There are a lot of perks to going to school in Los Angeles. For one, it’s sunny almost every day. There aren’t many other places where you can walk to class in flip-flops during the middle of February. But LA is more than just idyllic weather. It’s an immensely diverse city, and exploring it exposes you to an infinite array of people and opportunities. Film executives are making deals in Hollywood at the same time as a skateboarding competition in Santa Monica. This is the reason LA is one of the most famous cities in the world, and it is a contributing factor to USC’s prominence as a University. In fact, LA’s vastness is a big reason why I chose to attend USC in the first place. I knew that my opportunities would be endless if I went to school in LA. However, I didn’t know I wanted to work in real estate at the time. It was only when I joined TREA that I discovered how important LA is within the world of commercial real estate.
For each of the last five years, Los Angeles has been a top destination for foreign and domestic investors. The reasoning for this is best explained by Todd Tydlaska, executive vice president of capital markets at CBRE. “First off, it’s one of the six primary gateway markets that still feels affordable, comparatively speaking. Second, L.A. was late to the recovery this cycle compared with tech-driven markets such as San Francisco, Seattle and Boston. Third, no single industry is leading the economic recovery in L.A. Four, fundamentals are strong and there are significant barriers to entry in the Greater LA market, meaning that investors are underwriting continued strong leasing fundamentals. Five, this area boasts a tremendous population base that feeds the market locally and regionally; and last but not least, the ports of L.A. and Long Beach are a huge driver of economic activity and growth.”
Put simply, LA is red hot. The high levels of foreign investment in LA’s real estate market are indicative of LA’s growth. Industrials, especially in the inland empire, saw a 266% increase in foreign capital during 2019. Retail rents in LA have risen 19% over the past year. These numbers demonstrate exactly LA is the place to be if you work in commercial real estate. Even with concerns about a looming recession, LA’s economy is too robust for capital to not keep flowing.
In July of 2019 Amazon’s market capitalization surged beyond 1 trillion dollars. What is Walmart’s market capitalization? $335 billion. Target? $59 billion. Name the market cap of any major retailer and compare it to Amazon’s, it’s not even close.
We’ve all heard the headlines, the retail industry is in a downward spiral. With Amazon leading the way, e-commerce is dominating the traditional retail experience. In the US, nearly 12% of all retail spending is through e-commerce, a 17% increase compared to the year before. If that number seems small, consider the fact that in 2005 e-commerce sales accounted for only 2.3% of total spending. Within just a decade, we Americans have made a monumental shift in how we’ve been spending our money. Brick-and-mortar stores struggle to generate revenue as more and more consumers buy from home. Strip malls are being eviscerated by massive retailers like Walmart. Even the future of grocery stores, the trusty anchor to any residential retail development, seems uncertain. After all, if a drone could deliver milk to your doorstep, would you drive to the grocery store?
There is no arguing that brick-and-mortar retail is on the decline. E-commerce will continue to grow, and less and less consumers will drive to a store to buy what they need. That’s not to say that retail is dead, but it is past its peak. Given all this, why is the jury still out on the future of retail real estate? When we think of the core property types in commercial real estate, multi-family, office, industrial, and retail are what come to mind. However, it is quickly becoming the case that retail is not included in core funds. As Jonathan Miller writes for GlobeSt, “The idea of owning a 20 to 30 percent component of retail properties in an institutional core fund has been blown up whether we all realize it yet or not.” If retail is no longer considered core, surely it’s doomed. Credit-risks plague shopping centers where it’s only a matter of time before a tenant can no longer cover rent. This, however, gives a far too grim outlook on retail. Yes, the days of strip malls and convenience centers are reaching their end, but a new era of retail is taking its place.
In 2018 Forbes profiled Rick Caruso in an article titled “The Man Who Could Save Retail”. It’s a flattering look at Caruso’s real estate empire. Noting Caruso’s tendency to develop “Disney-esque shopping centers”, the article demonstrates something important. The convenience of buying things online is impossible to match. So when consumers go shopping, they are craving something more. This is why Rick Caruso is a billionaire. His genius is the ability to transform shopping from being a chore to being an experience. This is the silver-lining in an otherwise gloomy forecast on the future of retail real estate. As more and more retail space is expanded into multi-use, consumers are now shopping for the experience. Even though retail may no longer be core, its promise as an opportunistic and value-add investment play will continue to generate returns for investors savvy enough to spot the trends.
Exploring something new is always daunting. You’re so curious, and yet, asking questions makes you feel like an outsider. Where do I start? Who do I talk to? These were the questions I asked as an eager Freshman interested in real estate.
As a Marshall major, I didn’t know where to turn. There are endless resources for investment banking and consulting, but when it comes to commercial real estate you’re out of luck. I felt like there was an invisible wall between me and the real estate community on campus. That was until I joined TREA.
I vividly remember the first TREA event I ever attended, it was the first speaker panel of the year and it was all about brokerage. I walked into RGL 101 wearing pants, flip-flops, and a t-shirt. To my surprise, everyone else was donning button-downs and blazers. Horrified, I decided to make a b-line straight for the exit. But just as I stood up to leave, a girl named Shirelle introduced herself to me. She asked what grade I was in and why I was interested in real estate, boiler-plate stuff. When I asked her what she did, she told me she was the TREA president. I was shocked. Taken aback by Shirelle’s friendliness, I decided to stay for the panel. For the next hour I was bombarded by real estate lingo as foreign to my ears as Mandarin. Argus? Capital stacks? It was all new to me. Yet, despite the unfamiliarity, I was hooked. From then on I went to every TREA meeting I possibly could, constantly learning new things and meeting new people.
At a school like USC, it is hard to not feel disconnected in some ways. There are so many different microcosms, and the real estate development program is one of them. It seems like one out of every three kids has a dad who is the CEO of a major brokerage firm. Freshmen, Seniors, professors, and even the RED alumni all appear to know each other. As an outsider, that level of camaraderie is incredibly enticing, yet also very intimidating. Breaking through may feel impossible, but it is not. For those reading this who are interested in real estate but don’t know where to turn, here is my advice… Never stop trying to learn. Join TREA, take an RED class, talk to your friend’s parents in the industry. Although it may not seem like it, people in real estate are extremely friendly. Everyone wants to be a resource, not a roadblock. Your curiosity will take you where you need to go, and it will pay dividends towards your future.
By: Dylan Strode