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

Patrick Smith is an executive vice president and principal of the retail real estate services firm SRS Real Estate Partners, which was spun off from Staubach when that company was acquired by Jones Lang LaSalle. Mr. Smith is a busy leasing dealmaker not only in the city but nationally and represents a host of large retailers that have been active in the market both here and around the country, including Dick’s Sporting Goods, Party City and Disney. With ICSC, the biggest retail event of the year, only weeks away, Mr. Smith weighed in on the state of the retail market with The Commercial Observer and discussed what he has planned for this year’s conference in Las Vegas.

sit down for web Retail is Dead, Long Live Retail: Patrick Smith of SRS Real Estate on the Future of Brick and Mortar

Patrick Smith.

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.

How does that trend bode for retail space? Wouldn’t you imagine that with fewer retailers who are smaller in size, it’s going to create permanent vacancy and also fewer deals for brokers to do?

Long term, there are absolutely going to be fewer deals and fewer retailers and very few projects coming online. That’s another reason there’s a renewed focus on New York. There’s all this opportunity here. The volume and New York traffic are terrific.

How do retailers differentiate between New York and the rest of the country when on balance they’re shrinking but perhaps also interested in expanding here?
They do differentiate. And New York City is one of the few places where you have positive absorption right now.

What about the West Side rail yards and the World Trade Center site, where large retail projects are envisioned and in process—how will they fare?
Retail in New York is very much transit-based. If the train is finished on the West Side by the time the rail yards are developed, which appears on schedule, I think they’re fine. For the West Side, like any new retail market, it takes time for customers to discover it. Downtown, though, is a proven shopping destination that is way under-retailed and there’s no question that will be successful. Westfield’s deal person, Sandi Danick, was brought on to lease that project up. The plans they have are good, it’s going to be phenomenal. You’re still a ways off from that being available, 24 to 30 months. I think most of these guys do strategic leasing. They’ll maybe do a larger-format store to set the tone for the rest of the space. I don’t know what the approach will be that they take, in terms of whether they want to do a food or a department store. But Sandi is pretty approachable and she’ll get deals done. Brookfield at the World Financial Center is also building new retail space and they’re making the same decisions. New York is unique in that you can use a food component to brand a retail space, which is not traditional elsewhere in the country. Look at the Time Warner Center, where they did four or five destination restaurants that everyone wants to go to. The retail success there owes a lot to that component.

You represent large retailers like Whole Foods and Dick’s Sporting Goods. Have you spoken to Brookfield or the Port Authority about bringing any of your tenants to those projects Downtown?
We have talked about it with Brookfield but, honestly, it is nothing too serious right now.

ICSC is coming up. How is that conference regarded in the industry and what are you doing to prepare for it?
We are almost fully booked for the company. We send out about 100 professionals. It’s a convention that you can go to and walk around, meet folks and talk to them, but it’s really appointment driven. There are people going out to show their projects and their space and there’s dealmaking and pitching. You don’t just walk up to people and do that stuff, you usually have to book those appointments weeks or months in advance. Every year the planning for that has been getting earlier and earlier. We’re basically fully booked for the two and a half days of the show in two-and-half-hour increments, 8:30 to 5:00. And then there’s the entertaining and social aspect of it. We do a client function. ICSC has about 35,000 attendees. At the height of the market in 2007 it was about 51,000. That’s our whole industry. It’s fairly small and for the guys active in our markets and the major markets in the country, it’s even smaller. So the social part of it all is very important. It’s very much relationship-oriented.

Are you discussing any particular business this year?
We’re in the market with a one million-square-foot project that we’re pitching. We have two assets, one that will be about $19 million and another that’s around $26 million in Manhattan that are for sale that we’re marketing. One is a retail condo at Second Avenue and 23rd Street that is net leased to Duane Reade, and the other is a retail asset in Chinatown that is net leased to East West Bank. People who are pitching new deals are about 40 percent of it and 30 percent is trying to finish deals that we’re active with. Then there’s business development. We have at least four meetings with guys who are considering coming to New York. It’s interesting—people who aren’t in our business have this perception of things getting crazy in Vegas, and there is a time and place to have fun at ICSC, but there is a lot of business too. You’re spending thousands of dollars entertaining people and you want to get a yield on that.

Lately there has been seemingly a lot of movement in the brokerage services industry in the city. Has that been felt on the retail side of the business?
There is a lot less movement than you think. The only thing that has happened were that a few brokers left Newmark.

It was recently reported that you were in the market with Dick’s Sporting Good at 3 Columbus. Is that deal progressing, and how big will it be?
I really can’t talk about it now.

What other large deals are you working on?
We’re active with Dick’s in the entire metro New York area. Whole Foods is active. We’re active with Party City. We’re going to announce a few more. I think there’s a reason for each one of them. I mean it seems like all the guys in the pet supply category are active, in fast fashion, limited service fitness like Planet Fitness and Crunch. You’ll see them do some deals. There’s a lot of activity in the walk-in medical center tenants, which is a new trend.

Is Nordstrom still out in the market looking for space?
I’m aware there’s still a requirement to do a store. They’re looking at stuff, but where they’re at I’m not sure.

What do you think of the living-wage legislation passed by the City Council?
There’s a difference between my own personal ideology and what I think from a business perspective. Look, it’s a great thing to do from the standpoint that everyone should be able to earn a living and I support that. But also something that we all need to be aware of is that anything that imposes operating restrictions on a retailer, and I’m privy to their thinking and decisionmaking, and you’re going to have problems. As soon as you bring in issues that are different from anywhere else that they operate, and you create a significant problem. It will kill a deal in my opinion. That’s not an opinion on whether it’s right or wrong. It’s just a fact. You’re now getting into the way that they operate their stores and it creates a huge issue.

11 Times Square was a much-heralded retail space at the edge of one of the city’s busiest retail neighborhoods. What is happening there?
It’s a great space with a beautiful design and a strong location. They have had transactions there but nothing has closed. I don’t have anything to do with that building directly so it wouldn’t be right for me to comment beyond that.

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