Insights from Matthew Wallace: Future of Shopping Centers
Q: How did you get into commercial real estate, and what led you to the current leadership positions you hold now?
A: My first role in real estate was on the transactions team at DDR (now SITE Centers). It was a fantastic place to learn the business. We had an incredibly talented team that was doing a massive amount of deal volume. I was underwriting West Coast acquisitions and dispositions as an associate to start and then moved over to the East Coast shortly thereafter and began running my own deals. I got to meet all different types of owners and brokers across the country and built a really strong network. One group I sold to had a great strategy and eye for value, so in looking for my next step, went to work with them. At Chase Properties, I got to learn from some incredible developers and operators with a unique view of the market. I dabbled in more asset classes and expanded the transactions and asset management platforms, all while continuing to build new relationships. Every role I had (and have) I look for new opportunities, new skill sets to learn, and new people to meet.
Q: You were recently named National Director of Shopping Centers. What are your main goals for this role, and how will your experience help you enhance the shopping center division?
A: Shopping centers are a unique asset class. We’re going to attack building the division from multiple angles. We have a deep bench of talent here currently, and we’ll continue to give best-in-class support to foster growth organically. But we are also going to look outside for established talent that has deep relationships in their regions.
Q: From a high-level perspective, how is the shopping center sector performing? How has the hike in interest rates affected shopping center investors?
A: We’re, of course, down like all other asset classes volume-wise, but the good news is we never had the crazy feeding frenzy of some of the other guys over the last decade. When you are pricing assets to perfection in your pro forma, you can get into trouble pretty quickly. Shopping centers took the brunt of the pain in the 2008 crisis and have spent the last decade rebalancing the supply-demand dynamics. It is one of the areas where you can finance with accretive debt, so we are not as locked up as other markets.
Q: There has been a lot of talk about how the “traditional mall” is dying…what is your take on this?
A: The traditional mall model works in some areas, but the overexpansion of the 90s into every nook and cranny created way too much retail square footage. That rebalancing has been going on for over a decade, and there is still a massive opportunity out there to repurpose some of these malls. Mixed-use is more likely for Class B assets, while flex/industrial seems to be the move for Class C assets. Retail has changed, and the traditional mall is a massive tanker that takes a long time to turn.
Q: Redevelopment is also a hot topic in the shopping center space. Do you think certain markets better suit the reuse/rehab method? Will mixed-use continue to be the darling of shopping centers?
A: Mixed-use is a really broad term as is value-add, so it really depends asset by asset and market by market. The live, work, and play communities that are done right do really well, but there are unique challenges to combining asset classes. Having an operator that can understand the whole picture is crucial. It is also imperative to be aligned with the municipalities and other stakeholders, as having everyone on the same page with the vision is what will lead to the success of the larger scale projects.
Q: Are landlords and tenants on the same page? If not, what are their biggest differences?
A: Centers always work better when landlords and tenants look at negotiations as a collaboration to have both groups succeed rather than a zero-sum fight for every last penny. Landlords need flexibility to help be creative when conditions change, and retailers need to have seamless operations to drive revenue. With the rebalancing of supply/demand in retail square footage, landlords and tenants have been working more in unison, and that is good for everybody.
Q: What are the prime opportunities in the shopping center market right now? What should investors be looking for?
A: Pricing for everything has floated above historical cap rates, so there is still a good yield to be had for traditional stabilized centers, particularly grocery. The basis is permanent, and financing is temporary, as said by John Gray, so if you are long-term in your strategy, now is a great time to uncover great deals at fair value. Medical uses eating up vacancy in shopping centers will only continue to grow with the demographic tailwinds in that space. The move into high-quality unanchored strips is very popular right now. They allow you to align and reset rents more frequently to keep up with inflation. Those are just a few of the opportunities in retail and shopping centers right now.
