Podcasts

The Economics of Brick-and-Mortar Retail with Jeffrey Bayer (Part 2)

In part two of this discussion, CEO Terry Montesi and his friend Jeffrey Bayer, CEO of Bayer Ventures and Founder of Bayer Properties, talk about how oversupplied retail impacts mixed-use development in the U.S. They add how recent trends, innovations and technologies influence future brick-and-mortar retail expectations.

Jeffrey wraps up the conversation sharing his current projects, including his work with his daughter’s company at Dallas’ Katy Trail.Stay tuned to the end where Jeffrey shares additional thoughts about the future of retail and suburbanization.

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: This is Terry Montesi, CEO of Trademark Property Company. Welcome back to Trademark Property Company’s podcast Leaning In. This is the second part of an episode, and you can find part one on the podcast page. Thank you for tuning in.

On today’s episode, I conclude my conversation with my friend Jeffrey Bayer of Bayer Ventures. We discuss his thoughts on retail over supply in the US, the most significant change agents needed in our industry, and his perspective on the future of brick-and-mortar retail. He also talks about his current real estate projects, which include a new endeavor in Dallas.

You and I discussed that retail is oversupplied in the US, and this is one reason you lost interest in developing more retail projects. Give me your thoughts on that, what effect that might have on our business, the business you used to be very active, in going forward.

Jeffrey Bayer: Well, it’s not that I lost interest, it’s that as you retire, you don’t have an army to develop what product that requires an army. You know that. It takes disciplines of all types. When you no longer have that infrastructure, you’re not able to. And so, it’s not that I lost interest, it’s just that it’s just not relevant in my life right now.

Montesi: Yeah. But we have discussed the oversupply and how that really impacts the retail development business.

Bayer: Well, to me, we will always have trends, correct? Nothing’s forever. And I read an article yesterday that the malls are dead forever. I don’t believe the malls are dead forever. What do we have – 1,000, 1,100 of them?

Montesi: I think it’s probably more like 1,000 – 950 now. Another one bites the dust every few weeks.

Bayer: But one of the, I think, changes that are taking place – and I think I always thought it was going to take place, and I’ll tell you what I mean – the pandemic, I’m sure, accelerated the older millennials leaving the heavily urbanized cities to move somewhere else.

Montesi: From the suburbs or smaller towns.

Bayer: Smaller towns. I felt for the last, I don’t know, five, six, seven years, how were millennials going to have children and how are they going to educate them? Because unfortunately, I think it’s true to say that our urban core education systems are not good. They’re not getting better. So, you had these very intelligent, becoming wealthy, older millennials that were going to be forced to leave, because not everyone can afford or wants to educate their children in private schools. As they grew their households, could they afford to stay in Boston, New York, and pay $2-3,000 a square foot to accommodate their sizes? So, they’re forced to move. Companies are moving. And those people are moving to suburban areas where most of the good malls, or I’d say many of them, are located. And I think this is an opportunity for those malls to do some recreating of themselves, and they have a cohort group that’s going to be moving into those neighborhoods that is probably as wealthy as any generation that we’ve had. So, I don’t see the great malls or the good. I went into North Park in Dallas Saturday, spent two and a half hours just walking around, and what I saw was truly amazing. As to who the shopper was, I saw a lot of young people, and it was packed, and they were carrying bags, and they were not all shopping the better brands. They were up on the top floor where there’s more moderate pricing. So, I couldn’t begin to tell you, you may know what the sales-who knows with the pandemic, but where is it headed? And I see that mall being very viable going forward, it was packed. The older millennials are moving to the suburbs, many of them are for the reasons we’ve discussed. I’m sure some of those malls that you’re working on, as you said, they have too much GLA for retail.

Montesi: I’m working on North Point Mall in Alpharetta, which Avalon hit hard. But it’s still great real estate in a great suburb in this country. I think it will survive, but in a new form. And even, like you mentioned, these malls that are in good suburbs around this country, I think many probably will survive, but I don’t believe many will thrive in their current form. They’ll have to transform to thrive.

Bayer: And I believe there’s another trend – I haven’t tested this out on many people – but I know at our ICSE Trustee meetings, as we sat and listened to the e-commerce industry and the havoc that it was reaping on our industry, I’ve constantly thought for the last couple of years with the shrinking of middle-class America, and I think we have to all probably acknowledge that it has happened, and the pandemic, I think, has screamed out to us that there is an inequality factor that this country is going through, that downsizing of the middle class, especially in secondary and tertiary markets, took shoppers out of our shopping centers. They didn’t have the disposable income any longer. So, what did that do to our industry along with e-commerce? Again, not to be political, but I think we’re-

Montesi: You can’t help yourself. Anybody that knows you, knows that.

Bayer: There’s some real structural changes, I believe, that are going to come to this country. And I don’t believe they’re all going to be bad and that there are going to be new jobs, new industries created. There’s going to be higher pay scales. People are going to be able to be retooled, and they are going to go back to work. Some of them in these cities, “hillbilly elegy regions,” and they’re going to have disposable dollars, more than they’ve had in 10, 15, 20 years. Where are those consumers going to shop? What are they going to turn to?

Montesi: That might be good for the mall.

Bayer: I think it’s going to be good for all sorts of retail and how people spend their money. So, I’m sure a lot of smart people are thinking about it. But I think it’s going to add a whole new wave of consumers that we lost that will be coming back into the market. And we need to think about, do they shop mixed-use? Do we all stay focused on mixed-use, or do we go back to those malls and we tear down what we need to tear down? And what’s it going to do to convenience center business? So, I believe there’s a really good opportunity coming. And that’s what we, as an industry, need to be thinking about.

Montesi: Very interesting, challenging perspective. That’s why I have you here. I knew that would happen. So, what do you think – you just alluded to it a little bit – do you have an idea of what the most significant change agent for retail real estate will be going forward?

Bayer: Well, I do believe that the rebuilding of the middle-class is one. But I sense that retailers have spent millions, and perhaps even billions, of dollars building their e-commerce platform. You had a gentleman on one of your most recent podcasts, I think the name of his business was johnnie-O’s, which was really an e-commerce platform. He has started opening-

Montesi: Well, they were wholesaler, too, at country clubs and some retail stores as well.

Bayer: But during your interview with him, he talked about how they felt compelled to begin to open brick-and-mortar. And to me, the retailer needs to interact, needs to create a one-on-one relationship with their consumer, which says to me that you must begin to build that platform. You won’t do as many stores as others did, as Ann Taylor and all – we are long beyond that. But so, are the retailers, and you’re more current than me, are they spending the necessary- Pre-pandemic, if I went into one more store and it was sloppy, and it was dirty, and the sales force was not educated, and they told me they didn’t have it, but to go online and buy it, I was going to throw up. So, to me, there’s a lot of money and a lot of effort and a lot of focus that needs to be put on the brick-and-mortar stores. There’ll be fewer of them. When that customer comes in, there is a real relationship that is developed, the stores look good, they’re clean, people are well educated on their product. And so, I’d like to ask you, are you seeing that happening? I mean, the pandemic has killed everybody, but do you see that happening? Do you see the retailers that are going to make the commitment now to focus on their stores that are remaining and really make them something that shines so that the consumer wants to be there?

Montesi: Yeah, so I think we are seeing a type of retail Darwinism, and I think that it is evolve or die for them. And many are evolving, and those that don’t will die. And many have died over the last few years. And so, yeah, I do see a real commitment for most retailers in Omnichannel, and they have invested so much the last few years in e-commerce that it’s kind of time, not that they won’t continue to invest, but they’ve made their big foundation on platform investments. Now those investments will be smaller. So, I think most retailers are investing in their stores. They are understanding that they’ve got to educate their people, and the great retailers like the Targets and Macy’s and others, they have made the bar pretty high. And so, if you want to compete with the really good retailers, you’ve got to get good at it. And so, I do think that’s a great point. That is a point of optimism for our businesses. I do think that, even though we’ll have less retail square footage, and we’ve needed that – you and I have been talking about that for years – we need less retail square footage here, but that would survive and will leave and instill an enormous industry. An enormous industry. Even if it was downsized by half, it’s still an enormous industry and that the surviving retail centers and the surviving retailers will be better for it.

Bayer: Recently, I was in Colorado, and I went into a shopping center that was probably built 15 years ago. And one of the retailers you just mentioned was there with a large format store, and my wife and I needed some goods for our home, and it was probably one of the poorest presentations of merchandising that I have seen. So, I’m just hopeful because I think the opportunity is there. I am so hopeful that those that are left – there will be plenty left, I shouldn’t say those that are left.

Montesi: Well, there will be fewer.

Bayer: There will be fewer, but there are more coming. There are new concepts opening. I just hope they will have the ability and the wherewithal to invest money into their stores to make it a pleasant experience, and it will help them in their Omnichannel efforts. And that’s what we need.

Montesi: Yeah, no doubt. And I do think that virtually every retailer that’s not service or F&B – and well, a lot of F&B people have even gone their version of Omnichannel because of delivery and high-tech interface with delivery. But it’s all going Omnichannel, and the good news is it’s not all going e-commerce. It’s all going Omnichannel, which means they really are synergistic, and they need one another, and the retailers have all figured out that they need brick-and-mortar stores.

Bayer: Another change perhaps – and again, you’re doing it, so you know – transportation is going to change. Before the pandemic, I was involved in a presentation at ICSE about how automobile ownership was going to change – by the year 2035, that 70% of Americans were not going to even own cars. So, do we need those large parking lots developed for five cars per thousand? The answer is no. If you can get through your REA’s and you can reclaim some of that land, and you can recover it and redevelop, it can begin to change the total dynamics.

Montesi: There’s a real symbiosis there, because you mentioned, let’s say, of the 900 or 1,000 malls that are still operating, probably a good couple hundred of those, maybe 300 of those, are barely operating. You go in and you hold your nose and there may be cash flowing, a dollar and that’s somebody keeping them open, but many of those are barely hanging on. There’s a lot of malls, for instance, and large power centers that are in these places where they will survive. The ones that will survive, almost all of the retailers are figuring out that with delivery, with rideshare, etc., there is less of a need for parking. Of the 900 or so that are left, 300 don’t have any business even being open. Of the 600, probably half of those are in suburbs that are going to be sustainable places. And I do believe that when you’re coming about middle-class or affordability, I believe in many of those, the department stores that control the REAs and the municipalities that will control subsidy dollars will come together and they will allow multifamily, office, hotel, medical, churches, they’ll allow other stuff to be developed in those parking lots because they want the mall or the shopping center to survive. And those uses are symbiotic. They will feed the business of the department store. They will feed the business of the F&B, of the sporting goods retailers, the show retailers, etc. So, it won’t all be a fluent, super high rent. A lot of what will happen is it’ll be market driven and the REAs, the retailers, the municipalities, and the owners will come together and allow those other uses at market price, at market rate, because all of these add value to each other. So, I do think that’s going to be a little bit of a new paradigm that will show up that is something that you’re going to like, because you’d like things to be more democratic – not as a party, but just you’d like everybody to benefit from the same things.

Bayer: Right. So, irreplaceable what have been retail sites, those power properties, great locations will morph. They will reclaim that land. We won’t have to go up necessarily, although we can go up above the retail.

Montesi: There will be a lot of horizontal mixed-use. So, let’s say there’s a 300,000-foot single level retail center, 300,000 feet may remain, and you might add a multi-family project, or 200,000 feet will remain, and you might add a multi-family project and an office project on the same property, and then people will be walking a sidewalk or across a parking lot. And they will still be symbiotic, maybe slightly less symbiotic or value add, than if they were above the retail. But I think that’s going to be happening. And that’s a big part of our thesis for staying in the business.

Bayer: And those great sites will remain great sites.

Montesi: And great retail sites, as you know, Jeffery, great retail sites are almost always great multi-family sites, and oftentimes great office sites as well.

Bayer: Great hotel sites. So that’s what I really see happening.

Montesi: Yeah, and so, a lot of the mixed-use development we believe we will be doing, will be redevelopment and reclamation projects of existing retail. They won’t all be ground up, super complicated things where you’re building office above retail and then multi-family above the office, etc. We’ll do some of those but not that many.

Bayer: Right. One of my pet peeves in the industry has always been that not more-. It always to us, I think provided an opportunity, but not every developer reinvested capital back into their good assets.

Montesi: So, that’s a big point is that there’s a lot of great locations that lack the capital they need to evolve.

Bayer: When times were good, people were hungry for the cash flow and didn’t perhaps like to reinvest. It was always our attitude that you needed to reinvest capital, keep it current, keep it relevant, and it was a great way to keep people, competitors perhaps, out of the market. But not everybody did it.

Montesi: If you don’t invest, you become vulnerable to competition.

Bayer: And so, this is going to be less competition, I would imagine, for those young developers coming up, and it’s a wonderful opportunity to take great real estate and reinvest capital and keep it relevant and keep it going for the next decades.

Montesi: Yes. And I want to be one of those.

Bayer: You want to be one of those young developers.

Montesi: Yeah, exactly. So, as you look forward at brick-and-mortar retail, and you think about the trends that have affected the last five to ten years, the trends that are going to affect it the next five to ten years, and what the outlook is, what are some of your other thoughts we haven’t talked about?

Bayer: What my children are doing here in Dallas are smaller projects, much smaller projects, little what I’ll call jewel boxes, sites that are smaller, that you can go up, but you take a little bit of retail, a little bit of office. They’re building luxury condominiums. It’s turned out to be very interesting as far as I’m concerned. They’re building the business; I’m not, I’m there to help. So as far as I’m concerned, bigger is not always better. And at my stage of life, if I can help them pursue their dreams, which is smaller, high quality projects that maybe has a 10,000 square foot first floor of really good quality users and then a second floor for family office and then six floors of condominiums on top, then it’s not a simple project. But it’s not a hundred-acre project either. So, it’s a little less complicated.

Montesi: So, I see doing retail, small retail, ground floor, office, creative office, a couple of floors, multi-family above it – that’s the kind of mixed-use that we think we’re going to be doing in the future, either that or adding other uses to existing retail sites, not hundred-acre suburban lifestyle centers, mixed-use projects. Tell us about the project on the Katy Trail that Lindsay and Blake are working on.

Bayer: It has turned out to be fascinating, actually. There was a trail head at the property which was not functional. And so, the idea was created that to go to the city of Dallas, they had 8 or 9,000 feet, the elevation of that trailhead did not allow for it to really be used well. So, they were able to work out a land swap with the City of Dallas and move the building over onto the street corner of Ftizhugh. And by doing that, it improved the ingress and egress, but they were able to take the inside piece of the property and create a park, truly the only small park on the Katy Trail that the restaurant operator could spill out to. The park could be used for entertainment, and it has created a terrific gathering spot. Which, as you and I know from all the work we’ve done, you want gathering spots. So, on the Katy Trail, there’s not a gathering spot. It’s about a 9,000, although it sounds postage stamp, but for that corner, it’s terrific. And then, so it spills out onto that.

Montesi: A 9,000-foot park – it’s not tiny.

Bayer: For the scale, it’s terrific. And what I thought was going to be reasonably good priced housing has turned out to be very much luxury housing, reaching sales prices per square foot at probably the top of the market. And so, they’ve done it.

Montesi: They already have some sold?

Bayer: They started construction two weeks ago, through some consolidation of units, they started off with 20. Now at 18, they’ve pre-sold 40% of the units to a great clientele and the restaurant, a great clientele. There’s a retailer joining them. They may kill me for saying this, but you know the retailer very well, O2 Aspen is coming from Aspen to do a second unit and it’s going to be in their building. So, it’s a high-quality retailer, great use, especially on the Katy Trail. And the restaurant tour that they’ve signed is a well-known personality here that has multiple units already, and he’s going to do it as a new concept, and it’s all going to be spilling out onto the Katy Trail and into the park. It’s going to be what I call a jewel box of a location. And they’ve bought a second piece across the street, and they have under contract a third piece on the other side of the street. And that whole Fitzhugh Avenue is cleaning itself up, and they’ll participate in that. And I’m just having fun watching them.

Montesi: That’s very exciting. Well, I want to thank you for your time today. It’s been fun hanging out with my friend, and I’m glad to see you face to face. I’m glad we’re both fully vaccinated. We’ll continue to encourage all our friends to do so as well.

Bayer: Good seeing you and thank you for asking me.

Montesi: Thank you, Jeffrey. Cheers.

Bayer: This is Jeffrey Bayer. I really enjoyed my time as a guest on Trademark’s Leaning In podcast, and I would like to share a few additional thoughts about suburbanization trends and their impact on the future of brick-and-mortar retail. Many thanks for listening. As we consider brick-and-mortar, malls, and outdoor centers in the suburbs and their projected death, we perhaps should also consider as millennials were flocking to urban areas and as they have aged, the urbanization of America was beginning to be overshadowed by an even more dramatic wave of suburbanization. According to analysis of the US Census Bureau data conducted by the Brookings Institute, the population of suburban areas in the US has actually been growing more rapidly than that of urban cores since 2013. However, it appears the US retail sector seems to be operating under the assumption that the exact opposite was happening. Meanwhile, the hard work of making necessary improvements to suburban stores, such as building out a central Omnichannel infrastructure, was often overlooked. COVID has potentially exposed the short-sightedness of this city-centric approach and many retailers now find themselves scrambling to adjust to a suburbanization surge that was long in the making, even before the pandemic. Combine this suburbanization population growth with the buy online pickup in stores, I think they pronounce it BOPIS, and data telling us how much more likely an in-store visitor is to convert into a purchase compared to an online visit, combining this with the climbing rents in many of our shopping centers and the need to reach a new audience, and the situation becomes exciting. Again, combine this with the gen-Z audience, which is showing a preference for in-store shopping, again, a positive for brick-and-mortars. Therefore, I would suggest retailers must plan for a future in which suburban consumers constitute an expanding share of their customer base if they wish to succeed in the years ahead.

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