Phase 2 - Real Estate 101 (How to or one big idea)

Podcast - Is Retail Dead?

Adam Hooper
August 29, 2021
Podcast - Is Retail Dead?

Episode 7 of the Fundamentals of Commercial Real Estate Investing is now available on your favorite podcast listening platform. In this episode, RealCrowd Co-Founder & CEO, Adam Hooper, discusses what's happening in brick and mortar retail with Eric Hohmann, President & Co-Founder of Bond Street Advisors.
Eric Hohmann, is a founder and Principal of Bond Street Advisors, and is also the former President of Madison Marquette, a private commercial real estate investment and services company.

Bond Street Advisors is a real estate investment management firm whose core objectives are to provide investors with reliable, monthly, tax advantaged cash flow. Bond Street owns more than 20 open air convenience retail centers in five southeastern US states.

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Adam Hooper - Hey, Tyler.

Tyler Stewart - Hey, Adam, how are you today?

Adam Hooper - Good, thanks RealCrowd listeners for joining another episode of the RealCrowd podcast. Tyler, what's on tap today?

Tyler Stewart - Adam, on tap today is Eric Hohmann, Co-Founder and President of Bond Street Advisors. On the podcast, Eric is going to give listeners a very deep and diverse dive on the retail space.

Adam Hooper - Yeah, so Eric, really great guy, tons of knowledge, started back in the mid-80s with JMB. A lot of powerful names came from that firm over the years. So, joined Madison Marquette late 90s, he's seen a lot of changes in the retail environment. And we are fortunate enough to have his brain to pick here today.

Tyler Stewart - Yeah, Eric has been around the business for a long time. And when we reached out to Eric about doing the podcast, he was excited to come on and to really set the record straight for what's happening in retail right now.

Adam Hooper - Yeah, that was the biggest question of the day, right? Was, "Is retail dead?" It seems like almost every day we see new articles in the press about store closures and e-commerce is the end of retail, but we'll listen and find out if that's true or not, I suppose.

Tyler Stewart - Yeah, stay tuned. That was the key question of the day. And Eric offered some good thoughts on where he currently sees the retail space. And where it might be headed in the future. Eric also did a great job of diving into the fundamentals behind retail investing. He described three key points when buying retail. Retail needs visibility, retail needs accessibility, and retail needs to be built with merchandise that is in line with current consumer behaviors. And what you're seeing right now is that consumers are spending their time and money at retail that offers an experience to the consumer.

Adam Hooper - Yeah, and the experience side of the retail, it's no longer just about shopping in the goods and services, it's about that whole experience and we would touch on how some of the different retailers are trying to really embrace that experience and provide more than just a place to go buy things, but to provide, again, more of an experience when you go to their stores.

Tyler Stewart - Yeah, and embrace is really a great word for it. The hearth of retail, as you'll hear throughout this podcast, is really embracing the consumer, addressing their needs and providing them with a product they want.

Adam Hooper - One of things that really stood out to me was this change that we're going through and the concept of how the Internet and e-commerce is changing retail. This isn't the first time that some new channel has come up to change how retail functions. Eric brings up the concept of what catalogs did to the Sears and Macy's of the worlds decades ago. And I think there was a similar kind of a feel that this is the end of retail, brick and mortar stores, Everything seemed to be done through the catalogs. We're kind of seeing that again right now with the Internet and who knows what we'll see with that next. But the cycle of these changes are constant and retailers are always having to kind of reevaluate and revolve into what they are to offer those experiences and stay current. So that was an interesting dynamic that had never really crossed my mind before that we're seeing just a similar pattern repeat itself, except this time, it's the Internet versus mailed catalog.

Tyler Stewart - Yeah, the value of Eric's experience within retail is huge. He was able to remind us that while Amazon and the Internet may be newer disruptors within the retail space, retail has been seeing disruption ever since it was conceived. And the hearth of retail still goes back to meeting the needs of the consumer. Now, is Amazon too big of a disruption for retail to overcome? That's something our listeners will find out during this podcast.

Adam Hooper - Yeah, well, we don't want to give away too much. So, with that, listeners out there, if you have any questions, comments, feedback, please send us an email to And with that, Tyler, let's get to it.

RealCrowd - This podcast is brought to you by RealCrowd, the leader in online real estate investing. Visit to learn more about how we provide our members with direct access to commercial real estate investments. Don't forget to subscribe to the podcast on iTunes, Google Music, or Soundcloud. RealCrowd: invest smarter.

Adam Hooper - Eric, thanks for joining us today. You're in the San Francisco Bay Area. It's been awhile since we last connected and really looking forward to a good conversation today.

Eric Hohmann - Likewise. There's a lot to unpack in this retail world. Lot of headlines to discuss. It's interesting times to be sure.

Adam Hooper - Indeed, indeed. Well, why don't we take just a quick minute or two. Fill the listeners in kind of on your background, how you got into the real estate space and what you're up to currently.

Eric Hohmann - Okay, so I've been in the investment and development world in retail for 30-some years. I graduated from business school long time ago and worked at an internship in the pharmaceutical business. I had an engineering background and I was really interested in medicine and technology, the intersection. And I got an internship at a large mid-westerns pharmaceutical company. And I got my first exposure to large corporate America and I wasn't happy with what I saw, multiple layers of bureaucracy. I counted that I was 10 layers away from the president of the company.

Adam Hooper - Wow.

Eric Hohmann - And the organization was very political. I was advised on what kind of tie to wear and how to behave and I was really sort of turned off, even though the subject was fascinating, medical devices. But it just didn't seem to be a good fit for me. And I had a family friend that was in the real estate industry and I approached him. And he gave me advice and counsel. I really appreciated how the entrepreneurial side of real estate, the fast movement, the rewarding of local knowledge, and the creativity, which was something I hadn't recognized before. So my second year of business school I made a complete pivot in terms of career direction. And went into the investment analytical side of real estate. And have been in the sector since.

Adam Hooper - And that was with Madison Marquette, or different firm, or where do you start .

Eric Hohmann - Different firms, sort of a precursor of Madison Marquette as the parent company was JNB Realty based out of Chicago. And JNB was sort of a birthplace for a lot of great real estate careers, Barry Sternlicht, Sternwood Capital came out of it. I worked alongside him and some of the founders of Blackstone Real Estate came out of the JNB platform. And my first role was actually in retail development, joint venture between Federated Department Stores and JNB. And we were doing large scale mall development at the time. And then this is sort of in the final era of mall development, that's how long ago I've been in this sector.

Adam Hooper - And then from there went to Madison Marquette? 'Cause you've been Madison Marquette for quite some time, had been, right?

Eric Hohmann - 18 years. Joined them in '99. And the founders of Madison Marquette, Madison Marquette was formed in the early '90s, really as an alternative to the slowdown in mall development. And the department malaise, we'll hopefully talk about here later, really has its roots back in the early 1990s. Many people may not recall or may not have been paying attention, that Macy's went bankrupt in the early 90s. And so that was... We had sort of a worldwide real estate collapse in the early 90s with the S&L crisis. And a lot of turmoil in the sector then. So Madison Marquette, there was still these emerging brands called lifestyle tenets. Many of the household names that we know today like Williams Sonoma, and the Gap and J. Crew were just coming online and wanting to grow, but wanted to be outside of the mall format. And Madison was formed to take advantage of that demand and bringing retail back to the urban core. We had the exodus of retail outside of downtown districts to malls in suburbia. And in the early '90s, we saw a return and a revitalization of retail in urban districts. And one of the first projects, I hadn't joined the company at this time, but one of the first projects was the Niketown building on Union Square in San Francisco, converting 100% office building to 100% retail in a multilevel. And, of course, this one of the first Niketowns at the time. And so the co-founders of Madison Marquette were people I'd worked with before in my JNB experience. And so when they approached me in the late '90s to be the Development Director of a million square foot project in Emeryville, just over in the East Bay, San Francisco East Bay, mixed used project, which mixed used development with large scale retail and multi-family was just-- Very new, new urbanism was a new idea, and mixing uses was controversial back then. And I liked their innovative stance and jumped at the opportunity to join the company and rejoin my colleagues and run that project.

Adam Hooper - So for 18 years that was quite a change, I'm sure, as you said, pushing the forefront of some of these different development styles. What were some of the more notable projects that were fun, memorable projects that you worked on while you were there.

Eric Hohmann - So that Bay Street project took about four or five years of my life and changed my hair to gray, I think. That was a challenging project. We had the dot com bust back in the 2000 and we were trying to finance the project. AMC Theater was one of our anchor tenants, and their stock dropped to two dollars a share and there was concern that they might go bankrupt to this is a tactic of some retailers is a way to reject a lot of leases. And they had a lot of bad leases. So that challenged our financing environment. We were building on bay mud, so we had to built a significant infrastructure or foundation system. We drove 52 miles of piles, 52 miles of piles.

Adam Hooper - 52 miles, wow.

Eric Hohmann - Of pile foundations. We had environmental issues, came across contaminated soil. We had archeological issues. We came across archeological remains and we had archeologists on the site while we were under construction. We had Native American monitors on the site. It was a huge challenge, but we prevailed. And we opened the project in 2001, continued with delivery of the residential and hospitality. Went through three financial partners over the course of Madison Marquette's ownership tenure. Each partner made money. And Madison Marquette exited the property in total about two, three years ago to UBS, and everyone has made money along the way. So it was a great challenge, a great learning environment. And glad I don't have to do that again.

Adam Hooper - Sounds like just kind of your run-of-the-mill straight down the fairway project, yeah?

Eric Hohmann - Yeah, that's right. And but another project we did more recent than that, though, and probably more current, more relevant to what's happening today was a project called District La Brea in Los Angeles. We took a city block on La Brea Avenue in Los Angeles, between 1st and 2nd Avenue, vacant buildings, collection of vacant buildings that had been cleared out for residential development. The neighborhood fought it, the developer couldn't get the project entitled. So we bought the property, actually from his bank, and we made it an adaptive reuse project. There are about 100,000 square feet of retail base with office on the second and third levels of a couple of the buildings. And we had a vision to do sort of a innovative emerging brand, non-national tenant merchandising plan. And we stuck to it and we brought in brands, new brands at the time, like Bonobos. This is one of their first location in Los Angeles, the first outside of San Francisco, Union Square, AETHER Apparel, which is a really interesting performance wear, fashionable performance wear, retailer Sugarfish, which is a really great local sushi operation, Stone Island, which is a menswear, from a tie and designer actually will be opening soon. And we bought this property two weeks before Lehman Brothers declared bankruptcy.

Adam Hooper - Oh, boy.

Eric Hohmann - Filed for bankruptcy. So this was late 2007. You'll recall that mid-September is when the world began, the financial world, began to unravel. So our timing wasn't so good. But we held to a vision and we ended up prevailing and very proud of that project, because it was 100% empty when we acquired it. And now it's 100% full. And, again, just recently sold to an institutional buyer last year. And happy to say that our investors did well on that deal.

Adam Hooper - Good. So next phase, tell us a little bit about Bond Street.

Eric Hohmann - Yeah, so Bond Street Advisors, my partner, Mike Reynolds, and I were friends for quite some time here in the Bay Area. Mike comes from a multi-family background. He's a multi-generational real estate family and I come from a institutional, commercial and retail background. And we were sitting around about four years ago, emerging from the recession and wondering what should we do. Personally, we were at the stage of life where we're just trying to think, you know, how are we going to get yield from our capital, we're in a very low interest rate environment. We both weren't interested in rolling the dice on our personal capital in development. And, again, having emerged with the scars from the Great Recession. And so we started pooling our capital and getting some investors and buying yield properties. Now one thing that's great about retail and commercial property, but retail, in particular, is you can get yield. And you can get tax advantage yield. And in a world without yield, retail real estate provides that. So we honed a strategy over the course of a couple of years of investing in what we call convenience retail, which is unanchored strip centers, really basic blocking and tackling on the real estate side. Convenience retail is the attributes that we like are high visibility, great accessibility, and adequate parking. The convenience retailers you'll see are dominated by fast casual concepts like Panera Bread, Chipotle, Starbucks, Firehouse Subs, some very fast growing, very healthy, sector in retail. Hopefully we can talk a little bit more about that sector. And then there's also service, services like medical uses, Aspen Dental would be a typical use there. Very little apparel, very little to no apparel in this sector. And apparel's in a real malaise right now. We wanted to avoid that sector. So we had a product focus, this convenience retail sector. And then we developed a strategic, geographic, focus, and that was the Southeast US. And we have invested in five states, five contiguous Southeastern states. And the reason why chose, you know, why the Southeast? A broker some years ago showed us a deal in Sumpter, South Carolina. We went out and checked it out and we liked what we saw. We thought it was a great relative value to what we're seeing in coastal markets. We could buy the same credits that we could find here in the coast, on the West Coast, particularly, for 250, 300, basis points higher cap rates.

Adam Hooper - Wow.

Eric Hohmann - Same credits. And our cost of debt's the same. The debt really underwrites the credits and is relatively indifferent about what part of the country it is, as long as the fundamentals of the real estate are good. So we could get the same cost of debt, but at a better price. But the asset had a better price. So we opened up a office in Charleston, South Carolina, and we now have 20 centers that we own and manage, and out to buy more. And we're distributing yield to our investors, something that your investors at RealCrowd are very interested in, I know.

Adam Hooper - Very much so.

Eric Hohmann - Is distributable yield. And it's tax advantage, because it's a direct real estate investment, limited partnership interest. You get the tax advantages of the depreciation protection, particularly in the early years. If we decide to exit an asset, we can do 1031 exchanges, in a very tax efficient manner. That's something I think your probably your investors are very well aware of and acquainted with and something that really attracted us. So that's what we've been doing lately and had a great time at Madison. I'd sort of taken my career as far as I could to reach the presidency there. And had a fun run on the institutional side. But I wanted the opportunity at this stage in my career to do something more entrepreneurial and to sort of make my own mistakes. And we created this new platform.

Adam Hooper - So what is it about retail that gets you excited? What is it about that asset class that's so interesting to you?

Eric Hohmann - So it's intellectually a fascinating area, 'cause it's always changing, always evolving. And so retail, though there's a commodity side of retail that we probably will talk about, retail space isn't like what I would call office or industrial where you're just selling a commodity to your user. It's difficult to differentiate your product in those areas. Retail you can. You can differentiate your product by how you deliver and, in particular, how you merchandise. And so if you do it right, you can achieve superior results. When we comp rents, you have to comp comparable product, you can't just look at what the retailer is doing across the Street, because it doesn't matter what they're doing across the Street if they don't have your visibility, your accessibility, and your merchandise, your merchandise strategy. You can differentiate yourself in retail and if you can execute better, you can do better. And that, to me, is the fascination with it. It's always changing. You have to be on your toes and you're rewarded if you do better.

Adam Hooper - The changes are definitely happening, right?

Eric Hohmann - Oh, for sure. And it's less about market timing. I think an office is you got to be a good timer. You got to know when to get in and you need to know when to get out. Retail is less timing sensitive. It's more sector specific, and understanding what's going on in the market. And you just alluded, Adam, to the changes that are going on, they're a very dynamic time right now and one that keeps us on our toes for sure.

RealCrowd - Thanks again for listening to RealCrowd podcast. If you like what you're hearing, please visit to learn more and subscribe at iTunes, Google Music and Soundcloud. RealCrowd: invest smarter.

Adam Hooper - Okay, so let's dig in here a little bit deeper. First off, this week was ICSC, which is for listeners out there that aren't aware of that, that's the International Council of Shopping Centers. It's a huge convention in Las Vegas, annual convention, usually anywhere from, good years, 30 plus thousand people attend that. Give us just a quick overview. What was sentiment like there? What are some of the deals that are being made? Sectors that are looking good? What was your impression coming away from ICSC this year?

Eric Hohmann - So attendance was very strong, over 30,000 investors, retailers, investment brokers, leasing brokers. It's a deal-making convention. Everyone is getting together to trade stories, learn what everyone's doing and to get deals done. So it's a very much a transactional oriented convention. And so it's good to see strong attendance like that. But there's a lot of confusion out there.

Adam Hooper - Right.

Eric Hohmann - And there are a lot of sectors that are... You know, they're struggling. And there's a lot of sectors that are doing well. We get a lot of... We read every day, almost every day, or every week, in the Journal or other popular press about a malaise in retail, about retail apocalypse. Some of the headlines are getting pretty dramatic right now.

Adam Hooper - Right, store closures and this is the end of retail.

Eric Hohmann - That's right, end of retail as we know it. And, of course, there are sectors that are struggling, but then there are areas in the, let's say, the value categories, outlet centers that are going great guns, too. Lots of food concepts, lots of new F&B, or food and beverage concepts coming a long line, and increasingly having a greater representation and attention at places like ICSC. So there are a lot of... We should probably try to unpack it, Adam, but there's a lot of cross-currents going on in the business.

Adam Hooper - Yeah, well, let's do that. So, as you mentioned, headlines all over the place, like you said, retail apocalypse, it's the end of retail as we know it. That's a pretty broad brush to paint the entire sector with, right?

Eric Hohmann - Yeah.

Adam Hooper - As we were just talkin' a little bit ago, there's a lot of different sub-sectors in retail. You can't just say retail as a blanket. You've got, again, sub A-class malls, you got high street retail, you got necessity base, you got convenience base that you guys are focusing on with Bond Street. That's a much more nuanced picture than just retail is dead.

Eric Hohmann - You're exactly right. And I think the headlines are really being mainly captured by what's going on with the department stores, because they're very high profile, Macy's, in particular, with their comp store stales declines over the course of a couple of years. And Penney's as well. Of course, Sears. Sears has been a zombie retailer for... For some time now. For quite some time. And there's really nothing new in the Sears front. It's really being strip mined for value by the current ownership. And that's pretty apparent. It's been apparent for some time. Penney's had its run with Ron Johnson from Apple, who I think, I think the conclusion now he was the wrong choice for that role, because his experience at Apple wasn't that relevant to how to turn around a department store. So the department store malaise then feeds into the mall, distress in the mall industry, and of course the distress as you mentioned. Is it only in a certain sector? I mean, it's not the A-malls. A-malls have never been stronger. And the A-malls are attracting reinvestment capital and they're getting better, they're adding mixed use elements. A-malls don't trade that much 'cause they're in the hands of REITs, by and large, and very well capitalized hands. Mall returns, A-mall returns always ranked the highest. If you look in the last 10/15 years, then they REIT indices, that's where you want to be. Problem is they're hard to get your hands on, 'cause they don't trade.

Adam Hooper - Right.

Eric Hohmann - They're harder to invest in. B&C malls trade frequently, but that's the area of real concern. And it really should deserve the concern. The department stores have been in a secular decline for four years, ever since my, I've been in this business since 1990, department stores have, what they do and how they distribute goods to consumers have been first attacked by the power center and the power center retailers. And what the big box retailers did is they took the whole departments out of the department store and put them in a more efficient distribution model for the customer. The decline started this long ago.

Adam Hooper - Right.

Eric Hohmann - And we started seeing in the early 90s, the prevalence of power centers, with tenants like Marshall's and Best Buy and TJ Maxx. And, in fact, some of our best retailers today are TJ Maxx, which includes Marshall's and Home Goods. They're expanding significantly as well as Ross Dress for Less. The value sector is doing well. But that's not in the enclosed mall format. It's in a open-air power center format. And those retailers are doing well. So this has been a secular decline of the department store and of the mall. It's, of course, exacerbated by online penetration. Apparel is in a malaise right now. There is a probably a secular, rather than cyclical trend on apparel. There are no dominant trends in apparel right now. And this is affecting great operators like Nordstrom's. And they're having trouble with their mainline department stores, with their comp store sales. But their discount, Nordstrom Rack, is doing well, and they are expanding Nordstrom Racks and not expanding the Nordstrom mainline department store right now. Again, it's this attraction of value that we're seeing. So this malaise in apparel is, for malls and specialty retailers, is a real problem. There's a lot of margin. These are high margin areas. If a retailer has a high margin, the landlords can generally charge high rents. We see lifestyle centers struggling right now because of this malaise. The millennials. The millennials are hard to crack. It's much discussed, and I think it's true about their predilection for experiences, spending money on experiences, food and beverage, as opposed to things. And that's affecting certainly the retail world and how to respond to what the millennials are buying.

Adam Hooper - Yeah, I think many issue podcast in and of itself. Absolutely. So one of the things, Eric, that you said there that I think is the biggest, or one of the bigger drivers in this whole shift in retail is the distribution, right? The distribution of goods. Retail is kind of the end node of that journey from manufacturing to consumer. You commented years before Amazon even existed. There are already some disruptions, if you will, in those distribution channels, going from the enclosed mall to the TJ Maxx model, right? The kind of power center model. Distribution of goods has always been something that has changed, fundamentally changed business models. And we're seeing that now. And you obviously can't talk about this distribution of goods without mentioning Amazon. That's a huge shift in retail, obviously. And that's getting, again, a lot of headlines we've been seeing several hedge funds come out lately and saying retails are being Amazoned, you're trying to short malls. How can they kind of position themselves and take advantage of this upcoming apacolypse? Where do you see the Internet and this kind of shift in how goods are distributed as a driver of these different retail models.

Eric Hohmann - Oh, for sure. And it's a distribution outlet. We've seen it before. Of course, the early lifestyle tenants, and it started with catalog sales. And so I see it aS an evolution of sort of a catalog, if you will. And many of these retailers are still relying on catalogs. Restoration Hardware, famously, you know, famous for the their 500 page, you know the thing that hits your doorstep. And you can hear the thud when they drop it off. So it is affecting... It's affecting close to 30% of apparel sales are now through online, certainly not only Amazon. Amazon is a part of that, of the online distribution model, definitely affected. Online sales, what people quoted was about eight to 9%, or experts, I don't think anyone really knows. They say it'll top out at 15% of all retail sales. I don't think anyone knows. But I think when you really unpack the online sales you find there's a couple of things that have to be reckoned with as an online retailer, and that is marketing costs. How do you acquire customers? And you see this with some of the retailers like Bonobos and Warby Parker concluding that owning real estate or having a real estate presence in high traffic areas is a great way of acquiring customers, and see it almost at equivalency between a marketing cost and a real-estate cost. We're in this interesting idea where real estate really is marketing, it's a way of acquiring customers. If you don't have physical real estate, you do have to find customers. And you have to spend, there's a lot of marketing expense in doing that. Also, cost of shipping. Amazon has said free is the standard now for shipping.

Adam Hooper - Right.

Eric Hohmann - You get to that last mile query. How do you solve the last mile? And Amazon, I think some 40% of the US population is within 20 miles of an Amazon distribution center, I heard the other day. And so Amazon is pushing distribution centers closer and closer to the customer, but you still have the last mile issue there. There's a real cost of shipping, but the online retailer has to absorb it because of the competition. And then we find the cost of returns, too. Online returns average about 30%. And so that's a significant cost, because retailers, again, because of Amazon cannot charge for returns. And that has to be a cost absorbed by the retailer. I thought it was interesting. I order a Casper bed a few months back, which is a great, it's a great product, and great value, very happy with the purchase. And, of course, they have 100, I think it's 100-day guarantee. If you don't like it, you call 'em up and they'll send someone out to pick it up and return it.

Adam Hooper - So you ordered a bed online without ever laying on it.

Eric Hohmann - Without ever laying on it, that's right. Part of it was I needed a bed, and part of it was I was fascinated. I mean, was just fascinated. It was great marketing. And, of course, they have a significant advertising budget to try to attain customers. And I heard about them through their marketing efforts. I found out later, I kept the bed, it's a great product. But when they come out to return your bed, it's really 1-800-JUNK who comes out and they dispose. It's cheaper for them to dispose of the bed.

Adam Hooper - You're kidding.

Eric Hohmann - Rather than return it, repack it, recondition it. And, think about it, it's a used bed. I mean, there's no market for a used bed, I bet, not much of a market for used beds. For them, it's more efficient to dispose of the product. And that's what I had heard. I thought that as just fascinating.

Adam Hooper - It is.

Eric Hohmann - To hear that. So, Adam, I don't know if I've answered you question here. Probably lost site of your question, actually, as I was rambling.

Adam Hooper - No, I think the model of distribution's always been changing, right? This isn't new. Amazon is a new of way of that changing, but the concept of retailers trying to reinvent or find new ways to distribute that product is not a new phenomenon. It's just that this is the latest way using the Internet as a distribution channel is the newest way to do that.

Eric Hohmann - Yeah, let me dive a little deeper on that, too, and sort of give you an intellectual framework that I certainly didn't invent but it was explained to me by a good friend of mine. And I think this is a way to think about it. So retail's divided into commodity goods and specialty goods. About 80% of retail is in the commodity sector and that's where the price convenience equation, if you will, determines the purchase. Usually the more convenient the product, the higher the price, the less convenient it is to obtain the product, the greater the price. And I would say that your corner convenience store is high convenience but higher price. Your Costco, which may be some miles away from you and a major excursion is your best price. The Internet is really making inroads into this sector, because if you have a commodity product that you know what you want and you have already identified the product and the model number or whatever it is, it's very easy to go online and price compare. And delivery is getting easier and easier so the convenience can be quite good there. That distribution channel's very attractive to the consumer. On the specialty side, specialty retail is defined by discretionary time and discretionary expenditure. It's where you want to spend your time, and it's what you want to spend your money on. And this is where environment, the physical environment, is very important. This is nice restaurants. This is entertainment area. This is were experiential retail comes in. And this is a smaller sector of retail for sure, but it's a lucrative area. It's an area with very high margins, if it's done right. And this is where architecture, design, comes in. Let me give you some examples, like The Grove in Los Angeles, Rick Caruso's project. Very attractive setting, particularly... You and I are sitting up here in Northern California and we might consider it a little manufactured, but I got to tell ya' Southern Californian's love it. It's swarmed, it's very successful, it's a great environment, a great hangout place, quality restaurants. And good fashion, too. Let's take a retailer, experiential retailer, Starbucks just opened in Seattle what they call a roastery and tasting room in the Capital Hill District of Seattle. And it is a fascinating experiment, which I think is successful, and they're going to roll it out. But you go there and it's a working roastery so you can see coffee coming in, getting roasted, and then you can drink it and taste it right there. They have food there. It's a great gathering place, it's a great experience in a historically renovated building. It's a wonderful execution. And I think that's where retail, on the specialty side, is headed towards as experiential, as people try to think where they want to spend their time and who they want to spend it with and what they want to buy. So think that these are areas that are, again, when you unpack what's going on in retail, you have to look at these different sectors and how different operators and different models are responding.

Adam Hooper - The experience side of it, too, we shared a panel, gosh, that was a little over a year ago. And we were talking about this generational shift of how the millennials are changing all different facets of real estate, right? And so much of what they look for is the experience. It's not just about the product. It's about the experience and how that whole outing comes together. And so there's certainly some of those experiential retail, parts of the equation that aren't really covered in a lot of the stories out there. So how, as a retailer, what are some of the things that you're seeing them try to right the ship or if they're seeing some of these other aspects of their business slide, what are some of the things that you're seeing out there, from a landlord's perspective, from an owner of retail, what are seeing some of your tenants do to try to right that ship or make some of those changes?

Eric Hohmann - Well, you're seeing some of the retailers getting into multi-channel distribution with ubiquitous access to the customer with apps, with online experience and integrating say through clicks and bricks is how you can find a product online with your favorite retailer and purchase it online but pick it up at your own convenience, at your own timing at the store. And we're seeing a lot of movement by the progressive retailers.

Adam Hooper - When you mentioned--

Eric Hohmann - This seamless experience.

Adam Hooper - So you mentioned Bonobos, they're almost the reverse of that, with the showrooms that they have. You go and try on your order and then it gets shipped to you.

Eric Hohmann - That's right, that's right.

Adam Hooper - Those were the early model.

Eric Hohmann - Exactly and that's an interesting model, because you go into the showroom, which is the right description for it, and you can't walk out with product. And that, to me, is a really interesting idea. I'm not sure I understand that fully. But...

Adam Hooper - It's the experience, right?

Eric Hohmann - You can go to the store but not walk out with product. To me, that's interesting. And I guess Warby Parker is similar that way.

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Adam Hooper - I think the shift of these traditional retail models have to be rethought, whether it's a generational thing, whether it's the overall distribution models, there's constant innovation in how goods are delivered and what those retail models are. And it's not a forever downturn. I mean, like you said, with the advent of the catalog, that was probably going to be the end of retail back then. And then now the advent of the Internet, that's going to be the end of retail now. It just happens periodically. And I don't feel like this is a forever downtrend. Do you agree with that or do you see this as a forever downtrend?

Eric Hohmann - Well, it's an evolving downtrend. And one thing we haven't really talked much about, mentioned earlier, fast casual dining, but food and beverage, and how we're seeing in the retail environment a much greater increase in the amount of gross saleable area attributed to dining and beverage. And so the old standards, the old rules of thumb would be you would have less than 10% of your gross saleable area attributed to in a shopping center environment to food. And now we're seeing an approach, 20% and then some of these specialty retail centers much higher. We're seeing a shift in the type of food venues, too. We like fast casual at Bond Street, because it's a affordable and convenient and higher quality food experience, dining experience, than family dining or fast food. And Panera Bread, let's take Panera Bread as an example, they're putting together a high quality product that you could order with an app or online and pick up there, or they can deliver, so it's a very integrated model at a very good price. And so for $10 it's not as cheap as fast food, but fast casual is growing at the expense of fast food, because they're delivering a better quality product at a higher price point, admittedly. And people are spending, in the West Coast, we've seen this maybe before the rest of the country, but people are concerned more about where their food comes from, the quality of the food. Certainly Chipotle learned this. How safe is the food? Where does the food come from? The nutritional value? The taste, all is improving with fast casual. Other appeals of fast casual it's a low labor cost. The sit down and order from a server slows you down, the server adds no value to the transaction. They really don't bring anything to the experience. You have to tip them, or you feel compelled to tip them. Fast casual, you come and you order to your specifications what you want. Moe's Southwest Grill. You go in, it's a wrap concept. You design it exactly how you want it to be. It's all fresh ingredients. And you don't have to pay. You're in and out, you can take away or you can sit in the restaurant and eat. Very efficient model, low labor cost, for their operator and the customer. It's fast, convenient and they don't have to tip. So this sector's been growing double-digit for the last three, four, or five years. Projected to grow next year seven-and-a-half percent, very healthy sector. One aspect of the food and beverage that's doing quite well. Food halls...

Adam Hooper - Right, I was going to say another one is the kind of Eataly concept or Ferry Building, Oxbow, those kind of food halls and mercados. Those are tremendous performers right now.

Eric Hohmann - Exactly. And a lot of interest in this area. You've got food emporiums like Eataly, which is one operator with a theme, putting together a fascinating experience. And this gets the experience for retail. Retailer there. Were you can go and you can purchase raw goods, you can have a meal prepared for you, you can meet friends, fascinating environment. Then you got food halls like the Ferry Building. You mentioned Oxbow up in Napa, Oxbow Public Market, something that Madison Marquette was recently involved in. I think just wonderful environments to go where you have the perfect balance of prepared foods as well as raw foods, has a real authenticity to it. It's very social. There's no national chains. They scrupulously keep out the nationals, 'cause they want to have that unique experience.

Adam Hooper - Right.

Eric Hohmann - Something that you don't feel like you've seen everywhere else. And so this has garnered a lot of interest in the industry and we're seeing a lot of experimentation in that area. So I think that's a real interesting category.

Adam Hooper - It is, indeed. So I want to take a little bit of time here to kind of get back to the bricks and mortar side of things, with the real estate itself, and see if you can go over, for listeners out there that are looking at different investment opportunities on the retail side. What are some of those fundamentals of retail that you guys are looking for that see you in the market. Maybe if we need to go sector by sector, or maybe there's some kind of bigger picture fundamentals that you guys are looking for. What can you share with listeners out there that are trying to look at retail deals across a few different opportunities. What are some of those key fundamentals that you guys really try to focus on?

Eric Hohmann - So if I were an investor, I'd first look at the experience of my sponsor. Do they have experience in this sector? Are they able to discern good real estate from non-so-good real estate, surviving real estate. This is definitely and environment where good real estate wins out. And so with this...

Adam Hooper - You think retail more than some of the other asset classes?

Eric Hohmann - I would think so. I would think so. I mean, I think we get back to the fundamentals. The fundamentals are accessibility, visibility. Accessibility would include access to parking. If that's the main means of arrival, or access to transit, if it's a urban-dense location. Can people conveniently see and access? Is there a lot of traffic? Are a lot of eyes and footsteps going by? So you want someone who can make these judgements for you. Power center, you want to be careful about the anchors. And you have to worry about the anchors and their business models. There's always a Darwinian process going on in retail. Most recently I think typified by Sports Authority, which wasn't a great operator to begin with. So I'm not sure how great a job they did, but also Internet penetration in the sporting goods sector. But they got really supplanted by Dick's who does a great job. And Dick's is growing. And it has a growing presence in the brick and mortar space. So you want to make sure you have anchors that are on top of their game, that understand the business and are positioned well for the future. That's in that area. In the triple nets, in the triple net lease space, which is probably something that a lot of your investors at RealCrowd are looking at. You want to look at the credit quality of the operator, you want to look at the pricing. You'd have to make your own judgment in terms of credit quality, you know the trade-off between yield and credit quality. And you have to make your own judgment, make a careful judgment in that category. If you stretch for yield, you're not going to get the best credit or the best locations.

Adam Hooper - Right.

Eric Hohmann - So you have to make your own determination on the sort of risk/reward spectrum. But look for a good sponsor who's assembled quality real estate with quality operators in that sector. And I guess I keep coming back to saying that. I don't think your investors are really going to see a lot of B-mall product on your platform.

Adam Hooper - Haven't yet.

Eric Hohmann - I don't think that's something they have to worry about. I mean, that is really, investing in B-malls, is really for the experienced. B-malls, they're complicated, there's reciprocal lease agreements, there's lease restrictions, there's re-entitlement issues. There's exclusives. That's best left to the experts. Fraught with complications. I don't think your investors and certainly even someone who's been in the business as long as I have, I would approach that sector with great trepidation and skepticism.

Adam Hooper - And so given the conversation we've had at this point, with these changes in distribution and technology coming about and having an impact on retail space, does that change those fundamentals at all? Two years from now, five years from now, are you going to be looking at different factors. Or how does that come to the equation?

Eric Hohmann - Well, so as a real estate investor, any kind of an investor, you're looking for... Disruption's not always a bad thing, because there might be opportunity down the road. And if we saw good real estate, but with bad leasing and bad merchandising, bad position, we would move into a value add role. Right now we're purchasing for our investors good properties, stable properties, for yield. I think it's too early for us to move into the value add side of things, but that's something we would keep our eye on if we saw assets that are distressed. I think it's a little early for that right now.

Adam Hooper - So most of the deals that we've seen lately on RealCrowd, we see a lot of multi-family and the value add strategy there, fairly straightforward, right? You're going to come in, renovate the units, spend anywhere from 5,000 on the low end to 15/20,000 on the high end to renovate units, increase rents, bring more efficiencies to the operational side and that's how you add that value. What do you see in the retail side, or how does an owner of retail real estate add that value, similar approach, are there different things to add that value?

Eric Hohmann - So it really comes down to leasing. And getting great merchandising. So if you have rollover or vacancy, it's finding users, in a multi-tenant center, which we're trying to do, is bring compatible users that will support each other, 'cause retail lives off traffic. And if you can bring in the right operators that will attract customers, and then you get the parasitical tenants that feed off that traffic, it's finding that balance. So it's really on the merchandising side where you can be most effective. There are also a number of centers that might have been held for a long period of time and managed for cash flow that are capital starved. And so we find assets that need, there's manage for cash flow, so it needs an investment, needs an uplift, needs a reseal and restripe for the parking lot, needs a new facade. Maybe the facade and the storefronts are bland and uniform. And we can add some pop and excitement by undulating the facade, popping a storefront's in and out, getting better signage, improve landscaping, better signage, better monument signage, upgrading lighting. These are kind of the tools we use in the open air retail space. Not complex to do, but it takes capital to achieve. And you do that where you have an opportunity to move rents and where you have an opportunity to upscale the merchandising. You need to move the appearance and the visibility up the curb as well.

Adam Hooper - Good. All right, so we're going to do a little crystal ball time. Where is retail going, everything taken into consideration what we've been talking about? What do you see the ultimate impact of some of these factors and five years from now or three years from now when we look back on this conversation, what's going to be different?

Eric Hohmann - So I think we're going to see increasing mixed-use environments with retail, combining pure retail destinations. Certainly in the development front I think we're going to see fewer pure shopping center constructions and more mixed-use environments, bringing residential and work, office, into the same environment. It's really, I think, a trend of this urbanization, that we started with the new urbanist movement. That's going to continue, I think, and create more interesting environments. And I think that's what the customer's going to really like to see. I think we're going to see successful brands fully embracing the online experience, this multichannel that we've talked about already. And figuring out how to create this, almost seamless, experience between the online and the physical, being able to purchase online, pick up at the store, or go to the physical store and buy at the store online, the product. I think we're going to see this experiential increase. We talked, you know, I mentioned the Starbucks Roastery. Seems like Bass Pro. I don't know if you've ever been to a Bass Pro, but it's like Disneyland for the outdoor sportsman.

Adam Hooper - It is.

Eric Hohmann - It's an incredible environment. And if you're into that sort of thing, it's a fun place to go and just check it out. And so I think that is... Successful retailers are going to blend that kind of experience and entertainment into it. Apple Store, I think, has a bit of that, that you can go into an Apple Store, you could get help. They're bright, well-lit, well-merchandised environments. The new Apple Store in Union Square here at San Francisco has actually tables and chairs and sort of a hangout environment. And that's a trend we're seeing more as well. So it's sort of that's sort of combining the lifestyle. There's a great retailer in L.A. called Deus Ex Machina, excuse my Latin. But it is an Australian motorcycle company on Lincoln Avenue in West L.A. And they have a coffee shop, they sell apparel, they sell motorbikes, it takes the entire, what they've done is taken this sort of entire motorcycle aficionado experience. You can go there and hang out with people who want to swap stories and share experiences. I always wondered why European automotive retailers haven't embraced this idea, because there are people who are just fascinated and love their particular brand of car. But going to a dealer ain't that great, usually not that great of an experience. And put the F&B in there as this motorcycle company has done in L.A., very creative, I think. And you go there to hang out. Maybe you go there, you don't have any intention of buying something, but likelihood, you hang out there long enough, you will. And I always wondered why automobile... I think they're stuck into an older way of thinking on how to enhance that customer experience.

Adam Hooper - So I think it's safe to say we can put you in the camp of retail is not, in fact, dead.

Eric Hohmann - No, ever-evolving, always fascinating, and getting better, too. The food and beverage experience is far better now, today, than it was 10 years ago. And five years from now, it'll even be better. We'll have higher quality, more choice, better food. In 2015 the lines crossed of grocery purchases and outdoor dining. Outdoor dining in 2015 exceeded grocery purchases for the first time. That's a trend I don't see any end or reversal on. People are time-pressed. They realize they can get a quality dining experience, a healthy, nutritional experience outside of the home and they don't have to cook. And you can actually get a better, certainly in my case, I can go out and buy a better meal than I could prepare. Those lines crossed in 2015. I see no going back and you're seeing this in fast casual already. On your drive home or on your ride home, you go to your app, be it Panera Bread, or others, and there's a lot of more interesting concepts than Panera Bread coming online. You order your food and you have takeout as well. So you can pick up on the way home. Centainly for busy mothers, busy families. It's a great option and you can get out of the fast food and the drive through at the fast food and not feel guilty about feeding your kids junk.

Adam Hooper - Right. Good, well, Eric, that's a lot of good insights here. We really appreciate your time and anything else you want to add as we wrap it up here?

Eric Hohmann - Look beyond the headlines. Unpack the stories. Look at the motivation of some of these short sellers. Sometimes I wonder if they're talkin' their book, talkin' up their books, so be a little skeptical. But definitely look beyond and unpack what the real story is. That would be my...

Adam Hooper - Think that's just great advice in general. Perfect. Well, Eric, look, we really appreciate your time today. As always, listeners out there, appreciate you listening. If you have any questions or comments, please send us an email to And, Eric, we look forward to the next one.

Eric Hohmann - You bet. Thanks, Adam.

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