Guest Speaker: Kenneth Bernstein
November 2nd brought Ken Bernstein, of Acadia Realty Trust, to the Oak Room of the Newman Building. Mr. Bernstein started with a simple question. Where in Real Estate did members of the audience want to be? Development, management, capital markets were some of the responses. Mr. Bernstein offered to the audience an overlooked area — retail and leasing.
The story of Acadia started in the early nineties at the bottom of the RE market. The firm grew until ’98. Then came LTCM & the Russian crisis. The portfolio started to look bad. The REIT world started to recover in ’00, but Acadia was not recovering like the other REITs. They needed a turnaround plan.
The Turnaround Plan: create a solid core portfolio, a strong balance sheet & a profitable external growth strategy. The plan worked after ’00 by staying relatively small and focusing on what Acadia does well.
What does a solid core portfolio mean? Acadia sold off the bottom half of its portfolio. The company took the medicine and focused on core areas. These were major gateway markets with high barriers to entry and fortress markets. It wasn’t just selling. The company also relied on turning around (i.e. redeveloping) properties.
With the turnaround complete, performance returned and Acadia kept pace with other REITS. But, . . . you can’t ever stop. The fund continues dispositions and acquisitions. Lately, Acadia has been selling malls and buying street retail.
In watching for emerging retail trends, Acadia is careful to separate cyclical from structural changes. Now the economy is in the bottom of a cycle. It will get better. However, there is the reality of e-commerce — a structural change. The next generation of stores will be multi-channel retailing. They will be smaller, urban and closer to shoppers. It will be a part of the e-commerce mix.
With that in mind, Acadia has been looking at RCPs (Retailer Controlled Properties). That is: buying retail real estate from big retailers who do not view themselves as being the RE business.
Acadia has also focused urban development (e.g. NYC and South Beach). There is 20+ Sq. Ft. of retail space per person in the US, but only 6 Sq. Ft. per resident in NYC. Moreover, small street-level stores fit into the e-commerce shift.
If you want to be in the RE or finance business, you must watch the debt markets. It’s just a spread business. You have to watch the 10-year t-bill. The spreads tell a lot of stories.
When you see an opportunity, check your assumptions, but don’t be afraid to go for it.
Questions from the audience
How much do you spend on TI? Too much. I prefer to be on the conservative side of rental market. With strong retailers, be conservative, and put the money in it.
What makes a retailer a good tenant? There must be a great merchant; someone who knows how to sell in an exciting way. You need a good location that you can stay in and, critically, the ability to adapt. Today, a AAA tenant is Walmart — about the only one.
How do you reframe the conventional wisdom in RE to see opportunities? If you are honest with yourself, the reality will stick. Watch the trends and how that will impact your operation. I don’t necessarily look for “new” ideas, but rather what has worked for others and what hasn’t. If everyone is looking one way, it’s worth looking the other and see what the reality is.