Podcasts

The CRE Retail Puzzle with Ken Bernstein (Part 2)

In the second half of this discussion, Trademark’s CEO, Terry Montesi, and his good friend Ken Bernstein, President and CEO of Acadia Realty Trust, discuss investment strategy and how it, along with urban and suburban real estate markets, have transformed during the pandemic. The two talk about omnichannel retailing’s dependency on brick-and-mortar, and how retail real estate supply and demand is shifting as we ease out of the pandemic.

Terry and Ken share advice for young professionals and why they see retail as the “New York” of the real estate industry: If you can make it there, you can make it anywhere!

Follow “Leaning In” to hear future discussions about mixed-use and retail real estate every second and fourth Wednesday of the month.

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TRANSCRIPT

Terry Montesi: On today’s episode, I’m back with Ken Bernstein, president and CEO of Acadia Realty Trust. We wrap up our conversation on the real estate investment industry and how it’s hard to adapt due to the pandemic. We examine retail industry trends, and we discuss his views on e-commerce and Omnichannel. He also speaks to his vision for the future of bricks-and-mortar real estate and his plans for the future of Acadia. Thanks for listening.

Big issue – you’re a big thinker – what key retail trends do you see as the real influential ones for brick-and-mortar the next few years, post-COVID, post this reset with e-commerce growth, etc.? What are you focused on?

Ken Bernstein: So Omnichannel is certainly going to be a critical piece of this, and we’ve already covered that. What I’m going to be watching for additionally is how are retailers avoiding the go broke last business models of years past as well as the oversupply and ubiquity of items because if the consumer thinks, you know what, I can buy this anywhere and the price is always going to go down, well, that was unfortunately the experience that we saw pre-COVID. Now, if anything, the consumer, because of supply chain issues, because of a variety of things, including pent up demand, there is that sense you better buy it today because you may not get it tomorrow. And if retailers can focus more on curation, more on scarcity, and more on maintaining a growing top line but also a bottom line, that could lead to some very positive trends for us as landlords. Again, we’re oversupplied. So that doesn’t mean every square foot in the United States rebounds as retail. Some of it has to get demolished and go to a new, better, and higher use. But for those retailers who can curate what they’re selling, who can maintain that scarcity demand, what we have seen in multiple different trends is people are willing to pay up for that special watch, those special sneakers, that special dining experience, and a variety of other things. And that’s a trend – it’s still early days – but so far, I’m seeing certain retailers do a very good job of that. Then the other side with Omnichannel is there will be those providers of everything you could possibly want, whether it’s Amazon or Target or Walmart, and they’re going to be very careful about pricing, very careful about execution. And for those folks, it’s about just death execution in Omnichannel world.

Montesi: Yeah, I knew you’d mention sneakers before we got off of here. So, you do have some awfully snappy sneakers, by the way.

Bernstein: I credit my 22-year-old with that.

Montesi: You mentioned ubiquity, over supply, go broke last, and as you said that, I think about almost exclusively but certainly mostly the full price, sort of mid-price fashion business that filled a lot of our lifestyle centers and streets, from four to twenty years ago. As you look forward and think about that, and there’s still some rationalizing and fleet trimming to be done there, in my opinion, but as you think about that, and then you think about the shopping center of the future or the street of the future, and its mix, what do you see happening?

Bernstein: Tree trimming or rationalization is absolutely a part of it. And I’d say we are working our way through that in the different components. The department store of the future and those department stores that make it to the future are going to look very different than the department stores of the past. Some are already gone, right? There’s no more Lord & Taylor, there’s no more variety of other departments stores. So that channel and the ability for brands to sell through that channel as their primary source of revenue is going to change dramatically. And then similarly, those retailers who used to hang around adjacent to those department stores are also looking for alternatives. So first of all, some of that ubiquity is going away in a good old fashioned Darwinian way. And then what I’d say is for those retailers who make it to the other side, they probably will have fewer stores than in prior generations. Some because they were digitally native and started online and now will open 1-300 stores, but not a thousand. And then within any given market, the notion that in New York City, you could have five or six different areas that attract all the same retailers, it’s probably three or two. So, you could argue where uptown it’s either, it could be Fifth and Madison, it’s not going to be Third. And it’ll be SoHo and perhaps one other area, Williamsburg or something like that. And the other areas are going to serve the local needs of the millions of people who live there, and that’s fine because there’s millions of people who live there.

Montesi: Yeah. So, like Bleecker won’t need a Cucinelli and a Ralph Lauren, but they’ll have local stores on it again with lower rents in all likelihood?

Bernstein: Yeah. And I’m not going to comment specifically on one street and have one of my friends call me up and say no, I’m wrong.

Montesi: I’m the one that did that. I can do that.

Bernstein: You can do that. So, they’re going to pick their spots. Retailers already have shown us, we have it at Armitage Avenue in Chicago, we’re seeing it in Rush and Walton in Chicago and Soho, etc. It’s clear where they’re going to cluster and that’s going to be the areas for those kinds of retailers that are going to be most exciting. And then the others will meet the local needs. And I think that’s fine. I think that’s how it plays out.

Montesi: Moving on to other uses, mixed-use, you and I have talked about this at ICSE trustee meetings, and so many of our peers, including ourselves – we just got in the multifamily business – are investing in developing other uses and densifying our retail real estate, buying real estate with the- we looked at one with a business plan to densify and right size or shrink the retail. What do you think of that? And is that in your plans?

Bernstein: So, a few things. One, the grass is always greener on the other side. We built up a very nice self-storage portfolio about 15 years ago and spun it off. We’ve built office buildings and ReSi, etc. And my hats off to the experts who do those things. There is what I refer to as a dumb tax every time you enter into something new. So just be careful and be prepared to pay a dumb tax if it’s not an area that you have a real core competency in. That being said, best and highest use for some of the assets that you and I already own or might buy have to include other components. And there we can debate whether we sell off that portion to a residential developer, or we build it ourselves, whether we underwrite it to the same yield that one of our hotel peers might be willing to develop to because they know exactly what they’re doing. I’d caution against that, or just invite them in. And I think there’s always a healthy debate about controlling everything and what cost is associated with that. We are partnering to do an industrial development where best and highest use is industrial. We have done a bunch of self-storage development on top of urban shopping centers, because that was best.  But again, we brought in a partner. And in other cases, on residential, we’ve done it ourselves. The world changes. I think we need to be prepared to change with it, but again, with a big dose of humility – we’re really good at some things, and the things that we are not, we should find people who are really good at them.

Montesi: I think I’m kind of done with my questions. What do you wish I’d asked you? What’s a good question I didn’t ask you?

Bernstein: And your questions have been good. I think rather than that, let me ask you a couple of questions. So, you’re active in repositioning of a bunch of enclosed assets. What are you seeing in terms of tenant demand to get in them versus tenants threatening to leave to want to go to open air? Do you think the notion that tenants are exiting enclosed to move to suburban shopping centers, is that a trend that’s going to play out or do you think that’s an oversimplified statement?

Montesi: No, I think it’s sort of both. We have some properties that we are redeveloping and operating that are benefiting from tenants leaving a nearby mall. And we are both redeveloping some malls, and one example, North Point in Alpharetta, suburban Atlanta. I think there are fewer retailers and fewer expansion retailers that want to focus on malls and be in malls. And so, I think many or most malls wish they were smaller, and they need to be smaller, and they are densification and diversification opportunities. So almost everyone we’re working on, we are planning to demo some portion of the retail space and consolidate the retailers into a smaller amount of shop space and activate, use the portion that was demoed, to bring other uses and bring customers at different hours and of different types to that place to make what remains viable and right sized. And it could arguably be something that only lasts for 15 or 20 years and then more is demoed. Many of these properties, several of them, have successful department stores, but maybe there was four and there only needs to be two, because out of the four, only two are successful. And so, it’s really editing, it’s thoughtful right sizing and densification. And I do think that many of these malls in good locations, like Alpharetta is really good real estate, it is a really good trade area, not all the malls in the country are in trade areas nearly that strong, but many of them are just such great real estate that when you create real true mixed-use places, places where people live, work, hangout, places that truly become walkable, amenitized districts, I think that brings a whole new brand and a whole new mindset to the consumer that is thinking about where they spend their time and their dollars. That’s kind of what we’re thinking, and our view is that most malls can, if they stay anything like they are, and all you do is make them prettier versions of their existing self, I think that’s a folly. I don’t think that’s a sustainable business model.

Bernstein: I got it. So, it sounds to me like the trend of the exodus is real unless Trademark is redeveloping it, in which case you’re going to edit it, create the scarcity, and win on both sides. I like that.

Montesi: Well, but it’s not that you’re going to necessarily be able to attract or keep the tenants that have made the decision that they want to be in outdoor lifestyle, it is that there are a number of tenants, it’s just a smaller number, that still are okay in enclosed malls or actually still want to be in enclosed malls. Like in Alpharetta, we’re likely to have two customers, like one customer of say 80% of the customer indoor might be very different than the customers outdoors. So, you may have only a 20-25% overlap. But it’s districting not much different than in New York City where you’ll have one district where a certain people are hanging out and then you walk a few blocks and there’s a whole different ethos and vibe and personality to that district. I see that happening. Does that make sense to you?

Bernstein: I have another question. You and I are both parents now of young professionals. Let’s talk about what advice, if any, for young real estate professionals that are listening to this in terms of getting into the retail component or the retail mixed-use component, if one of your kids was to say, “Hey, dad, I’m thinking of doing this,” what would your advice to them be? And I’ll have to give you my answer as well.

Montesi: Great question. I think it’s a really dynamic time, and I’ve always been a little bit of a contrarian. So, I think it’s a really interesting time to enter into the retail mixed-use side of the business. Retail only side of the business, a little less interesting to me, but in the sort of retail mix-use, meaning either new mixed-use that has retail as sort of amenity and ground floor activation, I believe in those projects, or great retail centers that control A locations in A markets and evolving those over time, I love that business. And so, I would just say it’s really more the mixed-use business. It’s really more the evaluating what each site needs to have to be vibrant and sustainable. I think that’s a very interesting business. What do you say?

Bernstein: I’ll see you and raise you. I would tell young professionals that retail is the New York of the real estate industry, meaning if you can make it there, you can make it anywhere.

Montesi: I love that. You’ve given me two good ones today.

Bernstein: Two of our YPO friends, ICSE friends have gone from being decades long retail CEOs – one to now run one of the major residential REITs and the other to run Blackstone’s Industrial – and while I’m fans of both of them, so I’m sure they could have done that either way-

Montesi: And one to run WeWork.

Bernstein: That too. They learned something rising up the ranks in retail, and I think it’s not just a coincidence. I think for young professionals, the discipline that you learn from understanding how our tenants work, how municipalities work, you put all that together, and if you can make it there as you grow up the ranks and the world evolves you can make it anywhere.

Montesi: Yeah, I also said like many people say, boy, retail’s the hardest of all the real estate food groups. And boy, I know you and I, neither of us would give them much of an argument.

Bernstein: Absolutely, but I wouldn’t discourage them either.

Montesi: I’m with you there. So, thanks to my friend Ken Bernstein for visiting with us on Leaning In today. And Ken, I look forward to seeing you in person here very soon. Take care of yourself.

Bernstein: I can’t wait, take care. Bye-bye.

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