Consuming Retail

by Susan L. Stupin, Managing Director, The Prescott Group, LLC.

September 15, 2011 - Retail is perhaps the most challenging and interesting sector in today's marketplace. With investors seeking yield (perhaps without thinking about risk adjusted returns), it is inevitable that retail will look like a “tasty treat” to devour. As with all distressed assets, and more so in retail properties, investors need to assess not only the asset, the tenant mix, the existing economics, and the market niche, but most importantly the time and capital (including additional costs such as leasing commissions, tenant improvements, and legal fees) needed to bring the asset to a competitive stance where it can start making money. Tenants these days are loss leaders - but why invest if every tenant is a loss leader? Furthermore, investing in "one-off assets" can be a recipe for disaster, unless the asset is a “country unto itself,” like such renowned assets as South Coast Plaza in Orange County, California or the Bal Harbour Shops near Miami, Florida. Everyday retail requires critical mass by every metric to effectively negotiate with tenants and to manage costs. So, watch retail with a gimlet eye and seek those situations where there is a synergy, cost efficiency, respected brand, experienced and battle hardened operator, and a capital market opportunity. And do remember that despite the exponential growth of online shopping, 80% of all retail purchases are still being made in physical stores.