Retail is Dead, Long Live Retail: Patrick Smith of SRS Real Estate on the Future of Brick-and-Mortar

The Commercial Observer: What is the retail market in the city like right now? Commercial office leasing has slowed.
Mr. Smith: So we’re a national company and what I tend to see, what is going on nationally and what is going on in New York related to the rest of the country in general, is that retail is getting smaller. There are a third less retailers than five years ago and most, if they have any growth, it’s relegated to the major metro markets. New York is very strong and that’s terrific even though there are fewer tenants. But that’s not reflective of what is happening in the rest of the U.S. It’s an interesting dynamic. There is a flight to the primary markets, and nowhere is that reflected more than in New York. In the city we’re seeing rent growth and positive absorption in almost every major market. And I can’t point to anywhere else than here that can boast that kind of across-the-board strength.

There are a third fewer retailers? We didn’t realize it was that bad out there.
In almost every category of retail there are usually two, three, four guys. You have the national players and then the strong local player. From pet supplies to sporting goods to shoes. And during the downturn there was a shakeout. The three- and four-guy, even the two-guy has gone away, either by bankruptcy or acquisitions.

Like with Circuit City?
That’s a great example. Circuit City went away and still the dominant player now in that category, Best Buy, is still trying to figure out what they want to be, what’s the right way to attack that market. You go category by category, I mean, think of toys. Toys R Us doesn’t have a major competitor. I think generally you would think if you didn’t have a competitor that you would be doing amazing. The reality of the retail of retail is, a lot of those guys even are still trying to figure things out. BARNES & NOBLE. Borders went away, and yet they’re still trying to figure out what they’re trying to be. But all this doesn’t beget the status of New York, it’s more about the industry as a whole.

So, while things may be fine in New York, is retail dying nationally?
Retail is not dead. The customer is getting the product in different ways or wants it to be delivered in a different way. The guys who are doing well are the vertically integrated retailers, the ones who have figured that out. You buy at the store, buy in the catalog or online, and it’s all seamless and interchangeable. There is also a move toward either competing on price or specialization or service. You look at electronics. If you’re trying to get the cheapest flatscreen television you can go to Costco and Walmart or go online, but if you want the service you go to Best Buy. Which is worth more? I think that’s still being figured out a bit.

So are large budget-conscious stores doing better than ever?
Both nationally and in the city there should be a huge opportunity for these larger-format guys, Target, Costco, Walmart, Home Depot. But it’s slow growth. Everyone still is thinking how bad things were three to four years ago. There is a growth initiative, but it’s not massive.

On a macro basis, large-scale retail projects aren’t getting built because it takes an anchor to drive those. And for malls or strip centers that you do see going up, they’re being anchored by nontraditional tenants who are smaller than what a developer would previously look to do a deal with, like a DSW. A niche-oriented tenant who is seeing an opportunity versus the large super-category store that in the past would have been the anchor. I mean you’re not seeing big-scale projects in the city even right now, like East River Plaza or Vornado’s project in Rego Park or what Muss built in Flushing. Those are massive retail projects, 600,000 to 800,000 square feet in size. They’re not on the board anymore.

Do you feel like the future of retail is going to be e-commerce?
There are tons of guys way smarter than I who could answer this a lot better, but my personal opinion is there is a certain social aspect to shopping, there is a desire to be able to touch and feel the product. The retailers who do it well, take J.Crew for example, you order something, you can return it to the store. It’s seamless, it’s delivered any way the customer wants it. The retailers who do that are doing well. Look at the music business. There are plenty of people buying music and books, just not CDs and paper books. It’s the delivery system that has changed. What we’re seeing is that retailers overall are getting smaller. Best Buy was 50,000 square feet; now they’re 30,000 square feet. We do work with Whole Foods. They used to do 60,000 to 70,000 square foot stores. Now it’s 45,000 square feet. They’ve tightened up the way they do their merchandising and marketing. You look at practically every retailer and their formats are smaller.