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Raub Report November 2014

November 20, 2014

Retailing is changing, but it is still very much in fashion.  It is now a tale of two markets. One is the large national retail corporations that have dozens, hundreds or thousands of store outlets nationwide.   They can afford to pay the higher rents that are required to support new construction.  The increases in 1. Land prices, 2. Construction materials 3. Labor costs 4. Government approvals, mean that construction costs require rents in the mid-$30’s per square foot (including expenses) to justify new development.  Also, lenders and equity investors are still pretty nervous, after the big scare of 2008-2009.  Consequently, they require substantial pre-leasing by credit tenants before they are willing to proceed down the development path.

All of this means that new retail construction is focused on top interstate corners, with lots of visibility and traffic.  Little construction will be done along major collector streets, as we had in the past.  New construction will be in Class A locations with strong anchors and Class A tenants.

The smaller centers we are used to seeing will be tenanted by service tenants:  a place you go for something to happen, not a place where you go to purchase something and take it home.  Walgreens and CVS, the new convenience stores, have that covered.  But you have to go to a location for a chiropractor, dentist, insurance agent, fitness center, hair salon, nail salon, etc. And these are largely local tenants, aka “mom and pops”, that cannot afford to pay half of what the nationals are paying at the new centers.

But the Big Fashion Shift in retailing is The Internet.  We are all going on-line more often to find deals and order, expecting deliveries to our front door, the next day. See The Raub Report April 2014.  Exhibit 1 – Amazon has built more than 60 fulfillment centers across the United States, similar to the 1.2-million square foot center in Schertz.  Amazon is all about logistics, moving stuff quickly and efficiently to your front door, from its point of origin, usually China.  Exhibit 2- Similar to Toyota, Amazon requires their most frequent suppliers to be able to get their items to Amazon’s fulfillments centers in a set amount of time, like hours. So, there is an additional 3-million square feet of industrial space scheduled to be built in Schertz to support the Amazon facility.  Exhibit 3 – Wal-Mart knows all of this, too, but they have a different real estate model than Amazon; they have lots of bricks and mortar stores.  And they are building a lot more, more than 8 in San Antonio in the past few years, some Super Centers, some neighborhood stores.  Now in small towns, they build small stores.  But you can go on-line and order anything under the sun and have it delivered to your neighborhood Wal-Mart for pickup probably the next day. They are also experimenting with call-in and pick-up groceries.  Exhibit 4 – You can do all of this shopping from the Smart Phone in your pocket, 24/7.   Who really needs a store, except for the fun of going in and seeing all of the stuff first-hand?  Exhibit 5 – Millennials would “die” if they could not stay connected.  An intern in our office said he felt closer to his friends from college who were also all over the state that summer, than he did to the people he saw face-to-face every day.

So the new style in retail is generating a building boom more in industrial warehouses nationwide than in retail stores. Distribution centers in a sense are taking the place of big box retail stores.  And San Antonio has the additional industrial catalyst of the Eagle Ford Shale.   It’s good to be in San Antonio!