notice that they’re remodeling one of those stores. Or you go in, we just did a deal, we have a Nike store in Colorado, and you look at how inviting is that store? Like, I just find that the good retailers, even people like Five Below, look at how great the store is. They’re not that old of a retailer and they’re in redoing their older legacy stores already.
I think to some degree, the good merchants won, whether they were in value or luxury, the good merchants won. And what are they doing? They’re doing what good retailers always did. They are staying close to their customer. They’re using technology to get even more data and closer, and so they can serve their customer better. And they are merchandising their stores, and they are modernizing, and they are making their stores a place where people want to go. And guess what? When they do it, they win.
Terry Montesi: Anything else to add? My next question was physical retail, e-commerce, working together. What’s your view of omnichannel and the future role of brick and mortar? Do you think you covered it, or do you have anything else to add?
Adam Ifshin: The only thing I will tell you is based on what I hear from a bunch of retailers, big, I think the store is only going to become more a part of the omnichannel experience, not less. I think that AI is going to enable the retailers to use the space, excuse me, even more productively and in better concert with the technology. And so I think the future is only omnichannel. I think pure play e-commerce faces a very, very difficult road to hoe here. And I think that that means that the store is going to become not less important, but more important. So, I think that’s a big part of it.
Terry Montesi: Hey, something recently hit the news that can be a little concerning for some – retail bankruptcies and store closures have flipped as they’re back in the headlines, because in ’24, closures actually eclipsed openings, whereas the prior couple of years, it had flipped to where there were more openings than closures. Is this just a moment in a cycle, or do you think there’s a bigger trend and story there?
Adam Ifshin: I don’t think there’s a bigger trend and story. I don’t think I’m talking our own book. I have always been a believer in the concept that an Austrian economist, Joseph Schumpeter, hypothesized right after World War II, which is the concept of creative destruction. Chains will come and go. Retail concepts will come and go.
The American consumer is the greatest engine of the greatest capitalist economy in the history of the world, that is also like any consumer. It wants what it wants when it wants it, and it preserves its right to change its mind. And it wants different things at different times. So if you do not change and adapt as a retailer, then you are likely to face a point in time where you may very well go away. And that’s not a new phenomenon, and I believe that that phenomenon is going to continue.
Terry Montesi: And in fact, it’s healthy.
Adam Ifshin: Oh, I think it’s completely healthy. I think you’re 110% right, Terry. The reality is that, and we see this all the time, we can very often replace a retailer who’s really struggling, who might be doing $100 or $125 a foot with someone who’s going to do $400 or 500 a foot. And that’s just better for the consumer. It’s better for the asset.
Now, as it relates to this current sort of little crop, Joanne’s, Big Lots, Party City, there’s some others, a handful of other stores, they all, to me, fall into a very clear category. This is all their second trip to bankruptcy. They all did a bankruptcy in and around the pandemic that was a kick-the-can bankruptcy, and they should have gone away then, but for the fact that nobody wanted to bite the bullet in the pandemic. Now, they’re going away now. I don’t think it’s a big deal. When Joanne’s filed for bankruptcy, my COO and partner, Chris Ressa, who you know well, and Adam Greenberg, our head of leasing, called me up and said, don’t be alarmed, we bought two full fare tickets to go see the following XYZ retailer. That was four weeks ago. We have three signed leases and five deals through real estate committee at an average spread of 60% to last rent.
Terry Montesi: That ain’t bad.
Adam Ifshin: That ain’t bad. Now we got to get those deals done. We’re going to have to spend some money to put those tenants in possession. But in the long run, the replacement tenants should do $400 a foot, average, 350, 400 worst case.
Terry Montesi: Adam, I think that’s a great example of, when those things are announced, there’s fear in the system and people say, ooh, what’s going to happen? And you’ve just answered the question at least partially, and as it relates to your portfolio, what’s going to happen, I’m going to replace them with much more productive tenants at much higher rent.
Adam Ifshin: Well, and look, we’ve always sort of skewed towards favoring, in the boxes, older assets with low rents, and it’s just a great hedge.
Terry Montesi: So, the last few years during COVID and beyond, outdoor retail in the suburbs has been a big winner. Do you see that continuing and do you have an idea of what else other than COVID and people wanting to be outdoors has been driving that growth?
Adam Ifshin: Yeah, I don’t think it was just about… I actually think the pandemic at the end of the day may have tipped some people who were still going to retail with roofs to go to places that were open air. But by and large, I think that trend was already underway and I think maybe it got accelerated a little bit.
But the reality is much like the consumer, what the consumer wants in a store changes over time, I think the way that the consumer wants to shop has also changed. And I think that it’s different in different markets, but she doesn’t love parking decks, my friend, as a general construct. The consumer’s, by and large, she, her, and she doesn’t like parking decks for whatever reason, safety, security, real or imagined. Speed matters. People feel that they are under immense time pressure. I think that living on your phone and social media add to that. And I think people want speed and access and easy in and out is the undeniable ace in the hole of open-air retail, and that’s what she wants.
I think also from the retailer’s perspective, and we have this conversation with retailers all the time, and I’m sure you do too, it’s much easier to use a store that’s in an open air center that has a loading dock in the back and a door for the customer in the front and the stockroom is attached to the selling space. It is much easier to do last mile fulfillment out of that than it is to ship stuff out of your mall based store. It’s just easier. Your stock room in a mall frequently, and a lot of consumers don’t recognize this, you know this better than anybody, may not be contiguous or adjacent to your space, particularly if you’re a sneaker retailer or a shoe retailer or certain types of apparel retailers. So, I think that it’s undeniable that the way the consumer wants to shop and the way the retailer wants to use the space is skewing to favor open air now over malls. There’s no question about it.
And malls, as you know as well as anyone, are hard to repurpose. It’s expensive, hard to do. There’s legislative and municipal entitlements to work through. There’s REAs and other counterparties to deal with. It’s complicated. Open air is not uncomplicated, but it is somewhat simpler. So, it can adapt faster, I think, to some degree to what the consumer wants and to how the retailer wants to serve that consumer. So, I think that continues to favor it.
I don’t think it’s about the pandemic at all anymore. It’s a lot about the consumer’s time. What the pandemic did do, Terry, was it changed consumers’ behavior around how they want to spend their time I think pretty dramatically. They do not want to commute. It’s very hard if they have children to figure out childcare. And as a result, they want convenience. And I think that open air right now is where they see convenience.
Terry Montesi: And even if work from home settles in and only averages say one day a week post COVID, whereas it was zero days a week before, that’s a big shift, that’s a big shift to suburban shopping centers.
Adam Ifshin: Yeah. I have spent so much time looking at that. The reality is even with all of these new CEOs, each wave press of CEOs, Amazon, JP Morgan Chase, we still can’t seem to break like low 60%, at least in most major metros. And I was having a conversation with another CEO who will remain nameless to protect the innocent or perhaps the not so innocent, who you happen to know well, and he’s like, yeah, we’re back in the office five days a week. I said, Fridays? He said, ah, who will pay anybody to come and work on Friday, physical impossibility. So, I think that some form of hybrid sub rosa or explicit is here to stay.
Terry Montesi: Yeah. I’m with you on that. Hey, so I’m going to shift to macro. I know you’re a big student of macro economics, and I want to get your view on interest rates, inflation, and what their impact on retail real estate and the investing and developing in ’25, ’26 is going to be.
Adam Ifshin: So, I’ve been in the camp of we’re probably closer to interest rate equilibrium than most people really want to have to recognize. Some people call that higher for longer. But the reality is that the financial markets, the fixed income financial markets have done exactly what they’re supposed to do here. They reacted to a significant spike in inflation that proved not to be transitory. They worked to settle that inflation rate down, perhaps not at a level everyone would like, but at a level that may be tolerable.
But as a result, there’s going to be a spread between that rate and what the fed calls short term at the window rates, call it 100, 125 basis points. Well, I think the most important thing that’s happened here is that lending spreads have come in fairly dramatically. We were faced with paying in mid to late 2023 anywhere from 275 to 350 basis points over an applicable base rate, whether that be SOFR, whether that be fed funds rate or whether that be 10 year treasuries. Now we’re looking at a market where, depending on leverage, you’re probably in the 150 to 225 range.
So, while base rates have not come down as much as people have liked, effective borrowing rates have come in, and the pool of lenders is… and I expect all of that to continue. I don’t think there’s much more spread tightening to go here, but I think that the market is reasonably liquid for deals that are well constructed to get done. I do not expect that inflation will fall dramatically further here in the absence of some exogenous force that causes a recession in the United States. We have low 4% unemployment. We have very low immigration. Wages remain under pressure to the upside because of those dynamics. We have an aging workforce. All of those things contribute for me to believe that inflation is more likely to run two and a half to three than it is two to two and a half.
Now the one wide regard for both of those obviously is tariffs. If the tariffs prove to be a short-term stick on the part of the administration to try and reshape trade imbalances, then it’ll be sort of a six to nine month thing. And it’ll go away. If they stick, I have a very different view that’s pretty negative.
As an economist by training, tariffs generally are aggressive tax on the middle class, and I find absolutely no rational reason why when the American consumer has not only carried the American economy, but it has carried the global economy out of the pandemic on its shoulders by itself, 7 billion people in the world, 330 million Americans have carried the global economy on its shoulders. Why in God’s name would you cut their knees out from under them? That I don’t understand. And that could be a real problem. But absent that, I have a fairly optimistic view.
Terry Montesi: Okay. Thank you. I’m going to switch to supply and demand. You’ve said and we’ve talked about extensively how since ’09, virtually nothing, no shop space has been built. So, we’ve gone from back in ’99 to ’09, substantially, I think in this country, overbuilt in retail business to underbuilt, which has created a strong landlord market. You mentioned rent spreads, etc., a lot of upward pressure on rents. As we move into ’25 and ’26, are you seeing any signs that that’s going to change? And what’s your forecast the next two or three years for rent pressure, supply, demand, etc. as you mentioned, basic retail real estate economics?
Adam Ifshin: I think that for the first time in a very long time, we are entering an extended period of time where the landlord, on a macro basis, has the upper hand vis-a-vis the tenant. We have seen for a huge swath of the middle of your and my respective careers, the tenant had the upper hand. I think you would agree.
Terry Montesi: Oh, yeah.
Adam Ifshin: There is no question now that the tenant no longer has the upper hand with the rare exception of a handful of tenants. And by and large, it is a landlord’s market. It will continue to be so for the foreseeable future. I do not believe that you can turn on a spigot here after 15 years of no new development, essentially, and suddenly have new development. As you know, it takes a long time. You have to line up the entitlements. You have to line up the tax increment subsidies because no deal works now without them at all.
Terry Montesi: Yeah, I’m living it.
Adam Ifshin: And by the way, again, there’s been significant construction inflation. The tariffs are threatening to drive construction material costs up another 20%. Immigration policy’s already driven labor costs up another 10 to 12%.
So, unless I missed my boat, I am not aware of too many box retailers who are prepared to pay $35 and $40 in rent, plus call it $8 to $15 in net charges. And to get a new box deal to pencil, if you tell me you are doing it for less than $30, you must own the land for free, the mayor or the county executive must be giving you a massive TIF at a very low tax exempt interest rate, and I don’t know, maybe your brother is your contractor. But it’s very hard to make the numbers work, even $30.
Terry Montesi: Yeah, and I can give you some input on that because we are, we’re building, we’ve got three ground up deals working. They are boxes, but we’re not building just boxes. So, we’re building boxes with a decent amount of F and B and shop space to go along with it that is subsidizing the boxes. They’re paying mid to high twenties. The shop space and F and B guys are paying high forties to high fifties. And for that reason, we can make the mid to high twenties deals work for the boxes.
But man, you mentioned landlord market, the co-tenancy issues, the ongoing and opening co-tenancy, the exclusives, everything that used to be a nightmare for us, some of which you inherit when you buy deals, has changed dramatically. The landlord, it’s just way more landlord friendly, no question.
And even I see, I know our friend at Vestar, they’re building a few things, we’re building a few things. But if you just look around, Herb White’s, I’ve talked to him, they’re building a few things, but if you just look around and compare that to the number that you and I remember that were under construction in ’99, 2002, ’04, ’06, ’08, it’s a fraction. And so, yeah, I think supply will start to bleed in, but it would be at least years before it would ever go back to that fever pitch. And I just don’t think it does, personally.
Adam Ifshin: Well, and also, in many places where land is scarce, the land value for other forms of development has changed dramatically.
Terry Montesi: Oh yeah. Multifamily in particular.
Adam Ifshin: Whether that’s a willingness, well, first of all, when multifamily got to a place where you could build stick on podium, and you could generate 40, 50 units without steel and concrete, 40, 50 units an acre, all of a sudden, they could outpay. And by the way, here in Metro New York and in other top markets, there are a lot of places where the industrial guys could pay more for the dirt.
Terry Montesi: I know industrial guys here, I was at a Dallas Real Estate Club meeting last week, paying 20 plus in Dallas Fort Worth, in Texas.
Adam Ifshin: Oh yeah, rents in North Jersey are mid to high 20s net with 3% annual bumps, 80% land coverage, and by the way, guys are getting keyed, guys are getting keyed for outdoor parking. So, there’s a lot more competition for the dirt. And even the people who are in the ground now, almost every one of them that I’ve spoken to is not doing a pure market rate deal. They are doing a deal where either they land bank the land a long time ago, the municipality’s prepared to give them incentives to cover the off sites at a big chunk of their infrastructure, whatever it may be, there is increasingly a portion of the capital stack that is not market rate…
That’s fine, but there just aren’t that many municipalities that are going to have the guts or the juice to pay the squeeze. And as a result, I think you’re right. It’s going to be episodic. Again, I was with a fortune 50 retailer yesterday, Terry. He said, yeah, we’re doing new stores, 15. 15. This chain that used to open a hundred a year. And I was with another retailer in January, also top fortune 25.
Terry Montesi: Switching directions a little, AI. How do you see that impacting commercial real estate and the retail real estate business? And how are you guys using it now and how do you see using it in the future?
Adam Ifshin: So really good question. I’m going to give you three short answers. We are just starting to scrape the surface of using it. What we’re learning is we need to get better about data to be able to really use it well, but we see already that it’s going to be hugely impactful in automating tasks that are currently done that are mundane and no one really enjoys doing them, and it’s going to be a game changer in all of those areas.
For retail real estate, I think the thing it’s going to do the most is, I think it’s going to give retailers the ability to do an even better job for the consumer, and I think that’s going to bode really, really well for us. I think that means that they will become more efficient, they will use space more efficiently, they will do more sales, and they will be able to use AI to expand their profit margins and their sales, top and bottom line. And I think that’s the area that most people who are in the real estate part of retail don’t think about that much. But at the end of the day, the better the health of the retailer, the more sales they do, the more profit they make, the more rent they can pay. So, I think that’s the most important part.
Terry Montesi: You just imagine inventory management, ability to find goods in every store in the country and ship them out quickly, it’s all the different kinds of things that AI should be able to do, like you say, to make them better, more efficient. That’s very exciting.
Adam Ifshin: I think to me, that is the single biggest one. I think it’s going to help in our business, and it’s a broader subject for the time we have today, Terry, I think it’s going to help with things like design and permitting and plans and all that. I think over time, it will have the same kind of general impact in productivity that it does in other parts of the economy and for businesses, but I think the real big one is that retailer and consumer interaction.
Terry Montesi: Great. Last question, I’m going to end by asking you to put on your futurist hat and look into the future. Next five, seven, ten years, what’s one or two major shifts or trends that you see happening in the retail or retail real estate business?
Adam Ifshin: Well, I think the next five to seven years is going to define where the bulk of apparel shopping gets done. There are a number of department store chains that are really going to need to figure themselves out, and that will really determine how much apparel shopping gets done in malls versus open air versus lifestyle versus outlet. And I think that that is going to have profound implications for the investability of different types of retail real estate. That’s number one.
The other one I think is that I think we have a good future in terms of the interest on the part of institutional capital to invest in retail real estate. We have been in the wilderness amongst the institutional investors for so many years. When you and I came into business, typically 20 to 25% of their portfolios was invested in, their real estate portfolios were invested in retail real estate. That number got down to sort of high, mid to high single digits in call it 2018, 2019, 2020.
I think for a variety of reasons, some of them having to do with the investability of office, that many of them will, they won’t go back to 20 or 25%, but they may go back to 15%. And that I think bodes really, really well for our industry. Having institutional capital want to come particularly to the open air space in scale I think is a very, very promising future over the next five to seven years.
Terry Montesi: I think you’re right. Last question, is there anything you’d like to ask me or say that you haven’t said?
Adam Ifshin: Well, I’m still trying to figure out who helps you because you’re singularly one of the people in the industry who is better dressed than me, but I’ll save that for a private time and a glass of wine. I think the one that I want to ask you about is you have been strident, with good reason, in believing that there is still the ability to do new development. And you’re now three, four years into some of this. Do you feel as good as when you started those projects or better based on what you’ve seen over the last two, three years?
Terry Montesi: Well, we haven’t built anything out of the ground other than multifamily in the last few years, but we have three that we’re investing heavily in. And I would say, I’m cautiously optimistic. It’s hard, but I like being a contrarian. When it’s really hard, when the capital is hard to find, when the retailers don’t have many choices, it’s a very, very interesting and historically has been a period where you could have a shot at some super normal profits. So, it’s hard, but I think it’s going to turn out to be worth it.
But like I mentioned, there’s a deal in Northwest Houston we’re working on, Adam. We have 48 LOIs. We don’t close on the land until later this year. We have boxes competing for spaces and tenants competing for spaces. And it’s just if you can find good real estate at good prices, and you mentioned it, in a community that will support you, retail is still viewed as a real amenity. All three of these communities, all three ground up deals will have some sort of public private partnership, and they all want retail as amenity in their community.
And so, your word episodic, yes, I think retail will be built primarily in communities that really feel like they need and want and are willing to subsidize retail as amenity. But that’s what we do. We’re in the retail as amenity, special retail, building cool places business. And so, it’s hard. And that’s why I’m with you.
I don’t think the supply the next few years will roar back and cause, I don’t think it even causes it to get to equilibrium. I think you’re going to have a supply demand imbalance to the favor of the landlord for a number of years, but that’s also going to be a really interesting time to build some ground up new development because there’s just so little and there’s a lot of demand.
Adam Ifshin: Well, for all you fans out there, you all need to go to the church of Terry where he will be preaching that every Sunday and at every board meeting from here on out.
Terry Montesi: You got it. Well, hey, Adam, thank you so much for joining us today. It’s been really fun and delightful. And as I expected, you had some very, very sharp and wise observations my listeners are going to appreciate. So, you take care of yourself, and I’ll see you in a few weeks in Vegas.
Adam Ifshin: I’m looking forward to it. Thanks for having me. Best to Allison.
Terry Montesi: Thanks, man. Same, back at you.
Well, that’s a wrap on this episode of Leaning In. Thanks to Adam for sharing his valuable insights on the evolving retail real estate and investment landscape and what’s ahead for our industry. If you enjoyed today’s conversation, don’t miss out on our past episodes, including my recent discussions with real estate leaders from Macy’s and Dillard’s. To stay connected, to hear more top voices in commercial real estate, visit us at trademarkproperty.com. Be sure and subscribe so you never miss an episode of Leaning In. Thanks for tuning in. See you next time.