Retail: As the rules get rewritten, analysis comes to the fore
For the past several years, both the multifamily and office sectors have undergone significant shifts driven by changes in how people live, work, shop and play. Now, retail is being pulled into this whirlwind. But retail’s transformation is likely to be more turbulent and unpredictable than those other two sectors. Consider that in the aftermath of the 2008 meltdown and the rise of the Gig Economy, it became fairly clear fairly quickly where multifamily and office were headed. But as the entire consumer goods supply chain rushes to refit for a world in which people can shop for virtually anything from their homes or cell phones, there is no playbook or template to consult. Urban drone towers? Fleets of self-driving delivery vehicles? And possibilities like these don’t even address the spillover from changes unfolding in other sectors of the economy. What, for example, will the effect be as the country’s remaining 95,000 bank branches continue to shutter? There are simply too many moving parts to know what the middle-term future of retail looks like from a real estate perspective.
This is hardly to say that there aren’t good investments to be made as retail evolves. But to find those deals, investors have to get granular, with a much more hands-on approach to evaluating possibilities. “Traditional” malls may be dying, but a mall converted into an amenities-filled multifamily complex anchored by an upscale grocery and a 10-screen cinema with reclining seats and waiter service may do quite well, depending on the needs of the local demographic. Big box stores may be dinosaurs, but converting one into a showroom/distribution center may be a shrewd move.
In other words, it’s all in the details of how demographics and evolving solutions to the last-mile problem converge on that particular parcel of land. This situation calls for general partners to dig deep in their analysis of prospective deals. It’s no longer feasible to leave matters like tenant mix to the developers; today, the tenant mix is the deal. Fund managers need to start with a command of data at the individual store level. But this is only a start. At a time when the saying “past performance is no guarantee of future success” has never been truer, that data needs to drive predictive analytics. And those quantitative forecasts need to be combined with qualitative insights into those big-picture questions above.
For many funds, these requirements represent a significant ratcheting up in analytical capability and fluency. Even after more certainty is injected into the retail picture, this trend will accelerate over time as analytics become integrated into decision making best practice. Indeed, analytical capability will become a key criterion by which limited partners evaluate GPs. Forward-thinking funds will embrace analytics not just as a cost of doing business but as an opportunity for differentiation in a crowded market.
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