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

Podcast - The Current State of Retail Investing with Brian Neltner and Reynolds Thompson

Tyler Stewert
September 13, 2021
Podcast - The Current State of Retail Investing with Brian Neltner and Reynolds Thompson

This week, we sat down with Brian Neltner and Reynolds Thompson of Select Strategies Realty to discuss the current retail climate, where retail is in the cycle, and why retail might not deserve all the negative headlines.

Brian Neltner is the CEO at Select Strategies and is responsible for the overall direction and management of the company.

Prior to joining Select Strategies he managed all retail real estate activities for Colonial Properties Trust as their Senior Vice President of Real Estate.  Brian’s position involved the direct oversight of all operational functions including leasing, management, construction, development and redevelopment of a portfolio of enclosed malls and open air shopping centers.  Previously, Brian was responsible for all real estate development, management, leasing and construction activities for over 125 open air shopping centers for Kimco Realty Corporation as their Vice President of Real Estate.  He played a significant role in the repositioning of many assets in various portfolio acquisitions creating significant value and directly contributing to success of the ventures.

Reynolds Thompson is the Chief Investment Officer at Select Strategies and is responsible for the company’s investment activities and investment management services.

Prior to joining Select, Reynolds was President and Chief Financial Officer of Colonial Properties Trust, a $4 billion publicly traded REIT with a portfolio of multifamily, office, retail and mixed-use assets. During a 16-year career with Colonial, he also served as CEO, COO and CIO. He has extensive public company management, operating and investment experience having raised $950 million in equity, $2.5 billion in debt and completed acquisitions totaling $4.1 billion, developments totaling $1.5 billion, dispositions totaling $5 billion and joint ventures totaling $3.5 billion. Reynolds also has expertise in strategic planning, investment analysis, capital markets, financial reporting, regulatory compliance and investor relations.

Reynolds currently serves on the Board of Directors for Medical Properties Trust, a $7 billion publicly traded REIT.

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RealCrowd - All opinions expressed by Adam, Tyler, and podcast guests are solely their own opinions and do not reflect the opinion of RealCrowd. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. To gain a better understanding of the risks associated with commercial real estate investing, please consult your advisors.

Brian Nelter - We're seeing these really innovative things that grocery stores are doing that they're both going after the online stuff. But then they're really creating these great experiences inside. The very same consumer might say, "I'm going to buy all my canned goods online, but I don't want to buy my cheese or my bread and my fruits and vegetables online, because I don't know what I'm going to get."

Adam Hooper - Hey Tyler.

Tyler Stewart - Hey Adam, how are you today?

Adam Hooper - Tyler great, I'm excited to have a two, a twofer today.

Tyler Stewart - We have Brian Neltner, CEO of Select Strategies. Prior to Select Strategies, he ran all real estate activities for Colonial Properties.

Adam Hooper - We also have Reynolds Thompson, current Chairman and Chief Investment Officer of Select Strategies. Prior to that, he held a lot of titles. He was the CEO, COO, CIO, and most recently the CFO of Colonial Properties Trust.

Tyler Stewart - A storied past.

Adam Hooper - Between these two guys we've definitely got a ton of experience in the industry. Deep dive on retail today. Talked about the different kinds of retail. Retail just as a, an industry, that's a pretty broad brush, right. We broke that down into the different kinds of retail strategies, talked about some of the different demographic trends that we're seeing. Interesting stat too to start out that you'll hear in there is how many of the store closures and all these negative headlines are attributed to just 16 different retailers. Lot of doom and gloom for such a small percentage of the actual retail operators out there.

Tyler Stewart - Yeah, a small percentage. Some big names in there and so they get the big headlines. But overall, it was a small percentage of the real estate industry.

Adam Hooper - One of the big trends that we've talked about a lot on the show and continue to talk about here is this merging of brick and mortar and internet based retailing. That was one of the most interesting conversations. Talked a little bit about where do those lines start to blur in the future, and how does that change the nature of the retail space, and where does that create opportunities for investors out there today. That's enough of us talking. Another great episode today. As always, if you have any comments or questions, please send us a note to With that, let's get to it. Well, Brian, Reynolds thanks for joining us this morning. We lucky to have you guys on the show and excited to talk a little bit about the state of the retail industry today.

Brian Nelter - Well, thank you for having us.

Reynolds Thompson - Looking forward to it.

Adam Hooper - Perfect, well, Brian why don't you kick us off here and tell us a little bit about your background, how you got in the industry, experience in the retail space? And then, and Reynolds maybe you can fill in as well after Brian?

Brian Nelter - Great, well, I got in the industry directly out of college. I had studied real estate development and finance in college, and then, and also in my undergraduate and my graduate work. I went directly to work for a local Midwest developer who was actually regional over the eastern half of the United States. Moved from there into the public companies at Chemco and then eventually worked where I oversaw all the commercial real estate at Colonial Properties Trust, which is where I met Reynolds Thompson. My specialty and where I've really focused is mostly geographically in the Midwest and the Southern states and the Southeast, all the way from Dallas, all the way through Virginia and from Minnesota, through Iowa, Kansas, all the way through Ohio and Pennsylvania. I've worked on pretty much all food groups of retail. I've really specialized my whole life in retail. I've worked on everything from lifestyle centers to power centers, malls, grocery centers, neighborhood and necessity based shopping centers, pretty much the whole gamut. In there I oversaw and directly performed leasing, property management, development, re-development, construction, and pretty much all legal aspects of the shopping centers and asset management. I've kind of worked on all different aspects of the shopping centers, many different types of shopping centers and geographically in kind of the eastern half of the United States.

Adam Hooper - Perfect, so you've been at this retail game for a while then.

Brian Nelter - Since 1988, so it's been a while.

Adam Hooper - Very good. Reynolds, why don't you give a little bit about your background and kind of what you guys are up to today?

Reynolds Thompson - Sure. I began my career as a banker, and after a few years in the banking business had an opportunity to join a developer in Atlanta, Georgia who specialized in suburban, office, and industrial development. I came up through the leasing side of the business. After about a 10 year career there, I had an opportunity to go to work for a public company, and was again was focused on the office sector, but that really evolved into more of a investment role and ended up picking up responsibilities for both multi-family and retail investment as my career progressed. Ended up focusing on the acquisition, development, and disposition of business. And later, as a chief operating officer running multi-family office and retail for a diversified REIT that grew to about eight billion in size over kind of a 15, 16 year career there. We focused in the Southwestern United States, the Southeastern United States and more recently have worked in the Midwest. Have experience in joint ventures, equity and debt placement, financial reporting, operations, really the whole gamut of investor relations and reporting.

Adam Hooper - Good. You're the ones to talk to then. They've been through cycles, have seen different markets, you different product types. This is going to be a really interesting conversation today. Before we started recording, Reynolds, you and I were discussing there's a big convention out there, a retail real estate new industry group called International Council of Shopping Centers, ICSC. They have a big convention every year. For me that always served as a good barometer of the sentiment of the industry. Maybe you can kind of go over some of what we were talking about before of kind of how that sentiment has maybe evolved over the last few years and where you think that might be going now?

Reynolds Thompson - Sure, I'll focus on the investor perspective. I'll let Brian weigh in on what's happening from a tenant perspective, because we see a disconnect between investor perception and what we see at the operating level in terms of kind of what we call reality. Over the fast few years, let's say the investor sentiment has morphed from being very cautious to one of somewhat cautious optimism. And more recently investors are at the point of thinking about opportunities in retail. And we, as, because we operate, we've seen opportunities throughout that over the last three or four years, but investor sentiment has evolved. It's the idea that the headlines are really negative in retail, but everything that's gone on in retail is, isn't negative. The headlines are getting a disproportionate amount of the airtime, if you will, more of that kind of bad news sells. There really are some good things going on in retail. We're finding that institutional investors are becoming more and more interested in those opportunities, because it's affected pricing. And so pricing has become more attractive. And whenever pricing, there was a point where the risk and the reward come together. And that's where we believe we are today.

Adam Hooper - Perfect and then Brian what have you seen from the tenant side, the operation side of the users of the space? How's their sentiment changed, evolved or kind of what's the temperature out there? And again, I know that's a broad brush to paint the entire retail user base with. But maybe you can talk about some of the bigger segments, right, obviously kind of your smaller mom and pop shops, bigger national chain retailers, discounters? Just spend a few minutes on that.

Brian Nelter - It's a tale of two cities really. It's the best of times or it's the worst of times, and it all depends on what perspective you're coming from as a tenant. If you're one of the tenants that are very susceptible to internet pressure or that you're in a product line that is declining, we're talking to them about taking space back, downsizing their stores, really trying to redefine who they are. And it can be the worst of times. But there is a lot of people out there where it's the best of times. And those are, you've got this burgeoning and very large health club. If you think about it just 30 years ago you had Gold's Gym, and that was about it, and maybe some seedy gyms in different places. Now there's a whole plethora of different gyms and health clubs and ladies only and yoga studios and full on gyms and things that are, all these different types of health clubs that are out there that were never there before. You've got a lot of those guys. The restaurant business has just exploded with different types of restaurants that are available. Then you have people that are really more experiential. That can be everything from a TJ Maxx where the hunt of the deal is exciting. It doesn't really translate. Their sales are off the charts. That's true for Burlington Coat Factory and a few of these others, where you can't, you don't get that hunt, where you're going through racks and finding a really good deal online. It just doesn't work the same.

Brian Nelter - You have those tenants that are out there. You've got tenants that are trying to redefine who they are which is really exciting stuff. Pet stores, if they're just going to sell supplies, they're not going to compete very well. But if they sell shampoo or where they're actually, they have washing stations. And they've got grooming stations and veterinarians. Those are all things that can't happen online. If they've got, selling live pets, and you might buy a hamster for five bucks. But you buy the hamster supplies are $150. And you can't take the hamster home without a cage and wait for 24 hours for the cage to show up. Those guys are thinking very intelligently. Some of the office supply stores, instead of going away they're finding that the copy centers and all these different things that are service oriented really have a real value, because people don't have the same quality of copiers, for example, in a home office, so that there's things there for them. You have these people that are redefining who they are which involves us downsizing and making our discussions might be, "Hey, we got to remodel. We have to recreate who we are. But when we do that, we're much more productive, and we can pay a greater rent." You kind of got both. And then you have some that are just dying. Their time is up and they're going away. In many of those cases, they've, they're very old tenants and so very old leases. We're kind of really anxious to get those spaces back

Brian Nelter - in many cases, because they're paying a very low market, below market rent, and those can be exciting too

Adam Hooper - There's a couple threads I want to explore there. First is you said the businesses that are more susceptible to internet sells are the ones that are struggling a little bit more right now. I think the numbers somewhere between near 9 1/2ish percent of total retail sales happen online. We had a show, I guess that was season one, with Eric Hohmann. Anyway, we were talking about the retail's gone through a couple different phases of this disruption of kind of that last model of deliver, right. You had the Sears catalogs that just completely changed the whole nature of the landscape, right. And the concept of this internet shopping was basically kind of the catalog version of that disruption today. How much of an impact to the broader industry? Are we going to see that 9% grow to 50%? That's just kind of crystal balling, but it seems like for as much attention as internet sales and e-commerce is getting for it still to only be 9% of overall activity, do we think that's going to peak at some point or does it have the room to run another 5X that?

Brian Nelter - It's interesting. I kind of am in the camp that it's not really going to, we, it's going to eventually merge. It sounds strange to say that. But we're seeing these examples to where some retailers had stores that on the retail only were not profitable. But they said if we close in a zip code that we see our internet sales completely plummet in that zip code. Then we've seen some giant online retailers buy very large grocery chains, because they know they need that to make their online successful. Do I think that it's going to continue to go up? I do. I don't know what the tipping point is. We know it's not going to, we know all retail's not going to, it won't go away, because it seems like the bricks and mortar are more, are becoming more important than ever. It seems like we have seen the tipping point to where I don't think anybody believes any more that we will be a nation where 100% of our goods and services are going to be coming online. How much of that stuff? In some industries I believe it'll be 100% or close to it. There's, I don't know how many people, how many bookstores. It'll probably be one bookstore maybe for 2 million people demographic, because it's that one bookstore where you get coffee table books and art type books and things like that. That's an industry that has just completely found itself at the whims of technology. Then we're seeing these really innovative things that grocery stores are doing, that they're both going after the online stuff.

Brian Nelter - But then they're really creating these great experiences inside. The very same consumer might say I'm going to buy all my canned goods online. I don't want to buy my cheese or my bread and my fruits and vegetables online, because I don't know what I'm going to get. I'd rather go in there. That's actually kind of a fun Saturday afternoon thing to do is to go to the cheese shop or go to the meat shop or go to do these some of these different things to do when there's nothing else going on. I don't know what the percentage is, but I think the successful retailers are going to be the ones that do a little bit of both.

Adam Hooper - To build off of that, the changing nature of what a retailer does in the space, right. So, more of this experiential. We're seeing more kind of showroom space right. Maybe you're not having to stock 40,000 skews anymore. Maybe you've got just display products. Then you can have fulfillment come through this industrial channels. How much do you think that changing nature of this move towards more experiential? Is that a reaction to or is that caused by e-commerce or is that just kind of an evolution of the retail space?

Brian Nelter - It's getting back to fundamentals in some ways. We saw retail go just strictly for a long time they were focused on just price. Way before the internet phenomenon, the online purchasing phenomenon really took off. We were all, I was laughing with other industry guys, saying some day our kids are going to discover that service is really a cool thing, because retailers just gave up on it. It was, it just became product, cheap, and big box, and that's all it was about. And now all of a sudden the experiential is really just another name for service. It's another name for just really giving the customer a lot of care, really giving them an experience when they go in there that makes it worth it for them to drive five minutes to go up the street. It's kind of getting back to basics. I definitely think it is a response. It's a response to the online retailing. However, it was an overdue response, because I think we had to get back to that regardless.

Adam Hooper - Perfect. Well, I think that's a really good background. Now, kind of switching to the current state of retail, right. We said earlier the headlines haven't been kind to this space, lots of kind of doom and gloom about stores closing and just the death, this retail apocalypse, right. Is that justified? Is that real? Is that too broad of a paintbrush to try to characterize a whole industry as?

Brian Nelter - It's way overblown. If you look statistically in 2017, 40, almost half, 48% of all the retail closing was by 16 retailers. In 2018, it was, the top 16 retailers that were closing stores accounted for 66%. Ehen you're bad, you're real bad. You also get the attention. I had an older guy once tell me that our problem in the industry is not that we're overdeveloped it's that we're under-demolished. You got all these, if you think about it, there are homes that have gone through the development phase where it was a great neighborhood. Maybe it peaked as a great neighborhood. And now all of a sudden, the neighborhood's not so good anymore. Well, they haven't built new malls really since the '80s. A lot of these malls are surrounded by, where the demographics have moved on. The concept of the mall is not real anymore. Those big, dark boxes stare people in the eyes, and those are the things that get all the attention. And the major retailers that are closing, the Sears. Everybody's focused on how many square feet Sears and is giving up or how much Office Depot or Office Max is giving up or Barnes & Noble and the closing of Borders and Toys R Us. But nobody's really focusing on LA Fitness and Planet Fitness and Crunch Fitness and Anytime Fitness and through all of those or all the medical uses that are opening up. It's a lot easier to focus on the negative, because it, people are losing jobs. And when they lose jobs that's what you kind of focus on. Is it justified?

Brian Nelter - Sure, it's justified whenever anything that major is happening, but it's way overblown, I think.

Adam Hooper - Reynolds, maybe you can kind of take us through the, what are those kind of major classifications or groups of tenants, right? Big Box, you've got fitness. You've got food and beverage. Maybe kind of walk us through some of those major groupings of tenants, so that we can have a little bit more context as we work through the conversation.

Reynolds Thompson - I'll start by kind of a, with one, with a little bit of number background. It's important to realize that retail sales are continuing to grow in this country. While the online sales are growing at a pretty significant rate, brick and mortar sales are still growing. The brick and mortar portion is significantly larger than the online portion as you mentioned earlier. While you're getting all this negative feedback from the headlines, you still got hundreds and hundreds of millions of dollars in growth that are and not all of it is going online. A lot of it is still in brick and mortar. If you look at the absolute dollars, brick and mortar is getting a much larger share of the growth in terms of total dollars than online.

Adam Hooper - When you look at the health of the retail industry that's what you're really looking at is sales.

Reynolds Thompson - Exactly, you're looking at sales. To move on to the second part of your question, we like to think about groups of retailers in terms of, we kind of categorize them in a couple of different ways. We call one group necessity. Grocery stores are a big necessity retailer. Then we've got another group that we call value. The value retailers are people like TJ Maxx and Burlington and Marshalls. That group has performed very well. We expect them to continue to perform well. They also have very good balance sheets. There's a lot of credit there. That same thing's true of most of the grocery stores. Another category is entertainment. Entertainment we include things like restaurants. We include fitness. They're entertainment are things that are very hard to replicate online. Then you've got discretionary. Now when you get into discretionary, you pick up a lot more of your soft goods retailers. In that tenant category we are not as bullish on. We tend to look for shopping centers that are populated by the necessity, value or entertainment. Another category that we see that it's becoming more and more prevalent and that works very well with retail is medical. There a lot of medical uses that fit very well into retail shopping centers. So, that's the landscape. When you break it down like that, we also aren't very bullish on malls today. We like open air centers a lot more than we like malls.

Adam Hooper - Maybe you can tell us about some of the demand drivers for these different types of uses right. If we've got these sectors, some are doing better than others. Why is that? What is the demand that from the buyer's side that's using these retail services? What drives demand in some of these different categories?

Brian Nelter - Right, so location is still key. No big surprise there. But, what we're finding is that if you have a great fundamentals in your real estate or good fundamentals in your real estate, and you understand who, where your trade area is and what makes your site specifically good, then that gives you the ability to really target the retailers or the service uses or the medical uses that work well in those particular assets. It's really as much of an art as it is a science. But if, like just yesterday I'm learning something, we all learn something everyday, but just yesterday I found out that when you have a hospital, it's illegal to drive in some, in a certain state, it's illegal for an ambulance to pass one hospital to go to another hospital. Hospitals are starting to look for locations, which they never did before so that they can outmaneuver from a highway to capture more consumers. We know from our shopping centers that shopping centers, may, open air shopping centers lend themselves very well to medical, because there a grade. But the other thing about it is is that hospitals are starting to think like retailers, because they want to grow. They know that if they start to put smaller medical offices owned by the hospital out in the further reaches of these neighborhoods, small surgery centers or emergency care centers or different centers like that are, their different offices, that those become feeders. You might go to in a, an ER, a urgent care for stitches, but that makes you loyal now to go to the certain hospital in that city. These guys are really thinking

Brian Nelter - about that, that they're getting out and wanting to get into these locations. So they're thinking very much like retailers. This is also true to a large extent with all the health clubs. They know that while people are going to go in there and work out, it's got to be convenient, and it's got to be, the location is extremely important for them as well. At the end of the day, it's right back to the location and the fundamentals of the real estate are key for most of these retailers and also different service uses.

Adam Hooper - One of the things that we've talked about on the show before primarily as it relates to office space utilization recently is the density of use, right. It used to be 200, 225 square foot per employee. Now, we see that down, even in some cases down to as low as 100 square foot per employee. Reynolds, I think you said we're not so much overbuilt but under-demolished. Can we talk a little bit about the how is the change of use of this space evolved or is that more stable, and what's going on in the space? And then how does the supply part of the equation look? Are seeing a lot of new construction out there? Do we need just kind of start from scratch, raze some buildings and build from scratch to better accommodate the current use of the space?

Reynolds Thompson - All right, I'll take a shot at starting that and really kind of focus on the end of your question first. It kind of plays into the first part of the question. In terms of new supply, retail, unlike the other property types, has had very little new construction over the last few years. If you look at retail, new construction as a percentage of what was built in the past, it's significantly down. And that has really helped retail. And it makes some sense in light of the fact that there have been a lot of store closures. There hasn't been a lot of demand for new retail space. Most of that demand that has come has been grocery driven. And it's still relatively small in scale. That has helped retail. Brian mentioned earlier that retail it tends to work or it doesn't. Where it doesn't, you see some really tough centers. It's typically driven by what's, by the demographics that have taken place in that particular trade area. More than likely that shopping center isn't going to get repurposed in retail. It's going to have to find another use. That's where the kind of functionally obsolete comes in. We've all read statistics about the amount of retail square footage per capita in the US. It's one of the highest in the world. It would look a lot better if the obsolete or functionally obsolete retail was all demolished. Eventually that, those things will get repurposed for some other use. But, I didn't, they're not going to go back to being retail. It's really important

Reynolds Thompson - to find opportunities where the trade area that an asset may sit in has got to support the type of retail that's going on there. That may lead into the first part of your question about repurposing space. There are good retailers out there that are changing their footprint. I'll let Brian expand upon that a little bit more. But there's some real opportunities that we see. When you see an oversized XYZ, maybe there's a real opportunity to downsize that tenant and recapture space and release it at a much better rate. Brian, I'll let you pick up there.

Brian Nelter - That's one of the things that we find we've had the most success with in the last several years is that... At the end of the day, you have to really get on site, really understand the fundamentals of the real estate. You get to understand everything from traffic counts to physical barriers, rivers, mountains, things like that. Highways are big barriers. The existing tenancies though might be a dying retailer. Their rents are from, a lot of these tenants have had leases that were 20 year primary terms with six five year options with no rent growth. Those are some of the tenants where you have the greatest amount of opportunity. If you study your, all of your fundamentals, including the demographics, the income, the density, the disposable income, the visibility of the asset, the ease of access, the parking, the topography, the design, and you've got something that you can really work with then maybe redevelop the asset, you can move a $2 gross rent which we actually have some still. We're just waiting for the retailers to finally call no mas, because it's a dying retailer. And you're replacing those with $12 rents. You can really repurpose a building once you clear out these liabilities of these leases that have been in place since the early '70s. It really kind of creates, it creates an opportunity. And the boxes might be too big. You might have to re, configure the box. But really these buildings are built to last. That's really why we have an under-demolished problem is

Brian Nelter - because they're all steel and concrete. When you peel the building back 40 feet, suddenly you have the right depth. You got the right size. You had a few out parcels and you created an entirely different asset that was there before.

Adam Hooper - Something that you both just kind of touched on there and one of our questions was kind of what makes a good retail market. What I kind of heard between those two comments was, as you just said Brian, there's, you've got demographics. You've got the, just kind of the nature of this space. But more importantly, not just the kind of base level statistics, but how well does that demographic profile fit within the strategy of that retailer. Is that, are there markets that are just de facto better than others or is it usually a fit between the retail strategy and the particulars of that very local geographic region?

Brian Nelter - There are markets that are different than others. I don't know that there, there are some that are just noticeably bad. If you have some to where the retailers you can't... Retailers don't even want to go into it. There might be that it's so rural that there's just not enough people that will even support it. Really what happens is you might need, you might have a rural market, and you have to really look for a regional location, because, in some markets, people will drive two hours to get to a store. But, and then in other markets, it might be that there's too much shrink, meaning that there's so much theft that the retailers don't want to go there. For the most part, what we have found is that retailers they know where their market is, where the big trick is to figure out them. We've looked at a very popular retailer today, and we looked at these major markets which is what people will say would be sometimes quoted as a better market. Think Atlanta, Dallas, Houston, Philadelphia, New York and all that. We thought well let's just plot where everyone of their stores are. They have like 1,200 stores across the United States. 80% of their stores were not in major markets. And it, they're not doing that, because they're choosing to lose money. They know where their customer is. There are some markets that you would market to one person for an average household income of 45. There are retailers that service those markets. There are grocery stores that for focus those markets, where there's an average

Brian Nelter - or an median income of $45,000. Now there is also a different set of stores that will cater to a median income of a 135,000. Those grocery stores might be more your organic, prepared foods, higher end. But everybody's got to eat. You're going to have a different grow, but you can't have somebody that's all organic that's catering to, that's selling $8 gallons of milk to people that have a median income of $35,000. You just have a different retailer. I don't know that there's some that are better. Now when you get to the real scarce markets, their rents tend to be much higher. If you're in a Nordstrom market or you're in something like that, but that, at the same time that might not be where the most opportunity is, because all of the developers are chasing those deals as well which drive the cap rates down so low that suddenly your opportunity's not as good. Sometimes, and it's true in retail that it's better to sell to the masses and live to the, live with the classes, because you have an opportunity to get a substantially better cashflow return on a 9 1/2 cap asset than you can on an overheated market in a primary trade area for primary city trade area that is getting a 5 1/2 cap. It's hard, there's, and they're already at super high rents, so there's not a lot of place for the rents to go. There's not much spread between the debt and the, and I'll let Reynolds talk to that a lot more. Sometimes where there are what we might consider better locations, those also might not necessarily be the best investment location.

Adam Hooper - One of the things you just mentioned there that tenants kind of know their markets. As a landlord, as an owner, tenants drive everything, right. They provide the rent. They provide the income. How much of the role of the manager is it to, is it reactionary or proactive, right? Are you going to be able to convince a tenant to come into this market? Do they maybe already know what markets they want to be in and then you have to position your project as the best within that market? Maybe you can talk about that dynamic a bit of how does that interplay with tenants and where they want to locate with the actual operations and landing some of those tenants. How does that dynamic usually play out?

Brian Nelter - That's a great question. It really has changed over the last 30 years. 30 years ago the real estate departments for all the retailers were much bigger than they are today. One person today might be covering 25 states. He can't possibly know of every trade area in those states. They have come to start to depend much more on local brokers which have really become partners with us. What we've done is you have to be proactive. That's the difference between a successful project and not. You find out which, very often which brokers are representing tenants in the market. You say, "Hey listen I think this site's really going to work." And generally, very often you say the broker's are like, "Well we don't think it's going to work." And then we say, "Well here's why we think it's going to work." We've already run our demographics. We've done our trade area. Here are the traffic counts. Here's how you out position your competitor. Here's the size of the box. You start pitching your site. You're very, very, very proactive. We all love it when a retailer, you pick up the phone and a retailer's just called you. But very much the difference between a successful development and a non-successful development is somebody that understands the retailer and goes at it not just by calling him and say, "Hey we think you should look at this," but understanding their demographics, taking our trade area and showing them why our trade area meets their demographic needs and why our location is the best location

Brian Nelter - within that trade area for them to locate in and why they're not getting it, because the other thing is you have to think of cannibalism. Retailers don't like necessarily putting stores in where it's going to just take sales from another successful store they have nearby. Being able to explain to them you're not capturing this customer. If you are capturing them, there, you're going to lose them to a competitor if they come out here, because there's barriers that keep these people from traveling over there. Or, we've had a lot of success saying you should close two stores. We were the, we were very successful in going to one grocer and saying you have two small stores. We think you should combine them into one big one. We worked for eight years to convince him of that. They had told us in that case that if they just maintain the sales of those two stores by adding them together into one store, it would've been a major success for them. We had done so much homework that we knew that they were going to do better than that that the two, we ended up having sales where the two stores sales combined times two. In other words, they did twice as much volume by combining, because we had to show them where they were leaking product to competitors outside the trade area. You really have to understand the whole art of understanding that trade area, the primary trade area and convincing that retailer that you're right. If you're wrong too many times, and you hope to never be wrong,

Reynolds Thompson - the retailers don't trust you anymore. This is a business of relationships over decades.

Adam Hooper - I was assuming that that dynamic probably changes whether you're talking with a local nail salon owner or a local restaurant versus a major grocer.

Brian Nelter - That's right.

Adam Hooper - But, still very much again, you're, it's not completely reactionary. You're kind of telling the story. And as the sponsor and the manager, you're kind of helping them understand why, whichever project it is that you're representing is the best for their needs. There is some kind of sales that you're having to put your sale's hat on to go lay on those tenants. It's not just, they don't all just fall on your lap like some might think.

Tyler Stewart - Absolutely. That's absolutely right.

Adam Hooper - Well, and I think that's an interesting segue, right. Reynolds, you've had a background in a lot of product types. Maybe you can talk a little bit about how does the role of a sponsor in the real estate space differ from either your multi-family or office or probably wildly from industrial. Maybe you can kind of spend a few minutes contrasting those?

Reynolds Thompson - Sure. Retail is unique in that our, the landlord's customer really is the retailer, and then the retailer's got customers. That relationship with a retailer is very different than the relationship that a landlord might have with an office tenant or a resident in a multi-family community. The dynamic of the relationships is really important. Not just anyone can pick up the phone and call a particular retailer, especially the larger retailers. Getting access to that group and then more importantly having some kind of experience or relationship with them so that what you might be telling them resonates is critical. There's a barrier to entry in retail that really comes through your sponsor's relationships with retailers and, or their brokers that represent those retailers that's been built over years and years and years. It's a very hard business to break into from that perspective. The sponsor or landlord's relationships with tenants and their experience with tenants and hopefully successful experience with tenants is really critical to being able to perform. Really it helps not only in the, on the leasing of the space, but where our relationships have really helped us on the investment side is before you decide to make an investment being able to call a tenant and talk to them about their performance in that location or in a competing location and understanding what's working there and what's not working there, that kind of information is invaluable. If you don't have those

Reynolds Thompson - relationships that information is very hard to get. That makes retail very different from office and multi-family because of that.

Adam Hooper - How much as a owner, how much do you guys concern yourselves with the shopper experience? Is that your role? Is that purely the retailer's role?

Reynolds Thompson - Our role is curb appeal, creating a comfortable, safe, attractive environment for the experience from the street to the parking lot to the front door of the store is where we might play a role. Once they walk in the door, it's in the retailer's domain. We do have to make sure that our properties are attractive and safe and have some appeal from a physical perspective.

Brian Nelter - I would say also our big part of what we do is constantly trying to find the retailers that are going to make a very positive impact. There's not a long line of people that are trying to do a brand new deal with Sears today. They're just not going to add that much to your shopping center. But, there's a lot of other people are falling all over themselves to do a lot of the cooler grocery concepts or a lot of the different restaurant concepts, because they bring so much traffic. So, while those retailers have great experience, our job is to try to find those retailers that are going to add a lot to the tenant mix as well.

Adam Hooper - Maybe you can talk a little bit about how do you create that kind of programming or dynamic within a retail center to make sure that you're offering kind of complementary services so that once someone's there they can, they're just not going to one store necessarily? They're going to maybe three, four, five different stores within that kind of greater shopping experience, right. That programming is up to you guys, right.

Brian Nelter - It is, and it's very complicated actually. The documents are, everything from the document with restrictive covenants, because tenants will say I don't want these guys in. Everything from the document to the types of retailers and to, you got to think about parking. You got to think, because if you just put a bunch of restaurants in, you wouldn't have enough parking. You have to space them adequately apart. And time of day and all of these different things. It's a whole discussion that could go on for hours. There's a lot of tenants that work very well together. You wouldn't necessarily want to put... Again I hate naming tenants. But you wouldn't want to put a high end restaurant with a deep discount general merchandiser that is, those just don't work well together sometimes, because they're not getting the same, and I'm talking about some of the smaller deep discounters, not the big anchors, but the smaller guys that are maybe have, that have just really cheap merchandise. They serve a purpose, but they're not going to play well with some of these other types of retailers. You're trying to mix it both on what they sell, who they're selling to, what their needs are, parking, et cetera, visibility, outdoor seating. Gyms are great, but sometimes they, they're really parking pigs, because at certain times of the day right after work, people just swallow up a ton of parking which can discourage people at dinner from going to certain restaurants. You have to think about all of those things.

Brian Nelter - It's a big endeavor, but it's one that becomes because kind of second nature to somebody that's been doing it their whole life.

Adam Hooper - I chuckled at the comment about covenants and restrictions. This was years ago. I'm curious if you guys have seen this when there was a small retail center we were working on. There was a McDonald's there. One of the restrictions in their lease was an exclusive on all meat served in sandwich form. There was a hot dog shop that wanted to go in. It sparked this just great existential debate over is a hot dog meat served in sandwich form or is that a different delivery vehicle for meat.

Brian Nelter - And so that was just, it was just this bizarre, like who is going to argue whether a hot dog is a meat in sandwich form, but, and I don't recall that it ever got worked out. I think the tenant kind of gave up and just found another spot. Can you guys settle that for us? Is a hot dog meat in a sandwich form or do you think that would fly? Well, the problem is that a tenant wouldn't want to come in and invest significant capital, because if the restrictive covenant was written such that it was ambiguous, they won't open. It doesn't even really matter what we think. It's interesting because that's a big deal, because while it's, because I've seen even funnier things than that. I've seen crazy things where some people say you can't sell any chicken. Well, if it's a chicken, fast food chicken strip restaurant, you can there's a person...

Adam Hooper - Is it really chicken?

Brian Nelter - Well, yeah. Is it really chicken? That's a good question. But what, but really these guys are sending their draft, their blank draft form, which is asking for the moon and the stars. And you really got to get in there and say, "Okay, we're not going to let a fast food chicken restaurant that sells strips, that has a drive through thing," and that's exactly what we did with one of them. And they said, "That's okay," because if we would've just signed what they would've signed, I couldn't of done a Brio. I couldn't of done anything, because Brio has chicken on their pasta. You really have to experience helps you also negotiate those to, so that you can contemplate over the next 20 years that things are going to change, and you have to really be thinking about those restrictive covenants. I think your example is a funny one about a sandwich on. Is that a delivery device for meat and then what's it corn, what's a corn dog? I don't know what that is.

Adam Hooper - These are the things that keep me up at night.

Tyler Stewart - I want to see if I can put you guys on the spot real quick. Let's say you're starting a new retail center that, and you're going to have five different retailers. You want to diversify your tenant mix, and you want to diversify via time whether shoppers will utilize the retail in the morning versus the evening. How would you build out that retail center? What type of tenants would you put in place?

Brian Nelter - Well's you want me to do that one?

Reynolds Thompson - Sure, go.

Brian Nelter - It depends on your trade area. So let's go with a lower income trade area. If it was a lower income trade area, I might do a fast food restaurant along with a dollar store along with a nail salon and a haircutter. That's four, like a Great Clips, Supercuts type hair cutter. Another one would be maybe a less expensive fast casual that's in line. All of a sudden you've got or maybe an Anytime Fitness would work well or something like that. You kind of fill it out like that. If you're going for something really high end, it could be a table service restaurant along with a medical use that is more of a cosmetic medical use with a full service hair salon. And because the high end or table service restaurant's going to totally zoo your parking maybe a little bit in the evening. Whereas your cosmetic medical use and your higher end hair salon is going to be catering to somebody that maybe is able to get there during day light hours. Then maybe if you've got a big enough shopping center, an organic grocery store. For a higher income market that might be a real good mix there.

Adam Hooper - You were able to rattle those off pretty quickly. How much of this tenant mix is back to your grocery scenario where you had the two stores closing and combining into one. It seems like that was more of a kind of data and science driven approach to it versus being able to just rattle off that tenant mix pretty quickly. That seems more art. How much of this tenant mix is kind of data oriented reaction to what the kind of demographics and markets are versus just you can kind of art of that tenant mix?

Brian Nelter - It's 50-50 because even the data takes art. A great example is really lazy developers will do a one, three, five, and 10 mile radius on demographics. Nobody drives to a site based on a one, three, five, and 10 mile radius. They just don't care. What people drive to a site on is man I don't want to cross underneath that highway underpass, because at rush hour it is a nightmare going underneath it, and it's a nightmare coming back. All of a sudden your market completely stops at the highway. There's one developer I saw that did a 10 mile radius for his demographic, and half of the radius was across the Ohio River, and there weren't bridges for 20 miles in either direction. Unless people are swimming, they're not going to get there. The art is getting in your car, driving it, taking pictures of houses, what the price points are, where they are, looking at license plates, seeing what county people are coming from, interviewing tenants, not tenants, but actual consumers if they'll talk to you in the parking lot. Where are you coming from? Talking to other tenants about where their consumers are coming from. Then you use that art by really just getting out there and figuring it out and then you apply the data to it. It's really about half and half. The data and the art is kind of left hand, right hand. You need both or you're not going to be successful.

Reynolds Thompson - I was going to add we've used the word trade area a number of times during our conversation. Trade area is in a very, very important part of how we think about retail real estate investment, whether it's a ground up development or an existing asset, understanding that trade area is the first step in our process of thinking through, analyzing, an opportunity. All the things that Brian touched on go into that analysis. It's that trade area that really dictates your ability to attract certain tenants, the ability for the tenants, if they're already there, to continue to perform. It's the, it is the first step in our process. It's often overlooked. That idea of combining the art with the science is a really key aspect. It kind of relates back to what makes retail a little bit different than maybe other property types. That's really where that is happening. The experience that a sponsor has in is where that's becomes so important.

Adam Hooper - I was going to say, if it seems like this is all these signs are pointing towards retail operation as a much more hands-on asset class, than maybe some of the others out there. When an investor is looking at investing in a retail deal or looking at different sponsors in the retail space, what are some of the different questions they could ask or some of the factors that they should be looking for to determine how, A, how much experience does this sponsor have? How good are they at this art, right? How can an investor start to kind of peel back some of those layers and figure out if this sponsor and manager is going to be a good fit for either that deal or the strategy?

Reynolds Thompson - Sure. You think about experience and all that is good, but I think you really got to back up even a step further and understand how a sponsor might be thinking about retail. What's their strategy? Why does that strategy make sense in light of the opportunity that may be on the table? That would be the first question that I'd want to ask is what's your strategy and then how does this opportunity fit that strategy. And that leads you into, well, do you have experience doing that. What type of developments like this have you done in the past? Those are all part of the process, but it's, it goes back to that strategy and how do they implement that strategy and take advantage of whatever opportunity may be there.

Adam Hooper - What might some of those potential answers be to what that sponsor's strategy is? Are you talking development or repositioning and that kind of strategy or what are specifically referencing when you say strategy there?

Reynolds Thompson - No, I'm talking about a little bit more, big, bigger picture strategy. We mentioned earlier that we like necessity, value, and entertainment retailers. Part of our strategy is finding opportunities where the perception of value and the reality of the cash flows from particular investment may not be matched up. When I talk about perception I mean the market's perception of value versus the reality of the cash flow. We're looking for opportunities where our trade areas may not be in that primary market that Brian mentioned earlier that trade say at a more aggressive cap rate. But if we can find trade area in a market, a secondary market that's got the same characteristics that a trade area in the more expensive large city may have, but you're able to buy that for 100 basis points. We think that there's value there. Take the example a little bit further, if you're buying a grocery anchored center in that primary market, and you buy the exact same center, let's say it's the same anchor. You got same credit and the shop space that would be there would be very similar, same types of tenants, same types of credit. But investors want to pay a lot more for that opportunity in the major market and for some reason, we don't quite understand it, and we think it's an opportunity, they won't pay the same cap rate in a secondary market for that asset. But in reality, your credit, your underlying credit, your cash flows, all those things are the same. You're able to generate a better return by investing in that. What we are looking for,

Reynolds Thompson - in terms of our strategy, are those types of opportunities. If you are an investor, and you're looking for, you're looking at a deal that somebody's put on the table, how does that deal fit into that context? What's the tenant mix? Why does the developer like those tenants? Why do they like this deal? Why do they like the trade area? What, does that line up with what their strategy is? Is this probably goes back to our experience both on the public and the private sector looking back over the types of investments that we found successful. We think some investors miss opportunities, because they focus too much on say macro-demographic data, kind of the shiny, major market kind of macro-numbers. But retail macro-numbers don't matter a lot for retail. It's this trade area. You can find great trade areas within larger mar, larger and smaller markets that are driving a particular shopping center. That's what's important in retail. Being able to distinguish between those and have a sponsor that can understand why that's an opportunity or may not be an opportunity. That's important too. Understanding that trade area may tell you not to do an investment as much at it might tell you to do one. It works, whether you're looking at a large market or a smaller market.

Adam Hooper - And now, for the listeners out there that are maybe not retail experts, are there any resources or any areas that they can go to better understand what the trade area? Is that information going to come directly from the sponsor? Are there kind of standard definitions of these things? I mean, how can an investor start to familiarize themselves outside of this wonderful podcast of course with some of those concepts?

Reynolds Thompson - The only thing that an investor could get directly is probably some kind of a demographic information from a ring. But as Brian mentioned, we don't like rings, because they really don't tell the story about a particular site. I think you're going to have to rely on the sponsor to tell you what the real trade area is, because in order to do it you've got to have all that information that Brian mentioned earlier plus the, do all the on the ground. You've got to combine that art with the information that you may get from speaking with tenants and shoppers. That would be a monumental task for an individual investor to do.

Adam Hooper - Say you've got this center. You put the tenants in, and it's, you've done whatever work you need to do, and now you've got this great tenant mix, good performance, good tenant experience, shopper experience. How does the exit differ in retail space versus maybe multi-family or office or is it really the same, depending, are you going to try to leave some value in for the next buyer? Is it a longterm hold? Is there anything at the end of the lifecycle of this kind of acquisition process that looks different in the retail space than maybe some of the other asset classes?

Reynolds Thompson - It really works the same way. It's primarily going to be driven by the investors I guess objective. Is their objective to create longterm, consistent cashflow or was their objective to qui, try to quickly create some value to create an IRR? There's nothing wrong with either philosophy. It's really comes back to the investor. We have investors that are interested in kind of turning their capital over quicker. But we also have investors who are interested in stabilizing an asset with a, with an attractive yield and enjoying that for years to come. We probably as a sponsor would tend to, I guess, lean toward, create the stable cashflow and enjoy it for a while perspective simply because that's probably where we are in our careers and how we think about the world today.

Adam Hooper - Nothing wrong with cashflow.

Reynolds Thompson - That's right. Cashflow from a return perspective, getting your return in cashflow is a safer investment to me than betting on the residual. If you kind of look at it like that, then it makes you, puts you in a position of making that hold versus sell analysis a really fair one in that you're not being forced to sell in a unfavorable environment. You can kind of wait for the optimal time to sell.

Adam Hooper - There was a paper that our friends at MIT put out recently that I was trying my best to follow along with, and it was basically that exact point, right, the flexibility of those decisions. The simulations they ran, it was somewhere at like a 25% increase in IRR by having that flexibility of these timing decisions, right. When do you, if you're developing how do you phase development? Where on the exit, if you have that flexibility to really maximize market conditions, and you're not in a position, whether it's a loan maturity or something like that that's forcing that sale event, there's tremendous value in that flexibility, that operational flexibility for sure.

Reynolds Thompson - We would agree. You try to do as many things as possible to limit the things that could put you in a position of forcing a sale. Financing's a good example. Philosophically, we tend to want to put debt on a property in a way that would not put you in a position of having to make a decision because of the debt. In other words, we want to use leverage to improve our return, but we don't, we're not so concerned about the return that it would put our investment decision really is being made by the debt as opposed to some of the other factors that you would prefer to make it on.

Adam Hooper - Well I think that is a really, really good overview of kind of the basics of how the retail game works. Is there anything that you guys want to add that we didn't talk about that we should be discussing or anything for listeners, investors out there that, again, as we're looking at retail deals, maybe just a kind of quick recap of the major things they should be paying attention to?

Brian Nelter - If you have somebody that is not an experienced retail operator, then they're looking for a sponsor the most important thing is to find a sponsor that truly understands it, that can explain it simply and is somebody that has, it's a bit self-serving, but somebody that's got a lot of experience, because there are so many things to know. It's a business that is really one that is brought up through almost like a journeyman to somebody that's an accomplished person at it. And it's really something hard to do. If they've gone out there and they bought a building, and they got a great idea. If they can't talk to the tenant, they can't, they don't really understand it, you can get in trouble quick. I personally think the sponsor is clearly the most important thing as it relates to retail.

Reynolds Thompson - I would add that along those same lines, almost always you're going to get surprised by something, and is, regardless of the amount of homework you do and you buying up enough real estate, you're going to have the tenant that you thought was a lock to renew that's not going to renew. You're going to have unforeseen bankruptcy or acquisition that they got a competitor down the street. And all of a sudden a great store gets closed, because somebody bought, somebody decided to merge. And does that sponsor have the experience in dealing with the unexpected? And it really goes back to your original underwriting. Was it a, is the trade area going to support putting a replacement tenant in there and does that sponsor have the ability to think through that and kind of have options?

Adam Hooper - Perfect. Circling back to what we first talked about. Are there any resources that you guys turn to to get the non-sensational headline story of what's going on out there so that some of our listeners, if they want to get a more kind of on the ground actual report of what's going on in the retail space? Are there any resources that you guys can recommend that they can turn to and we'll put links in the show notes?

Brian Nelter - The ICSC has got some great stuff in it. There's a quite a few publications are out there, Shopping Centers Today, quite a few of those, because there's a lot of trade journals that speak to that as well. But ICSC is does a really good job of different resources they have.

Adam Hooper - Perfect. We'll put some links in the show notes. We'll close it out with the crystal ball. We'll put you guys back on the spot. If we have this conversation in five years what are we going to be saying?

Brian Nelter - We're going to be saying that bricks and mortar have become integrated. And there's going to be, it's going to be retailers. I don't think it's going to be online retailers versus bricks and clicks. It's going to be retailers. And we're going to be back to that and that internet is key to retailers but so is bricks and mortar.

Reynolds Thompson - I would add that I believe the industry will continue to evolve. People that aren't able to meld the internet with the physical are going to have a problem. I think online guys that don't have a physical presence are going to suffer. I think it's going to be the retailers that are able to combine both are going to be the retailers that we're talking about.

Adam Hooper - Perfect. Well, the good thing about podcasts is they stick around for a while. We'll be able to reference this in I guess maybe what 2024 we'll come back and see where we're at. Well guys, really, really appreciate your time. Thank you so much for jumping on today. This was very informative, and I think the listeners will get a lot from it.

Brian Nelter - Well, thank you very much.

Reynolds Thompson - Thank you.

Adam Hooper - Perfect, well listeners as always, we appreciate comments, feedback, ratings, and what not. If you have any info or input, please send us a note to And with that, we'll catch you on the next one.

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