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Retail real estate improving, e-commerce still a specter

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The retail real estate market seems to be improving, but e-commerce remains the pachyderm in the plaza.

The status of retail real estate was discussed Tuesday during a Bisnow-sponsored session at the Hyatt Regency Aventine. The session was co-sponsored by Allen Matkins Leck Gamble Mallory & Natsis LLP, Cushman & Wakefield, and Ryan, the professional tax services firm.

William Gerrity, managing partner of The Gerrity Group, a privately held shopping center investment firm specializing in short- and medium-term hold durations, is looking for older shopping centers with an upside potential.

"We are looking for something that's a bit, though not terribly, broken," Gerrity said.

Gregg Sadowsky, Regency Centers senior vice president and senior marketing officer, also said that his firm has been focusing on redevelopment, but has continued to be active with new construction, as well.

He said centers are changing.

"Most new centers today aren't very big. Most are less than 100,000 square feet," Sadowsky said, adding that unlike the old model, new neighborhood (often grocery-anchored) centers are being built without much in-line shop space.

Most on the panel addressed how e-commerce will continue to affect brick-and-mortar shops, but most seemed to agree there will always be a place for physical stores.

"Bricks-and-mortar has a bright future if it's done right," said Colton Sudberry, Sudberry Properties president and CEO, whose firm is the master developer of the huge Civita master plan on the edge of Mission Valley.

Sadowsky said that some retailers will be immune to e-commerce, while it will be a body blow to others.

"The winners (with some exceptions) will be retailers with food. The losers will be anyone who has to compete with something that's sold online," Sadowsky said.

Sumeet Parekh, a principal with HP Investors, paid $48 million with the aid of Clarion Partners last September to acquire the 54,773-square-foot Gaslamp Square development at 402-450 Fifth Ave. in the Gaslamp Quarter.

Parekh said he was "pretty freaked out about the strength of online shopping,"

"We are getting killed on the clothing side," Parekh said, adding that people frequently try on clothes in a store but buy them online.

Despite these concerns, Parekh noted that HP Investors has bought seven properties in the past 18 months in the Gaslamp Quarter.

"We're pretty opportunistic," Parekh said.

The types of retail matter, but as some panelists mentioned, just having a grocery model is no guarantee of success, as evidenced by the Albertsons stores in City Heights and Chula Vista that have been closing, and others across the country.

"There will be more closures coming in all aspects of retail," said Stuart Tanz, CEO of Westfield UTC-based Retail Opportunity Investments Corp. (Nasdaq: ROIC).

Stores continue to disappear, but Tanz said he is confident in the shopping center market that his firm has been acquiring at the rate of one every three weeks.

Pete Bethea, a Cushman & Wakefield Retail Advisors executive director of capital markets, said centers in secondary and even tertiary markets with Class B properties can fare well if they have the right tenant.

"We've had a good time selling the B properties," Bethea said.

Bethea said he is used to repositioning centers. Cushman & Wakefield is managing a 10-property portfolio for Kimco Realty (NYSE: KIM) with assets around the country that each had a Kmart at their heart. These are now being replaced with other users.

Tanz added that tenants are backfilling a lot of old Kmart spaces in his portfolio, as well.

Sadowsky said it takes some creativity to make a space succeed when it was designed for something else, and that it is often necessary to think outside the box.

"Maybe the answer isn't even retail," Sadowsky said.

Gerrity added that his firm has been instrumental in redeveloping Kmart sites into medical office buildings in the Los Angeles area.

In fact, in the early 1990s, when a Kmart overlooking Interstate 15 in the Scripps Ranch area failed, the property was rezoned and redeveloped as apartments.

More recently, a Living Spaces store replaced a Kmart store in Mission Valley.

"This property has done great," Sudberry said.

Sadowsky said what has kept such centers full is that very few new centers have been built in the past few years.

Sudberry said that although he plans to build new retail at his Civita master plan and at other Sudberry projects, he would like to see more demolition of existing retail properties.

"Some people say we are not under-retailed but are under-demolished," Sudberry said.

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