The so-called 'retail apocalypse' masks select opportunities for investment in retail properties , with Amherst Capital Management aiming to capture a reinvented sector by identifying future trends with the help of data and analytics.
That's according to Abbe FranchotBorok, head of originations – commercial real estate lending at BNY Mellon Investment Management's commercial property specialist boutique, who says retail is "not dead but is being reborn". Meanwhile, the erstwhile low-risk stalwarts of the sector have demonstrated a role reversal in recent years.
"When I was learning how to underwrite, you'd have the traditional 'anchors' in your retail portfolio; JCPenney, Sears and Macy's," says Franchot Borok. "They were such an important component of your asset. You wanted that exposure, while movie theatres, fitness centres and restaurants might have been less desirable. But these days that dynamic has reversed in terms of traditional underwriting and how you go about valuing a retail property asset."
The driver of that shift are the twin forces of technology and millennials, says Franchot Borok.
With 20% of current US retail commercial real estate set to become obsolete due to oversupply, she says Amherst is taking a proactive stance; using data and harnessing sociodemographic trends and themes to find opportunities in "transitional assets".
While, residential housing and traditional real estate (retail, office and industrial) make up a large proportion of the assets in the strategy, the US transitional mortgage space, where the team sees a 'value-add' opportunity, the potential universe is roughly US$50-60bn.
Despite well-documented store closures (including Toys 'R' Us, Mattress Firm Inc and Walgreens in the US, and Payless set to close 2,500 stores in 2019 – the largest retail liquidation in history) Franchot Borok says there are still signs of life in this sector. "We're seeing mixed signals with strong data separating the 'haves' and the 'have-nots'. Target, for example, saw very strong sales in 2018 and was up around 5% over the holiday season," a fact she attributes to the company's omni-channel strategy.
While online is still only responsible for 10%-20% of the overall retail market, Franchot Borok says online sales have increased by 180% since 2010, while bricks and mortar sales have grown 26% over the same period.
She highlights Amazon as a leader in online sales, and its move into last-mile delivery has led to a huge "pop" in industrial property, she says, as it and other retailers intent on providing expedited delivery increase their presence in areas close to large cities.
As the first generation to have grown up with a smartphone, millennials have different demands: experiential spending is more important than material goods, with the demographic eating at least 50% of their meals out, favouring 'Instagrammable' travel and preferring shopping experiences that play into that desire, Franchot Borok says.
Sources: US Census Bureau as at February 2019.
Millennial preferences / trends are driving change across many industries:
She names two experiential winners as Apple – where shoppers enjoy a sense of community, and can access the Genius bar where they can sample and learn to use products – and spin class SoulCycle (owned by US real estate investor Related), which touches fashion, community and lifestyle.
"Related is a very large real estate investment firm in the US," says Franchot Borok. "They bought that and [fitness brand] Equinox, which we interpret as a sign the traditional retail landlord has recognised the types of brands they should be attracting into their assets. You can finish a spin class and then go off for a foodie experience just next door, or meet for coffee – all on one site. This is a huge growth area for us."
Franchot Borok concedes that while real estate has been lagging other asset classes in terms of its use of big data to predict investment trends, it's swiftly playing catch-up, with Amherst applying technology twofold: deliberately asking tenants about their online strategy and tracking and monitoring data points to help it adapt to shifting demographic trends and identify future winners.
1 Investment Managers are appointed by BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA) or affiliated fund operating companies to undertake portfolio management activities in relation to contracts for products and services entered into by clients with BNYMIM EMEA or the BNY Mellon funds.
The value of investments can fall. Investors may not get back the amount invested. INV01622 Exp 2 July 2019. Published as at 2 April 2019.Back to main page
Mellon was formed on 31 January 2018, through the merger of The Boston Company and Standish into Mellon Capital. Effective 2 January 2019, the combined firm was renamed Mellon Investments Corporation.