Retail Real Estate - Observations from the Edge

Observations from the Edge…….

By Forbes Rutherford, Rutherford International

          

 One of the distinct advantageous of an executive search professional is their ability to observe the interaction of a company across the breadth of ‘like’ companies within a given sector. A consultant with a high degree of organizational awareness is not only able to peel back the layers of a single organization to reveal its internal strengths, weakness, threats and potentiality but is able to aggregate this same information across multiple organizations to uncover sectoral trends and unseen market opportunities.

One example of this lateral view of an industry is our published behavioral analysis suggesting the caliber of retail leasing professionals in Canada will significantly weaken as the ‘fifty-something’ generation begins to retire. In brief, the study bench-marked the key performance traits that one would typically find in a retail leasing professional employed with an owner/developer. The results are quite provocative indicating that the behavioral traits possessed by significant number of retail leasing managers in relation to what constitutes “high performing” leasing traits translates into their being average performers with respect to leasing stabilized retail assets, and irreversibly poor performers in green field or repositioning leasing.

Considering retail leasing is highly relationship based, the benchmarking study considered the demographic realities of the aging high performing leasing professional. We’ve determined that the “mean age” of retail leasing intermediaries is increasing and will continue to increase for five or so more years as “down-sized” and “semi-retired” retail executives re-invent themselves by leveraging their industry relationships and pursuing careers as consultants advising small to medium size retailers on network strategy and lease transactions.

Competition is good; the value proposition of an ex-retailer in this consultative role as network strategist is their intimate understanding of operating margins. But how will the tenant representative brokerages respond to this increasing incursion on their client relationships? There was a time when the tenant representative brokerages would leave each other clients alone; it was feared that the cost of cracking a relationship would commoditize fees and ultimately cost too much. This professional consideration not to poach has been set aside – all retailers are open-game.

The status quo no longer works. This transactional business model based on the singularity of a relationship is difficult to sustain with so many retail agents and consultants boasting a similar relationship with a single tenant. Too many transaction intermediaries are chasing a semi-elastic market share of lease deals. This fracturing of the market is pressuring the bottom-lines of dedicated retail tenant representation brokerages; which means they will need to evolve and place less faith in achieving their gross revenues solely on transactional activity. As this sector of the industry ages, it’s becoming ripe for consolidation through merger and acquisition. Unfortunately a considerable number of the leasing agents have shown little interest or perhaps are unable to evolve behaviorally from a transactional to a consultative sales approach and will be of little use to these merged entities.

This leads me to another industry trend which seems to be taking shape – the evolution of tenant representation from pure transaction to multidimensional services. The rise of the retail advisory shop that offers one-stop access to a variety of back-office store network services including transaction is the likely evolution of tenant representation. There are several examples of this globally; in Canada we will observe an increase in full-service platforms for retailers as the larger corporate real estate services companies seek to increase market share by supporting large retailers’ efforts to ratchet down their real estate costs.

We’ve already seen and will continue to observe private stakeholders in large format retailers tap the equity markets by securitizing their assets. The penchant of the financial market to penalize operating errant behavior will further drive efficiencies down to the property level thus requiring a more comprehensive service provider.

I suspect however, that it will take five years for this one-stop retail property services platform to achieve its own momentum as it’ll take Canadian retailers this long to interpret trans-nationally the benefits of out-sourcing property services. This rise to prominence of one-stop retail services shop is inversely timed to the demographic erosion of old-line but retiring relationships; and further enhanced if the consumer economy softens and pushes large store network retailers to increase their efforts to uncover operational efficiencies.

Relative to other assorted global markets, Canadian retail has had an amazing run these past few years. However if I was a retailer, facing a weakening economy, Amazon’s offspring and a Baby Boomer customer base that is rapidly shifting its purchasing patterns, I think I would be far more content with a ‘trusted adviser’ that can offer me solutions to reduce operational expenditures in my store network. Certainly I would be far more content, than placing my company’s welfare in the hands of a transaction specialist that might be inclined to swap me out of a ‘home plate’ location for another client in their roster.

Forbes Rutherford (855-256-5778) is a twenty-five year veteran in international real estate executive search. He began his career in 1986 recruiting GM’s for retail developers such as Markborough, Campeau, Marathon, Cadillac Fairview, Cambridge and Trilea. He’s survived multiple real estate cycles, has sufficient scars to prove it; and is able to recognize a frothy market when he sees it. He currently has particular interest in speaking with real estate professionals that are highly resilient to change, understand financial restructuring and are able to manage and lease assets in an under-performing economy.