1st Quarter, 2017
“The Reports of my Death have been Greatly Exaggerated”: “Get your facts first, then you can distort them as you please”. Just a few quotes from one of my favorite American storytellers, Samuel Clemens, aka Mark Twain. Coincidentally, these pithy tidbits of perspective relate to DJM Capital Partners’ everyday commitment to identifying investment opportunities, digging deep on the numbers and avoiding the cardinal sin of seduction, falling in love with the real estate. Oh, and the notion that we’re all dead men walking developers and investors because of Amazon and Google’s new “drone delivery”, the impact of ecommerce, and the tech mantra that the internet is eating our “bricks & mortar” lunch, or will soon enough. If one is convinced by tech’s forecast of the future of retail; we should bunker down, sell the portfolio and devolve into some couch potato bot, headset firmly in place linking us to the newest Virtual Reality offering via AI. Just like “Charlie don’t Surf” …. machines don’t need Whole Foods or Nobu, and your daily needs will fall from the sky or delivered in driverless Teslas. Leave it up to the experts and venture capitalists. “The worst loneliness is not to be comfortable with yourself.” As I Twain away, I’m very confident in what we do as investors, developers and wealth creators…With all this noise, nonetheless, we are paying close attention to the underlying change in the way people consume and view retail. We’re not dead yet!! Read on…
“Truth is more of a Stranger than Fiction”: According to data from the International Council of Shopping Centers (ICSC), of which DJM has been a member for over 20 years, 2016 US retail sales exceeded $5 trillion. The vast majority of US retail sales continues to occur in stores. Retail ecommerce accounted for 7.1% of all 2016 retail sales. By 2019, many analyst estimate closer to 9.8%. So, even if forecasted internet retail sales isn’t enough to boogey-man property owners like DJM, Credit Suisse (CS) recently downgraded public REIT shares, like Simon Properties, General Growth and Federal Realty stating that the current retail sales outlook is “potentially” bleak because of Washington’s threat of an import “border” tax and corporate tax reform and its direct impact on apparel and retailing stocks; think Apple, Ford, Kohls, Walmart, Gap, Best Buy, GM, Target, Macy’s etc.…the list stretches from Silicon Valley to Shanghai. It’s fact that retailers are already coming off a weak holiday season as shoppers flocked to online merchants. Now shareholders in REIT’s and public-owned retail brands are bracing for closures and widening bets against traditional brick and mortar retailers. Richard Hayne, chief executive officer of Urban Outfitters, equated the woes facing retail in 2017 to the housing market of 2008. Hayne traced the problems to over-expansion in the 1990s and early 2000s, noting that the US now had six times the retail space per capita of either Europe or Japan. “The US market is oversaturated with retail space and far too much of that space is occupied by stores selling apparel.” Not to say I told you so, but DJM recognized this trend in 2013, as we developed the merchandising plan for Pacific City and Lido Marina Village.
The Internet of Things-the New Normal: Unfortunately, many traditional retailers didn’t get the memo about customer experience. Just in the last year, institutional investors have demanded that many retail anchors reduce cost by closing hundreds of stores to offset the drop in in-stores sales volume. To wit; Macy’s, 63; Sears, 150; The Limited, 250; BCBG Max Azria, 120; Guess, 60; American Apparel, 110; Abercrombie & Fitch, 60; JC Penney, 140; Sears, 150; K-Mart, 108; Radio Shack, 550 (bankruptcy); Office Depot, 300, (over 3 years); Men's Wearhouse/Jos A. Bank, 250; Payless Shoes, 500 (bankruptcy).
A report from Thomson Reuters, for instance, revealed that two-thirds of companies missed comparable-sales targets during the key November-January quarter. Fundamentals still matter, and the bears and negative nabobs see more problems for brick-and-mortar retailers in coming weeks and months. Urban Outfitters, which operates roughly 200 locations under its own name and Anthropologie, said that despite sales declines in the single figures, it still planned to open 15 new stores in North America this year. That figure is a drop on previous years but looks rosy next to mass store closings recorded by rivals. What this metric suggests is the metamorphosis in consumer demand in retail offerings and experience. The ubiquitous and uninspired “big box”, anchor multi-tenant apparel retailer is in big trouble because they offer very little in a shopping experience; a new-found measure which creates repeat customers to your store and property. One of the more interesting questions for DJM is the re-purpose potential of these properties, particularly in our core markets in coastal California.
“The secret of getting ahead is getting started”… After all these years of DJM-centric sound bites such as understanding property DNA, food is the new fashion, aspirational retail, aesthetics, location, property vibe and a mandate to stimulate the senses, we are now beginning to be recognized as a developer/investor who cracked the code of property activation and curating to meet the demands of today’s very discerning customer. Bella Terra, Pacific City and Lido Marina Village in Newport Beach are perfect examples of places that deliver a social experience wrapped in beautiful surroundings; that is the future of retail and a clear antidote to ecommerce. Urban’s CEO gets it: “The vacancy changes in retail are similar to neighborhood gentrification … “Even if you put a Starbucks in, somebody got a call that they’d got the job or they kissed their girlfriend for the first time there. Some kind of positive personal memory is created; an empty storefront removes the possibility of any kind of interaction.” Translation: People are social by nature and crave experiences that stir the senses. Or, said another way; a recent Synchrony Financial report entitled “The Future of Retail” predicted that instant gratification coupled with a higher degree of tech-driven personalization would drive consumer behavior and retail industry through to 2030.The report said that the future of bricks-and-mortar will center on authentic brand experiences: more than half of consumers polled said they looked forward to an amalgam of in-store and entertainment experiences. “Brick-and-mortar stores will exist in the future but there will be fewer of them. A new model of delivering not only products, but also genuine brand experiences is emerging. People are social by nature and will be drawn to gathering places to share ideas and be entertained. It’s not just about making money. It’s about building trust. Retailers who tap into this trend will be rewarded. Shoppers are reaching a tipping point around American consumption”. Feelings of angst about acquiring too much ‘stuff’ is driving a shift toward purchasing experiences rather than things. I can’t make this stuff up; DJM is not the only one who understands what a property needs to offer its customers. Interestingly, Urban opened at Pacific City in November 2016. To understand more of our focus and our commitment to on-property experience, check out “DJM TV” and “DJM Dispatch” on our website…
DJM Capital Partners, Inc.
D. John Miller, Founder & CEO