No, I haven't lost my mind. Or if I have, I am not cognizant of it. Let me get right into it.
Retail has been pasted as possibly the "worst" asset class right now. There are words like "Zombie Malls" and talk about properties that have a negative value.
People point out that Amazon has destroyed retail, and the destruction continues. There is no end in sight. We aren't at the bottom.
And it gets better – I mean worse. There is no capital for retail. Lenders are scared, and investors worse than scared since they probably just watched their equity go to zero.
Almost "everyone" says, stay away!!!
Okay, but this is how my mind works:
If someone says something is a bad idea, my ears perk up.
If a lot of people say something is a bad idea, I get really interested.
And if everyone (or close to everyone) says something is a bad idea, I am jumping up and down because I know that I "might" be onto something.
This is not crazy foolishness, as, of course, most ideas that people say are "bad" are indeed "bad" for a good reason. However, my thesis is that:
"All brilliant ideas look bad at first as if they looked like good ideas everyone would already be doing them. In the stupid bin are the brilliant ideas; you just have to pick them out."
So with this backdrop, let's look at Retail.
At the outset, I think the word "Retail" is now a misnomer. The word should be chopped into two pieces:
Retail to many is a location where the retailer takes products from a producer of the products, puts them on a shelf, marks them up 50%, and customers come in and buy them at the higher price. The retailer gets the markup (less its costs). I would call that business "Old Retail."
But then there is a completely different kind of Retail, a location where the owner of a brand, or something that people need or desire, has a competitive advantage. The most obvious is an Apple Store, but there are many more, and you know it when you see it since it was packed with customers (before COVID) and will be again (after COVID). Technically this kind of business is also Retail, isn't it? But it is hardly struggling. I have coined the phrase, which you have seen in my prior writings, "Power Niche" to describe businesses that derive their competitive strength from a niche that they have ownership of. I would call this business "Power Niche Retail."
Power Niche Retail and Old Retail are, to my mind, completely different concepts, yet they are typically lumped together under the rubric of "Retail."
And what does this lumping together do? It scares off most buyers, lenders, and capital sources and drives down pricing, not only of Old Retail, but Power Niche Retail as well, since they are often mixed, both in peoples' minds and locationally as well.
An analysis of these two concepts can be done in an instant as follows:
- Old Retail – dead as a doornail – Amazon and the internet were killing it off for years, and COVID hastened its demise.
- Power Niche Retail – this is a super vibrant business with dramatic upside.
And here is where the savvy investor can dramatically outperform.
How to do it? Here are the steps:
First, let everyone know you are very interested in investing in/lending on, Retail. There is no point in you telling everyone that some Real Estate Philosopher guy was talking about Power Niche Retail. No one will care. All you want are possible Retail deals and opportunities to come your way so you can evaluate them.
In view of the paucity of interested parties and the industry's desperation, a lot of deal flow should come your way.
And wouldn't it be nice to look at a deal where there weren't 63 of your competitors looking at the same thing?
Second, when the deals come to you, make an assessment as to the occupants of the underlying real estate.
Most likely, it will be a mix of Old Retail and Power Niche Retail. Price the Old Retail at zero less the cost of lease-up to Power Niche Retail. With respect to the Power Niche Retail, do the opposite, i.e., price them as good tenants with upside.
If the property is a mixture of the two Retail concepts, this is where creative players have to be, well, creative. Perhaps there is a partial change of use, aka "Repurposing."
Perhaps it is a shrinkage of the overall shopping center, mall, or other location. Perhaps you have to restructure the capital stack. Perhaps a cleansing bankruptcy is needed. Perhaps, you need to chop away some of the pads. Perhaps you have to create new pads, new zoning, or non-retail uses, such as entertainment, etc.
Third, along the way, make sure that the various constituents who could block you from succeeding are on board or likely to be on board. And there are many constituents, including the owner, the first mortgage lender, the high yield, debt, the investors, the various Retail tenants (both the Old Retail and the Power Niche Retail), the community, and often others as well.
These parties may be eager for a deal to create upside or because they are desperate – or the opposite. Don't waste a lot of time if some of the parties are recalcitrant. Time is money, and there are a lot of distressed Retail situations out there.
Fourth, also along the way, be focused on "creating value." You may recall my article from last year entitled: You Will Never Find a Good Deal Again, as instead of 'finding' deals like in the old days, now you have to 'create' them. In my view, there is no better place to exemplify this than in the Retail sector.
And voila! You have some really nice investment – and lending – opportunities. And these opportunities should outperform other opportunities because you are one of the few who can separate the wheat from the chaff, where others see only chaff.
Q.E.D.
In line with our mission "To Help Our Clients Grow Their Businesses" – we have come up with the following plan of action pertaining to Retail…..
We will act as an informal Retail Win/Win Hub, where we will match our clients and friends of the firm with others in the following – super simple – way (with the hope of creating a win/win for all involved parties):
I will ask you to let me know which of the following, if any, is of interest to you. Once you do that, you will be part of an informal database that we will maintain.
For example, if you have a situation in which rescue capital is sought or capital to capitalize on an opportunity – or a similar situation, we will refer you to clients that have the dry powder. Alternatively, if you have capital available for investment, we will refer you to parties that are seeking this capital.
PS: I cannot help but add the following about our Firm's deep expertise in the Retail sector, which is summarized as follows:
If you are venturing into retail, either because you already invested and are working out some troubles (defensive), or you want to invest opportunistically (offensive), we can provide unique and powerful assistance to you. Here is a quick outline of our array of services:
- Finding a White Knight
- Litigation Financing (through our relationship with Parabellum Capital
- Legal Work – Workouts, Restructurings, Litigation and Bankruptcy
- Knowledge of Pitfalls
- Repurposing
- Strategic Thinking
Finally, it bears mention that we are not just jumping into retail now. We have been steeped in it for over twenty years. Some of our lawyers have spent the better part of their careers handling retail. We know every aspect of how shopping centers and malls are created and where the weak spots and touchpoints are – both from a legal perspective and a business perspective.
And I – as The Real Estate Philosopher – have been writing about it for years. We have been all over the deals as they were created and now have a competitive advantage – outlined above – in our ability to assist you.
Please feel free to reach out to us if you are in the retail world or are delving into it.
Bruce Stachenfeld aka The Real Estate Philosopher™