ICSC RECon 2018: Rising Optimism Meetings Rising Interest Rates

Norm Nichols, Head of KeyBank's Income Property Group, June 2018

<p>ICSC RECon 2018: Rising Optimism Meetings Rising Interest Rates</p>

Retail real estate owners and developers are more optimistic than they were at this time last year, though rising interest rates and uncertainty about government policies remain growing concerns across the industry. That’s what retail real estate owners, developers, and investors told KeyBank at the 2018 International Council of Shopping Centers’ (ICSC) RECon, the largest annual gathering of retail real estate professionals. Once again, Key surveyed attendees about their market perceptions and plans for the year ahead.

About the Respondents

The largest group in our sample, 47 percent, described themselves as long-term holders of retail real estate (owners), one-quarter identified as developers, and another 28 percent selected owner-developer. The respondents varied in size, representing a range of gross asset value of their commercial real estate portfolios from less than $100 million (65 percent) to more than $1 billion (11 percent). They are active across retail segments, including strip center, grocery, lifestyle and regional malls.

Greater Optimism in 2018

Sentiment is more positive than it was last year. In fact, the overarching sentiment of the survey is that owners and developers share a positive outlook about the future. One-third of those surveyed said they were “very optimistic” about the retail real estate industry over the next 12 months, and another 45 percent said they were “somewhat optimistic.” In 2017, respondents were more measured in their optimism – with only 6 percent saying “very optimistic,” 56 percent choosing “somewhat optimistic” and 18 percent feeling “neither optimistic nor pessimistic.”

Also encouraging, nearly 60 percent said they expected retail real estate fundamentals – vacancy rates and rental rates – to improve this year, compared to the only 12.5 percent who expected improvement last year.

What’s Worrying the Retail Sector

It appears the sector is worrying less about e-commerce, taking action to adapt to a world where bricks and clicks profitably co-exist. But there are other worries on the minds of owners and developers. In 2017, the overwhelming majority said competition from online sales and e-commerce was the biggest challenge or obstacle facing the industry. In 2018, new issues are emerging. Half of respondents named increasing interest rates as the greatest challenge, 15 percent fear a real estate or financial bubble, and another 15 percent are wary of government policy changes. Competition from e-commerce was still on the list at 17 percent, but results show that the industry is looking at more macroeconomic trends.

Where We Are, Where We’re Going Next

Retail real estate developers and owners are asking the same question as real estate industry investors and owners more broadly: where are we in the cycle, and how should we respond? Currently, retail owners and developers are still actively looking for opportunities, particularly in redevelopment, as well as acquisitions and new development. An overall feeling of optimism pervades the industry, but they’re keeping a watchful eye on interest rates and other moves from the administration.

For more insights and information about this survey, its results, and the possible impacts on your business, contact Norm Nichols at Norman_V_Nichols@keybank.com.


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