Investments in real estate products are always in demand, some more so than others. Actual returns on the investments appear to be moderating though development activity remains strong within specific categories such as single use retail (i.e. restaurants, fast-food, service). Here’s a quick look at a few real estate categories:
Hotels. Drive the interstates and you’ll see new limited service hotels coming out of the ground everywhere. There are new names for Hilton and Marriott being pushed out, each with the ubiquitous 100 room, four story design package. Are there enough to meet demand? Rumors of revPAR slowing for national branches seem to support the idea that at least a slow-down in construction is on the horizon. Perhaps a factor is the room revenue in the over 7 million home rental listings of Airbnb.
Retail. The retail world is very segmented with each grappling with its own set of circumstances, both positive and negative.
Enclosed malls continue to recede. Those malls in A markets appear stable while B and C market malls are struggling with all three striving to develop new interest in their products. Department Stores, once the anchor of choice, are searching for direction, if even still around. Sears, for all practical purposes, is gone, having been mis-managed, then placed in bankruptcy and now, as a last resort, is undergoing an attempt at re-packaging a select group of locations deemed to be strong. The effect of Wal-Mart, Home Depot and the internet has been relentless on Sears.
Macy’s is seeing sales continue to moderate, even as it works to enhance its internet presence. Its stock price has fallen from $45.41 in 2017 to $15.52 in mid-October 2019. High end Department Stores such as Saks, Neiman Marcus, and Nordstrom are likewise experiencing soft sales with same store sales increases being difficult to reach. Mid-market names such as Dillard’s, Belk and Von Maur, while affected by the internet, appear stable overall.
Highlighting the soft goods world of retail are the off prices operations of Burlington, T.J. Maxx and Ross.
Traditional mall tenants are fewer and fewer each day, driving mall owners to widen the scope of prospects to include entertainment, more food, office operations, temporary tenants and even housing alternatives for areas left by department stores. This week the famous L Brands, Inc., with Victoria’s Secret, found itself trimming the home office staff, changing leadership within the company and declaring it’s working on being more relevant.
Grocery Stores are not immune to the competitive retail environment. Kroger, the largest U.S. based grocery store, continues to find ways to cut costs. Wal-Mart, however, remains the biggest U.S. food seller. The regional grocery stores such as Publix in the southeast and H-E-B in the southwest are still growing. Grocery stores now have strong internet operations, including Whole Foods, owned by Amazon, though the changes to Whole Foods through the Amazon acquisition is still a work in progress. Of some impact to all the traditional grocery stores are those grocery options in the limited assortment category, which includes Trader Joe’s, ALDI, and Lidl, where sales are projected to grow over 5% annually for the next few years.
Housing. Housing is tied to the local commerce more so than perhaps any other sector. Homebuilder stocks, priced as of mid-October, such as D.R. Horton (DRH $53.97) and Lennar ($62.08) and Pulte Group (38.52) have been positive with stock values increasing by approximately 68%, 40% and 34% respectively. But, buying a new home remains challenging. First time home buyers have experienced loan qualifying issues, much of which is related to a lack of ability to make a down payment coupled with less than satisfactory credit reports, often caused by a delinquent student loan. Conversely, for those who do qualify, rates are very low. The availability of acceptable housing varies from locale to locale. Recently, a report from Denver indicated a scarcity of affordable homes for first-time buyers even if the buyer has a six-figure income. The market traits such as sound government, excellent jobs and superior public education have pushed home pricing much higher. One of the results of such higher pricing has been the migration to more rural areas of the country where life is a bit slower, and prices are more reasonable, a phenomenon that works especially well for that portion of the work force who now are able to work remotely.
On the opposite end of the housing spectrum are New York City, San Francisco and Seattle. An example of over the top pricing are the six homes purchased over the last five years by Adam Newman of WeWork fame which, all together, reportedly total over $90 million.
