In the 40 years since its beginnings in Tulsa, Stan Johnson Company, a real estate investment brokerage, has done $40 billion worth of deals. Net lease properties are its stock-in-trade (It’s dubbed itself “The Net Lease Authority.”), an important segment in retail real estate, and one that was quite active during the pandemic with many QSRs closing shop and others seeking to expand their drive-through locations. We recently discussed the effects of the pandemic with Stan Johnson’s articulate Managing Partner Josh Campbell. Here are the highlights.
In what significant ways has the pandemic affected retail real estate?
The pandemic was less of a depression-oriented downturn and more of a secular shift and dislocation. The conditions produced winners and losers, but not all segments in retail real estate endured significant impacts. We’re seeing a big push from the winners for more controllable and more convenient access points for consumers. You see restaurant tenants like Chipotle seeking net-lease properties that can accommodate drive-throughs. We’re also seeing a fundamental shift in the way retail space is going to be used in which last-mile fulfillment is merging with point-of-purchase in big-box and multi-tenant centers.
We thought it a telling structural re-alignment when CBRE combined its retail and industrial sectors recently. Are we seeing a historic change taking place?
Industrial is becoming retail. That’s a big shift. Retail is and will remain the most attractive dirt in an urban location. It’s conveniently located. It’s next to rooftops. What’s coming is not going to displace the retail models that endured the pandemic. What changes is the credit of the tenancy and ability to pay or the mix of the tenancy.
Do you also see a significant shift in retailers’ real estate strategies going forward?
A lot of retail occupiers are shifting their business models. Point-of-purchase space is being repurposed to accommodate fulfillment, particularly in consumer goods. Retailers are looking for ways to create synergies with other high-traffic tenant models in their centers. Say you’re a Home Depot or a Best Buy and you’re looking at excess parking in front of your stores. You’re going to start thinking about attracting a Starbucks or a Chick-fil-A in that parking lot to bring more traffic in.
So how does that play out with the regional and super-regional malls that have been hurt during the pandemic?
Debt has to have a maturity date many years out, and equity needs to be patient. I think what we’re seeing happen with a lot of mall foreclosures is investors pushing too hard on the owner or developer, forcing them to push for a fast sale. But if equity can be patient, and if they develop sound re-tenanting strategies, they’ll have two flat years to maximize value.
What might you consider a sound strategy?
I think you’ll see a lot of removal of point-of-sale at malls and maximization of distribution. You have Amazon looking at a lot of empty Sears and Macy’s to use as distribution centers. You’ll also see developers carving off the edges of parking lots and lining the outer edges with quick-service restaurants, coffee shops, and health services.