On-Demand: Bust to Boom – The Retail Resurgence

Garrick Brown:Hey, thanks a lot, Michael. You know, you had me on back in 2020 as the pandemic was in as early stages. And I think after that I had more people calling me Dr. Doom than by my actual name for about three months. And what I'm really ecstatic about is a lot of what we were looking at, because we could see the risk, we could see the challenges, we couldn't see the solutions or the responses and it was dire. It really was a situation where we went from a narrative that was overblown about retail apocalypse to, we might actually be in a retail apocalypse. So what I'm most proud of is I was wrong on a whole by bunch of things that a whole bunch of things developed that yeah was retail ground zero, along with hospitality for real estate pain? Absolutely.

I am still pleasantly surprised and almost shocked sometimes by some of the numbers I'm seeing coming out of the industry that resurgence. Yeah. Yeah. And let me get into why it's pretty undeniable. First off, got to do my quick little plug. I'm really ecstatic I'm part of Lockehouse Retail Group. We are full service retail-focused firm based in California. We do tenant, landlord, leasing, investment sales, everything from net lease to shopping centers. Consulting that's me. And we also have national reach through ChainLinks Group, which we're very actively involved in. I came over last year and it's great for me because now I get to be 100% retail, but where are we at today?

Obviously coming into the holidays, we have tons of concerns about consumer confidence, supply chain and this blows me away. This is the OECD Consumer Confidence Metric, which consumer confidence was lower in December than it was in May, 2020. May, 2020 we were looking at the real possibility of a global depression. December, 2021 we're looking at paying an extra buck for a Big Mac. I think that just goes to say, consumers really hate inflation. They really do. They feel it but you know the other part of that, the supply chain issues, one of the things I think people forget- Part of the supply chain issues is China's got a zero-tolerance policy when it comes to COVID. So we are so reliant on a global supply chain, we made everything about just in time delivery rather than just in case. You know back in April of this past year, there was a COVID outbreak and it basically shut down two-thirds capacity at China's two largest ports for a few weeks. That's where we started to see our backups getting into- Ships waiting a month offshore.

But the other thing that people don't talk about is it's not just supply side it's demand side. Okay. Container traffic is up almost 20% from two years ago from October, 2019, our last normal year, right? That we can measure against. This is the latest data, by the way. So consumers are buying a ton of stuff. We don't just have the issues of getting the supplies here, we've got the issue of surged demand. And of course, everyone thinks consumer confidence goes in the toilet then consumer sales must. Not always, there's a loose relation usually they don't stay disconnected for long, but we just had the strongest holiday shopping season in 25 years. And that follows what had been the strongest holiday shopping season in 24 years last year.

Simple, the lopsided economic impacts of the pandemic. Those who lost their job mostly were service workers, now of course they're in short supply. Most of us who were lucky enough to emerge unscathed did fine. Tons of government aid pumped into the marketplace plus we're not spending money on services. You know, I'm still clearly not back to my old haircut regimen. All right. But I'm spending money on a whole lot of junk, which is great. And some cool stuff too.

By the way, consumers are absolutely flushed with cash. The savings rate, I think was a really great metric to look at, at the beginning of the pandemic. This is how much of your disposable income that you put away in your savings. Prior to 2020, we were averaging just under 6%. Beginning of the pandemic panic saving, 33% of people's income they were scrolling away, afraid they were going to lose their jobs. Then these next two surges that you see on this graph that was government aid going right into people's bank accounts. The net result of course is if you look at personal annual income growth and this is includes all types of income, including government payments shot up seven times during the last two pandemic years. A lot of that was government aid.

So we've been averaging 2% annual income growth the year suddenly it's 14%. And all of that means is Americans are sitting on a ton of cash. This is a metric that the Fed uses checkable bank deposits. It's the accumulated total of what some people's checking accounts in the United States. There's 5.4 trillion more dollars in there right now, as of, I believe this last, I was able to update about a week ago. So 5.4 trillion more than we had in our bank accounts prior to the pandemic. And of course the surge of stimulus cash, another thing that drives inflation. So suddenly we're at the highest level of inflation that we've seen since the first term of the Reagan presidency. That's the challenge.

For real estate it means construction prices are surging. New development prices are surging, tenant build out surging. The ability to redevelop say a shopping center. That's another issue. This is coming a little bit back down to earth, but this is going to be a big challenge. And the other thing about inflation where this isn't just a supply chain thing, this is going to be with us through the remainder of the year. And by the way, Goldman Sachs says that the fed will hike interest rates at least three times this year and the fed in their meeting the other day, definitely hinted that that's what's going to happen. That'll bring stuff back down, but here's the thing, have you tried to hire anybody lately? You know, the great resignation is real and what's happened is simply the amount of money you're having to pay to get employees in the door, especially for the lower end service jobs. I know of retailers and restaurants that are suddenly having to raise their wages 20%.

Now this is even though, you know, because we have 3.9% unemployment and if you look at the number of employed people, we're still down 3.6 million from where we were in February, 2020. Here's the thing nearly 3 million people dropped out of the labor force. A lot of this was moms. A lot of this was people taking early retirement. We don't know how many of these people are going to come back. But the last metric for job openings, we had 10.6 million available jobs, right? So put those numbers together and if you look at it by category and you say, all right, how many available jobs versus how many jobs did we lose in the pandemic?

Well, what you end up with is that we're basically short at least 7 million workers even if the 3 million that dropped out of the workforce would come back. We have a serious labor issue that's not going to go way. And remember this past year we reached our lowest birth rate of ever less than half of a percent. The birth rate in the US- Actually the population growth rate because until about six years ago, every year our population would increase by roughly 1.1 million people. Half of it was an immigration. Half of it was live births. Immigrations disappeared, hasn't come back.

So all of these things mean that wage pressures are going to stick with us. So we're not going to escape without the fed really raising interest rates. But keep in mind, we've had record low interest rates forever. I don't foresee anything where we get back to '80s level interest rates where you're talking double digits, but you know we've been in the 2%, 3%, it's going to go up. I would say we're probably in for four or 5% interest rates by early next year, but how's this all play out for retail? Obviously the labor challenges, the supply side, but remember where were we before COVID? You know, we were retail apocalypse 24/7. And a lot of that was because people in the United States we associate malls with being retail. We associate retail with the iconic brands of our childhood department stores. So we got Sears in deep trouble, eventually declaring bankruptcy. All of this plays on a psyche.

For the retail real estate malls, the mall world is about 8% of all retail real estate. Most of our retail real estate out there for shopping centers, it's grocery-anchored shopping centers. It's your local Safeway center, your local Kroger center, whatever. But you know, it's pretty bad when Bloomberg creates a video game, where you take over a dying mall. You know, I definitely ran a whole bunch into the ground and I'm going to circle back and show you where malls are today. This is where malls were right before the pandemic, about 1,200 malls, a little bit less. We were looking at the class C and D malls as basically in death spirals. We were looking at the class A malls as having the challenge of what do you do with the empty JCPenney? And the class B malls were the big question mark. Remember that.

By the way, pre-COVID bankruptcies, you can see go from 2017, '18, '19. Most of these players were in certain categories. A lot of them were mall-focused, but those numbers kept climbing until we hit 2020 and 2020, wow. Because we have two pages of bankruptcies. We set all records. What's interesting thing is last year we- And we just look at basically major chains, by the way. Chains with at least 50 units or above and I throw restaurants and health clubs in there, not just traditional retailers, but we're still talking about less than 20 concepts that filed bankruptcy last year. It was the lowest number of bankruptcies in over a decade. We went from 75 to 15.

Obviously a lot of the pain was felt upfront for us. A lot of pain. I don't want to mitigate that again I include retail and restaurant and health clubs. Many of you probably have seen a commonly cited number for chain store closures that my good friend, Deborah Weinswig at Coresight Research does it's I think 12 or 14,000. I don't dispute that at all. She's counting major chains and again, 50 units or above, the apparel players, all that. Throw in health clubs, 20% of our health clubs failed, 20% of our restaurants failed. And this doesn't even count the independence. We had 27,000 closures that I tracked, nothing close. But here's the tricky thing what's the state of retail today?

Well, let's just start by looking at bankruptcy watch lists, you know, Moody's, Fitch, Credit Intel, all these guys track the underlying economic fundamental of these publicly traded companies. And you know, you reach a certain point and you get on that watch list. So bankruptcy watch list in February, 2020 included these major chains. This is compiled from all those guys. By the time we got to June of 2020, this is page one of the bankruptcy watch list we were looking at page two. Now, many of these players didn't escape without filing. A whole bunch of them did and the thing is these sheer numbers, first off suddenly lenders were more willing to work out debt at lower interest rates for a lot of these players, because nobody wanted to be crushed by this wave.

Secondly, the interesting thing on all those bankruptcies that did occur the previous 20 years, about one in five retail bankruptcies ended up with liquidations like Circuit City, Toys R Us, Payless, the second time out, right? We're basically all right, we don't find a way to work this out, adios, all the stores closed. Last year that number dropped to about 8%. Lenders again because of the sheer volume of the troubles I think were more willing to create creative workouts. So suddenly we have an environment where there's fewer retailers today on bankruptcy watch lists than there were in 2019. And if you look at it, the categories and by the way, these ratings think of it like a report card, A, excellent. B, very good. C, average. D and E is where you start getting into trouble. F, basically you already or you already are in dangerous spot where you haven't been living up to your covenants. You could be sued.

It consistently paints the same picture. Theaters are not getting better necessarily with their credit. Although I know AMC is in the middle of trying to renegotiate a lot of their debt. A few clothing brands that were troubled already, but nearly everybody else, their credits improving. Nordstrom ended up on this list. Nordstrom is an incredible operator. They will be off this list, right? Some of these players, probably not, but we've always had troubled retailers. So one of the things that we've seen year in and year out as I discussed was closures and Michael, I know we've felt it'd be fun to do a few polling questions.

Michael Morris:We have one up for us right here, Garrick. I'll read it out although I could just sit back and listen to you for hours. So some of these are trick questions. You got to be careful when you answer them because Garrick actually put them together. So proceed with caution. Contraction has been the norm for many retail categories prior to the pandemic, when closures and bankruptcy set records. We track roughly 27,000 major chain store closures, which included traditional retailers, restaurants, gyms, health clubs, et cetera. How many major change store closure should we expect from all categories that use retail space in 2022? And we'll give everybody about 30 seconds to answer this.

Garrick Brown:By the way, one thing that I'm really happy I wrong about last year is we thought if this was going to be an 18 month ordeal and it basically has been, and then some that we'd lose 30% of our restaurants, 30% of our health clubs. The losses were staggering, a lot of pain felt, but in both categories it ended up being about 20%. So what really made the difference it was a combination of government aid, I think operator grit. You know, we saw from craft brew guys that suddenly were creating hand sanitizer to my local Mexican restaurant that did a great job of selling these essentially like the wine box bags full of margaritas and government moves like allowing home alcohol delivery stuff like that. And certainly the government aid, but probably the big unsung one was the willingness of landlords to work out special arrangements.

A lot of that was blend and extend deals. Okay. Don't worry about paying rent for the next six months. We'll add six months under the back of your term. Some of that was moving the percentage rents and look to the duration of the pandemic, or maybe the next year, you just report to us your gross sales and instead of that set rental rate mark we'll just make it say 8% of gross sales, that kind of thing. But it really was a big game changer and kept what was catastrophic from becoming even worse.

Michael Morris:Yeah. Well, a lot of our clients, we talked about that and they instituted that philosophy that you're talking about. It's everybody's got to work together through this. Okay. I think we can move on to the next slide. That'll give us our results.

Garrick Brown:Oops. I think we hit the button the same time, Mike. Wow. You have got a savvy crowd. You have got a very savvy crowd or maybe I did a good job on selling my case, but between four and 6,000. Yep. Now this isn't net, this is closures that have been announced. By the way, we are still in closure announcement season and you know, there's been some CVS over next three years is going to close about 10% of its stores. But what's amazing so far is I'm seeing more store opening announcements in January than store closing announcements. And in some big ones, you know, Mattress Firm wants to do 100 stores a year for next five years, even though they declared bankruptcy about four years ago and closed about 800 stores.

So it's that, that back and forth, but that's where we're at right now is 4,100 announced and ones that we're pretty sure are going to happen I think that'll go up by 1,000 before we're all done. But it would basically be one of lower closure rates that we've had in quite a while. And this, again, doesn't take into account store openings. So obviously the pain was differently felt depending on category. The thing for everybody in the investment world, you got to connect is that we traditionally had certain categories. They go for certain types of retail assets, certain types of shopping centers, grocery-anchored felt the least amount of pain, in line their losses were to small shop users, the independents, the restaurants that didn't make it. But being outdoor shopping centers they also had less of a failure rate. A lot of them turned parking lots into outdoor dining and so forth, right?

Malls, lifestyle outlet centers had the categories, largely felt the most pain. Don't get me wrong certain sectors of restaurants really were just hammered so were the health clubs, but there were some categories that actually really benefited. Everything having to do with the home you know, Restoration Hardware is sitting pretty right now, but let's get into a few other things to talk about real quick. Now, right now there's all this stock market volatility going on. This is going to probably, you know, hopefully this ends up just being a correction. We're overdue on a correction in my opinion, better to have corrections than market blowouts. But here's the thing, Wall Street, of course at the beginning of the pandemic was down 6 trillion. All the global markets, 6 trillion in wealth had evaporated. It came back by August 2020. As of a few weeks ago, it actually had reached a point it was up 50% from pre-pandemic levels.

Now, this is 33% as a Monday, but it's been crazy. This is the metric that freaks me out. This Shareholder priced earnings ratio basically we were reaching territory where the price to earnings ratio, the price of a stock was matching in at about 40 times earnings. That's territory we haven't seen since the Tech Wreck. That actually dropped Monday to about 35, but then it bounced back as we keep zig-zagging, who knows where that's going to end up? But here's what's going to happen is almost every stock market analyst that I value their opinion and I keep report cards and their predictions. Everyone says the same things, major stock market volatility this year. So what does that mean? It means that you're going to see a whole lot of people fleeing for the relative safety of real estate.

By the way, we've got about half as many publicly traded companies on the market, on all the indices that we had in the late '90s. And so suddenly we saw the surge of IPOs last year, everybody wanting to get in on the rich stock market valuations. Set records over 1,000 IPOs. I think the last time we saw that was in the '80s, but here's what's interesting. We saw retail IPOs. Now something I should warn everyone about, like right now you might have heard that there's all sorts of stuff going out Kohl's with activist investors that want to spin off their eCommerce. No doubt they could make easily, at least a seven, $8 billion evaluation on that. Even though remember the last 15 years, everything in retail has been about creating a seamless integration of your eCommerce and your stores. So would that be good for Kohl's in the long run?

Maybe they've got some secret sauce I don't know about, but it would buck the trend and you see all these activist investment groups going out for that. The thing that worries me is just the approach as a means to an end that this might be bad for the core business. Who cares if you get an $8 billion evaluation and sell your shares and go off into the sunset? Something to keep an eye on the movement of activist investors warning Nordstrom to spin off Rack, I think is a bit different that doesn't drive their eCommerce. And that actually is where I see Nordstrom getting off of bankruptcy watch list and doing quite well. But because retailers are part of the IPO mix what we've got to remember is once you're beholden to Wall Street, you need to drive that three, four, 5% annual growth.

The nice, easier, well, not very easy way. The nice way, the safe way is same store sales going up every year, right? It's the economy's good we do a great job of merchandising, we get on a hot trend, suddenly we're up 5%. That usually doesn't happen. The other way is to open stores. That's how we became over retail to begin with. So suddenly with all these retailers coming in, all of these players are suddenly getting into opening more stores. Allbirds, 300 stores in the next five years, this digital native brand. By the way, a lot of this is digital native players. Some of it are players that were in financial trouble, or even in bankruptcy recently like Claire's or Guitar Center is going to go from bankruptcy to being IPO suddenly probably opening more stores and tweaking concepts.

All of these players are suddenly in the market to grow. And I bring this up just for one other thing, all the unemployment stuff I was telling you, you want other investment that I think is rock solid VC is dealing with robotics because automation, every single retail and restaurant chain that I know of is looking into ways that they can deal with the staffing issues, particularly the restaurants.

So whether it's Flippy the robotic burger flipper, you know, I think that that runway for growth is huge. And as you see, VC totals blew away all previous records. By the way, we're going to make these slides available to you so I know I zip through a lot of these pretty quickly, but you can use these as a reference later on. But here's another thing that made me very pleasantly surprised about what happened. Seems counterintuitive, startups surge during the pandemic. In the financial crisis of 2008, we saw a similar trend in that all these laid off business professionals that had means we saw a surge of franchising. Subway saw their greatest franchise years after that. They were doing 1,000 new stores a year.

Well, we saw new business formations shoot through the roof, retail shot through the roof as well. A lot of these were digital native brands. A lot of these might be mom and pops going to swap meets, right? But the thing is, if you look over the last two years, retail startups have increased almost 75%. Many of these are going to eventually need space. Many of them all already needs space. New business formation for restaurants. Again, one of the hardest hit categories up over 50%. A lot of these startups are doing the food truck route. They're the reason why food halls are searching virtually every two week. I'm tracking a new food hall that's coming online. And some of these are in small towns, things that when food halls were just a Manhattan thing, no one would've predicted, except for me. Okay. I'm kind of a jerk on that one, but all of this is coming to market.

And here's the other thing to keep in mind if you track retail sales just month over month, first off, don't read the headlines to always focus on monthly change. That's the least important number that comes out with monthly retail sales. Why on earth the media always reports that? I don't give a crap that retail sales changed 1% from the month before. What I'm interested in is the bigger picture trend where are they from the year before? We average 3% the last 20 years, more or less, if you look at where we are year over year today, we're up 17% almost. And if you compare where we're at today to the last normal year, 2019 up almost 20%, that's amazing growth. That's more than eCommerce was growing before the pandemic each year. Even department stores are up. I mean, they're down slightly from 2019 so I think their surge is going to be limited, but year over year, they're up considerably.

And of course the big winners for traditional retail, general merchandise. This includes the Big Boxes, the discounters and all that. All of those numbers are through the roof. And again, talking about credit scores, here's where you just see the progression of these credit scores and the turnaround. The discounters and dollars stores on the right. Okay. They've been sitting pretty for a while, by the way, all of these are ramping up growth. Costco just announced 28 new stores this year, yesterday 28, 28, big, big, big boxes. They usually average about 10. Okay. So something I would want everyone to think about is how will this play out? So Michael, take it away.

Michael Morris:Okay. Here's our question, of all the business categories that utilize has announced the most planned growth in 2020 of new store units. I mean, we know what Costco's doing and I believe it. That place is killing it, but please feel free to answer that.

Garrick Brown:It's a zoo. It's a zoo.

Michael Morris:I know. I mean, I love Mattress Firm is doing 100 units. One of our clients is a tenant and tow developer for those smaller retail pieces. And that is definitely one of their clients that they work with. So I'm sure that's music to his ears.

Garrick Brown:Well, one thing too, you know, as people are voting. So when you look at where the damage was for closures, the thing you got to keep in mind, the easiest thing to replace in retail is the smaller space. There are more tenant opportunities say 2,000 square feet, or less than there are say 2,000 to 5,000 square feet or 5,000 to 10,000 square feet. And as you move up, when you cross 50,000 square feet, you are starting to deal with very few tenant leasing opportunities. Hobby Lobby is active, Costco usually just builds their own building. You know, sometimes they'll lease secondhand space, but they're pretty unique and they're very big. But when you get to 100,000 square feet or more, now you're just talking home improvement stores, Costco, et cetera.

Everyone is shrinking their boxes for the most part. Certainly Burlington would do 80,000 square feet stores now they're going very strong on a 35,000 square foot template. Kohl's which normally was 80,000 square feet is exploring a smaller template as well. Best Buy, which is still right sizing, right? They're going to be reducing their store count by about 2% a year for the next few years that comes out to about 20 stores. But they're also starting a new small format concept that they're testing in Canada. So there might be some swapping out there, but what's amazing to me is nearly every category has got growth lined up. The only difference is, is it's still going to be a bit of a challenge, you cross that 50,000 square foot threshold and you've only got a few categories that ever do those right now. Grocery department really aren't ramping up, although I'll get into some more of that in a second. So looks like we've got about a little over half of our attendees have voted.

Michael Morris:I think we can move on.

Garrick Brown:Yeah. Okay. Discounters, dollar stores. Well, now I'm not going to give you the answer just yet. You know, dollar stores 10 years ago, there were about 22,000 of them in the US. Now there's moving in on 40,000. 40,000 dollar stores, but of course they're not dollar stores anymore. They're dollar 25 stores because of inflation. This is going to be a big year for the differentiated dollar store. Here's the thing, their runway for growth is kind of maxing out. There's only so many markets left to grow and where the growth is, is suddenly to have the idea of a dollar store that appeals to higher income consumers. That also means different real estate. So the success of Five Below, which is doing 170 stores a year, we see Popshelf by Dollar General, which is very interesting concept. It's more like these are $5 stores. This is going to be an interesting year there, but we're still seeing a lot of growth from those guys.

And by the way, I hadn't had a chance to update that Costco number when that info came up. Apparel, we still have some challenges. Okay. Men's dress apparel still has some issues because casual Fridays just got accelerated significantly during the pandemic, but off-price apparels has been killing it. What's interesting is a lot of those players in the middle where the challenges had been are in a better credit spot. The growth story of the last few years been off-price, and it's been Aritzia, Lululemon, et cetera. But we also see some traditional players coming back to it. And this is because retail sales for apparel really rebounded. This is one I need to watch in the future because this might just be a we went back to work and we have to go get some clothes situation. It might be a short term surge, I think a long term trend of off-price apparel, really driving things. And it's certainly more casual wear being dominant.

To me, that's a no-brainer, but we see some big growth. I mean, Lululemon 45 stores, plus Allbirds that told you about which mainly shoes, some apparel. Psycho Bunny, new kind of funky hipster concept ramping up growth at malls. Athletic shoes, you know, when it comes to shoes, if it runs, it works. If it's dress shoes, not so much. I think, I don't know if you're like me, but I put my Bostonians away at the beginning of the pandemic and now I really struggle to wear anything but sneakers because my feet hurt like hell, when I put the dress shoes on.

And of course, anything doing with nesting, home improvement, boom, through the roof, up 30% from where it was in 2019, because we were all cooped up. Furniture, furnishings, et cetera. Hence, I throw Mattress Firm into that category, but also whole bunch of other places that we're going to see some ramped up growth coming out of. At Home is a great example. The big mega, big box player that was actually on a bankruptcy watch list last June. Well complete turnaround in their economics and they're ramping up growth. So that's one of those few players that's above that 50,000 square foot range, looking for space actively.

Even electronics and office supplies, which has been a challenge category. Now Best Buy does everything, right? They're still right sizing, but their numbers are good. But Office Depot and Staples there was that real challenge of do we need these stores when people are buying so much online? That's why Staples has been dominant. Their online presence but they got a boost because people had to basically build out home offices. All of this, more growth than I've seen in the last seven years. And this is just the major growth plan announcements, right? Of course, it's across the board and it's not everything. Theaters are deeply, deeply challenged. Again, that acceleration theme prevalent through the pandemic. Streaming was already cutting into theater revenues and let's face what's really happened here. It's like everything else where a middle has disappeared.

You know in retail it's become about the luxury high end or the experiential versus the discount and the stuff in the middle was convenience. Well that all went online. I view to some extent the same thing has played out in theaters. Hollywood's abandoned the adult drama because we just don't show up the way the kids do. So everything there is about men in tights and great big things blowing up. And meanwhile, I can't watch enough Netflix because I like drama. So all of that's been accelerated. Literally the amount of streaming hours globally tripled during the pandemic. And they've only started to moderate slightly. They're not going back. Don't worry about the Netflix stock issues that's just because they're pricing for the future and they've already achieved their growth. But I expect one in four theaters to close over the next five years.

The other thing is that theaters are clamoring to boost the experience to stay relevant. So while this is happening, you're going to see consolidation in the industry, bankruptcies, some players buying each other out, but a lot more dine-in theaters coming back, Alamo Drafthouse, their largest franchisee worked out their bankruptcy in near record time. And immediately had two locations lined up for new theaters. So at everything is going to be, we have to give them a reason to show up. So I don't bet against dine-in theaters, but if you don't have a special offering. What about eCommerce? Okay. Look, Jeff Bezos, the year before the pandemic went through a divorce, cost him a record, the most expensive divorce in human history, was over I think it was 38 billion. I'm just guessing here. I think that's roughly right. Well, his value in June of 2020 paid off that divorce one month. Thanks COVID.

Now of course his wealth is paper and he's been taking some hits lately, but you know, eCommerce growth prior to the pandemic had been averaged 15, 16, 17% a year, and it shot through the roof. It shot through the roof. It's still up 28%, but here's what I'm seeing 10 years ago, 3% of all apparel sales were done online. It was almost 30% before the pandemic, now it's 40, 45%. How much more market penetration is there? Because I don't believe we're going to be in a world ever where 70% of clothes are sold online. Now there's still some categories that can be disrupted, but that acceleration, I think moved eCommerce further ahead and closer to a stabilization point.

And we washed out so many store locations that suddenly that whole problem the last 15 years, which is, oh, how do we rebalance our store fleet against our eCommerce? We're much further ahead in the resolution of that. In fact, I think now retail for the first time in 20 years is in a point where our biggest threats are economic and cyclical. They are not structural anymore. I can't say that for office space. Office space and the rise from work from home is their digital disruption. And I don't think it's going to be catastrophic, but if suddenly everyone needs because of flexible work, maybe 20% less space on their renewal, when that comes around, that's real disruption that's barely hit that marketplace.

Now, don't get me wrong, there's a lot of organic growth in the office world. A lot of VC money I showed you went to tech startups, right? So there's new sources of demand. But if the average office user doesn't need as much space, you're going to need a lot of organic growth to make up for that without feeling some pain. But here's the other thing about eCommerce space that I want to put out to everyone. And that's that remember all those startups I showed you about 80% of those retail startups were digital. Okay. If you want to be online and reach consumers, you basically have Google or Facebook advertising.

Those are the players. What do you think happened to their advertising costs? Skyrocketed through the roof. Now, if you're a mature eCommerce digital-made brand, let's just say Allbirds, but before the IPO. We already had a robust consumer base, how much further were you going to go with your traditional means of advertising as those costs are skyrocketing to acquire more customers? It suddenly becomes the 80/20 rule where to acquire 20% more customers you're spending 80% more than you did before you became a mature retailer.

So suddenly we had this issue of customer acquisition costs impacting eCommerce and that customer's curve. Well, all of this is driving more and more digital native brands to open stores. And I want people to think about this, Jeff Bezos has spent hundreds of billions of dollars at record deal levels for industrial real estate the last few years. With them literally driving about a third of the activity, right? Proximity, proximity, proximity. The challenge for retail always was, well, how do we compete with this? No one's going to be able to build this infrastructure ever again. That's part of Jeff Bezos' genius. 20 years before the retail part of Amazon give or take made a profit, being able to get his investors to go along with reinvesting all of that to this infrastructure that's made them unstoppable now.

Well, you've got this challenge now you've got all of these players that are coming to market, looking for stores, the digital native brands. You have existing players that are saying, how do I keep up with Amazon? All of that's going to drive a great big change I'm get into in a second that worthy of keeping an eye on as an investor. But here's what's playing out is the last five or six years if you track retail, we've made such a big deal and a hoot and holler about Warby Parker opening stores. Hey yeah, digital natives are going physical. Woo, woo, woo. And the sheer numbers, so few. Half of these stores ended up in Soho for God's sake. Okay. They had little impact on the market outside of a couple of New York high streets, LA, San Francisco, Chicago, maybe Seattle, once in a while, maybe Boston once in a while, maybe Miami, that was it.

It was good to see these guys going physical, but this year it really takes off for real, for real, and Amazon is driving it. They're highly secretive, but what I've tracked just in their Amazon fresh grocery concept so far suggest a hundred of those. And you may have heard at the Americana at Brand down in Glendale, which is a great project that is the highest sales per square foot mall. Really a lifestyle center in the United States. Amazon is opening a 30,000 square foot apparel store called Amazon Style. So they've gone from Amazon, the destroyer to Amazon, the really, really, really active tenants. And that doesn't include Amazon Go, which is ramping up. That doesn't include Amazon 4-star, which is ramping up. And most likely we might see another couple of concepts coming out of them. Beyond them we see this huge drive back to market.

That's critical to keep an eye on. By the way before I finally give the answer to that question. Groceries were the other big winner, their sales shot up 17%, two years ago. And that was at the expense of restaurants, which you can see the crazy zig-zags. Right now though, restaurants are up from 2019, right? 41% year over year. Well that's 41% over a psycho year, just a horrible year. You know, at one point restaurant traffic in April, 2020 was down 60%, 60% decreased in sales. But again, the carnage was real, not as bad as originally feared. I have it at 135,000 restaurants closed permanently.

There are still some in trouble and the big challenge right now is the labor shortage you throw in Omicron. I mean, every neighborhood I go into has a restaurant that's been impacted enough to have to close one day unexpectedly because of those two factors, meaning that they couldn't operate that day, but the impacts were vastly different. The damage for retail depended literally on where you sat, if you were sit down or not, if you're a concept that was about taking it home, going through a drive through you killed it. If you were a fine dining concept, you got killed and everything in the middle, it all depends on your ability to get into delivery. And other means of serving the consumers.

Now food delivery was, was a differentiator, but here's something. When I get into that final mile thing, I brought up and the changes ahead, investors need to keep an eye out. We saw DoorDash, for example, revenues, double skyrocketed. The nice thing they only lost about 350 million last year while doubling their revenues. Delivery has this challenge, which is, will it be profitable when you build enough scale? Probably. Here's how I think this is going to play out though. Every one of these players is now looking to become the final mile solution for retail stores. DoorDash is actively signing up retailers. Uber just announced, of course, Uber already had the ride sharing and they also had Uber Eats. They just announced yesterday a that they're going to get into retail delivery.

I think there are two things are going to happen. First off all of these delivery verticals, you're going to start to see them before pronged dip their toes into ride sharing, dip their toes into restaurant delivery, grocery delivery, and now being the five mile provider for retailers, which think about that. If Jeff Bezos is spending hundreds of billions of dollars for proximity and suddenly you're like, Hey, well actually I can do this from the store and maybe this store isn't a liability anymore. The way we've been thinking about it for 15 years, that could be a major game changer. I do think you're going to see consolidation within that industry as well. I think you're going to see mergers, buyouts. Eventually I don't think this market is going to be big enough for the scale to be built without both this happening and reducing the number of players to no more than two.

But I think this is the year it starts happening. And back to who's going to grow the most, mind-blowingly, restaurants. Restaurants I'm tracking 6,100 planned units this year. Obviously most of them are QSRs fast food, but a couple of things are white hot people are just going nuts for chicken concepts. You know, it wasn't always this way. It was the Chicken McNugget that did this, but the reality is I'm tracking dozens of new hot chicken concepts in aggressive growth mode, including, you know, the giants Chick-fil-A et cetera.

Coffee is off the hook, Dutch brother. I mean, you name it there's about 15 different major coffee concepts beyond Starbucks that are really racking stuff up. At this point, what we're tracking is overwhelmingly QSRs, but I'm starting to see the casual dining guys come back, including by the way, some have just declared bankruptcy and almost none of them liquidated, Chuck E. Cheese is looking for growth again, Benihana is back in the market. So, food for thought.

Michael Morris:I'm jumping in for one last question here, and our clock is ticking because it's 9:55 out here. I know you're killing it. Which retail asset class will likely return to pre pandemic vacancy levels in 2022? And I don't think we have to wait too long. Yeah, yeah, yeah, yeah. This year.

Garrick Brown:This year.

Michael Morris:So I don't even think we have to wait, Garrick just keep going buddy. Because we're a little tight.

Garrick Brown:All right. Well, we see it starting to come in and I won't tip my hand, but yes, grocery-anchored we're the big winners and being the least losers during the pandemic. But if you look at essentially the amount of absorption we are already seeing, we're actually having a challenge of not having enough quality class A grocery-anchored shopping center space. I don't foresee development ramping up either significantly. I do think there's opportunities in some markets. The challenge with retail is bad real estate if it's a bad location, it's a bad location, right? So hence the old statement, retail's not overbuilt, we're under demolished.

We don't have enough good real estate for that asset class. Power centers, again, recovering fast. This should be back to pre-pandemic levels by end of 2022. So two of those asset classes, it was a trick question. The challenges here will be larger boxes, but there's not enough 30,000 square foot boxes for all of the concepts that are squeezing down and going for that size and malls, lifestyle outlet centers. Yes, but class A again, the trophy assets, I think by late 2023 and that's back to the whole issue of the mall. I always like to tell this story. Abbreviated version is the guy designed the first indoor mall Victor Gruen up in Edina, Minnesota in the '50s envisioned a giant mixed use project. The developer said, "I just like this parking lot part and the part with the stores. Thank you very much."

Later on two years before he died in the late '70s, biographers writing asked him, what's it like to be the father of the American mall? And he says, "I renounced paternity of these bastards." Well, what happened? We've known for really the last 10 years malls needed to transition to mixed use. Suddenly I'm tracking more than 100 projects that are either adding mixed use elements or going full board to redevelopment as mixed use, and even some of the trophies in class A which we knew all along would be the one part that would recover of this market, where finally people are saying the best use for that dead JCPenney is high end luxury apartments or other elements, hospitality, office coworking, all of these things that are playing in.

Now, all of this data, I'm going to wrap it up with investment. Again, you can get these slides, all the data, you can study it all later. You could always call me or Mike, but investment activity we already saw shoot through the roof for all product types, industrial multifamily have dominated. Office not so much for clear reasons. There's a lot of question marks, right? But look at these cap rates, office and multifamily and industrial cap rates have been compressing so much the real question for me is, as an investor are you looking at park your money or do you want yield? And where can you get yield?

I look at what's happening already is driving, by the way, core cap rates, you know, you are parking your money if you're going to buy a life science building, okay. That's a fact. But it shot demand for net lease and grocery-anchored up through the roof. And I think that demand is only going to increase because there's now fewer question marks at that asset class than any type of retail. If I were looking for a deal, I'd be looking for a center that has a couple of large vacancies so the dealer has some hair on it, but not above the 60,000 square foot range. I'd line up a great leasing plan. I would buy it at a higher cap rate and really make out, but I've got a higher appetite for risk. That said you can read all of my top 10 predictions on here as you go through and Mike, do we have time for questions?

Michael Morris:No we don't. I wish we did because we got some good ones, I apologize. And we are literally running out of time, but you know, that was fantastic. And you talked about it, you do report cards on groups and I'm going to give you a report card, A+ on an excellent presentation. Garrick Brown, a friend, and just a lovely presentation. So informative and I loved Flippy, the automated hamburger flipper, but I'm not giving-

Garrick Brown:But listen, I didn't get to any questions that people have and you're going to be posting this on your website as well?

Michael Morris:Yes. Yeah. Oh yeah. Yeah.

Garrick Brown: Feel free to reach out to me, my email is there to answer questions and then certainly hopefully the data that's in here I know I threw a lot at people would be helpful to everyone.

Michael Morris:That's perfect. Thank you so much, Garrick and I'm going to pass it over to Bella in New York, Bella?

And we've been blessed, I was thinking this morning, all the great events we put on Garrick over the years. He's spoken at our EisnerAmper private equity real estate summit on the west coast. He's spoken at my Beverly Hills dinner that was legendary for many years, and we hope to kick back up after this delightful period of not being face-to-face and many other things. So, he's worked with a number of our clients, and we have an outstanding group of clients dialed into this webinar as well. So Garrett, I'm just going to pass it right over to you to start your slides.

Garrick Brown:Hey, thanks a lot, Michael. You know, you had me on back in 2020 as the pandemic was in as early stages. And I think after that I had more people calling me Dr. Doom than by my actual name for about three months. And what I'm really ecstatic about is a lot of what we were looking at, because we could see the risk, we could see the challenges, we couldn't see the solutions or the responses and it was dire. It really was a situation where we went from a narrative that was overblown about retail apocalypse to, we might actually be in a retail apocalypse. So what I'm most proud of is I was wrong on a whole by bunch of things that a whole bunch of things developed that yeah was retail ground zero, along with hospitality for real estate pain? Absolutely.

I am still pleasantly surprised and almost shocked sometimes by some of the numbers I'm seeing coming out of the industry that resurgence. Yeah. Yeah. And let me get into why it's pretty undeniable. First off, got to do my quick little plug. I'm really ecstatic I'm part of Lockehouse Retail Group. We are full service retail-focused firm based in California. We do tenant, landlord, leasing, investment sales, everything from net lease to shopping centers. Consulting that's me. And we also have national reach through ChainLinks Group, which we're very actively involved in. I came over last year and it's great for me because now I get to be 100% retail, but where are we at today?

Obviously coming into the holidays, we have tons of concerns about consumer confidence, supply chain and this blows me away. This is the OECD Consumer Confidence Metric, which consumer confidence was lower in December than it was in May, 2020. May, 2020 we were looking at the real possibility of a global depression. December, 2021 we're looking at paying an extra buck for a Big Mac. I think that just goes to say, consumers really hate inflation. They really do. They feel it but you know the other part of that, the supply chain issues, one of the things I think people forget- Part of the supply chain issues is China's got a zero-tolerance policy when it comes to COVID. So we are so reliant on a global supply chain, we made everything about just in time delivery rather than just in case. You know back in April of this past year, there was a COVID outbreak and it basically shut down two-thirds capacity at China's two largest ports for a few weeks. That's where we started to see our backups getting into- Ships waiting a month offshore.

But the other thing that people don't talk about is it's not just supply side it's demand side. Okay. Container traffic is up almost 20% from two years ago from October, 2019, our last normal year, right? That we can measure against. This is the latest data, by the way. So consumers are buying a ton of stuff. We don't just have the issues of getting the supplies here, we've got the issue of surged demand. And of course, everyone thinks consumer confidence goes in the toilet then consumer sales must. Not always, there's a loose relation usually they don't stay disconnected for long, but we just had the strongest holiday shopping season in 25 years. And that follows what had been the strongest holiday shopping season in 24 years last year.

Simple, the lopsided economic impacts of the pandemic. Those who lost their job mostly were service workers, now of course they're in short supply. Most of us who were lucky enough to emerge unscathed did fine. Tons of government aid pumped into the marketplace plus we're not spending money on services. You know, I'm still clearly not back to my old haircut regimen. All right. But I'm spending money on a whole lot of junk, which is great. And some cool stuff too.

By the way, consumers are absolutely flushed with cash. The savings rate, I think was a really great metric to look at, at the beginning of the pandemic. This is how much of your disposable income that you put away in your savings. Prior to 2020, we were averaging just under 6%. Beginning of the pandemic panic saving, 33% of people's income they were scrolling away, afraid they were going to lose their jobs. Then these next two surges that you see on this graph that was government aid going right into people's bank accounts. The net result of course is if you look at personal annual income growth and this is includes all types of income, including government payments shot up seven times during the last two pandemic years. A lot of that was government aid.

So we've been averaging 2% annual income growth the year suddenly it's 14%. And all of that means is Americans are sitting on a ton of cash. This is a metric that the Fed uses checkable bank deposits. It's the accumulated total of what some people's checking accounts in the United States. There's 5.4 trillion more dollars in there right now, as of, I believe this last, I was able to update about a week ago. So 5.4 trillion more than we had in our bank accounts prior to the pandemic. And of course the surge of stimulus cash, another thing that drives inflation. So suddenly we're at the highest level of inflation that we've seen since the first term of the Reagan presidency. That's the challenge.

For real estate it means construction prices are surging. New development prices are surging, tenant build out surging. The ability to redevelop say a shopping center. That's another issue. This is coming a little bit back down to earth, but this is going to be a big challenge. And the other thing about inflation where this isn't just a supply chain thing, this is going to be with us through the remainder of the year. And by the way, Goldman Sachs says that the fed will hike interest rates at least three times this year and the fed in their meeting the other day, definitely hinted that that's what's going to happen. That'll bring stuff back down, but here's the thing, have you tried to hire anybody lately? You know, the great resignation is real and what's happened is simply the amount of money you're having to pay to get employees in the door, especially for the lower end service jobs. I know of retailers and restaurants that are suddenly having to raise their wages 20%.

Now this is even though, you know, because we have 3.9% unemployment and if you look at the number of employed people, we're still down 3.6 million from where we were in February, 2020. Here's the thing nearly 3 million people dropped out of the labor force. A lot of this was moms. A lot of this was people taking early retirement. We don't know how many of these people are going to come back. But the last metric for job openings, we had 10.6 million available jobs, right? So put those numbers together and if you look at it by category and you say, all right, how many available jobs versus how many jobs did we lose in the pandemic?

Well, what you end up with is that we're basically short at least 7 million workers even if the 3 million that dropped out of the workforce would come back. We have a serious labor issue that's not going to go way. And remember this past year we reached our lowest birth rate of ever less than half of a percent. The birth rate in the US- Actually the population growth rate because until about six years ago, every year our population would increase by roughly 1.1 million people. Half of it was an immigration. Half of it was live births. Immigrations disappeared, hasn't come back.

So all of these things mean that wage pressures are going to stick with us. So we're not going to escape without the fed really raising interest rates. But keep in mind, we've had record low interest rates forever. I don't foresee anything where we get back to '80s level interest rates where you're talking double digits, but you know we've been in the 2%, 3%, it's going to go up. I would say we're probably in for four or 5% interest rates by early next year, but how's this all play out for retail? Obviously the labor challenges, the supply side, but remember where were we before COVID? You know, we were retail apocalypse 24/7. And a lot of that was because people in the United States we associate malls with being retail. We associate retail with the iconic brands of our childhood department stores. So we got Sears in deep trouble, eventually declaring bankruptcy. All of this plays on a psyche.

For the retail real estate malls, the mall world is about 8% of all retail real estate. Most of our retail real estate out there for shopping centers, it's grocery-anchored shopping centers. It's your local Safeway center, your local Kroger center, whatever. But you know, it's pretty bad when Bloomberg creates a video game, where you take over a dying mall. You know, I definitely ran a whole bunch into the ground and I'm going to circle back and show you where malls are today. This is where malls were right before the pandemic, about 1,200 malls, a little bit less. We were looking at the class C and D malls as basically in death spirals. We were looking at the class A malls as having the challenge of what do you do with the empty JCPenney? And the class B malls were the big question mark. Remember that.

By the way, pre-COVID bankruptcies, you can see go from 2017, '18, '19. Most of these players were in certain categories. A lot of them were mall-focused, but those numbers kept climbing until we hit 2020 and 2020, wow. Because we have two pages of bankruptcies. We set all records. What's interesting thing is last year we- And we just look at basically major chains, by the way. Chains with at least 50 units or above and I throw restaurants and health clubs in there, not just traditional retailers, but we're still talking about less than 20 concepts that filed bankruptcy last year. It was the lowest number of bankruptcies in over a decade. We went from 75 to 15.

Obviously a lot of the pain was felt upfront for us. A lot of pain. I don't want to mitigate that again I include retail and restaurant and health clubs. Many of you probably have seen a commonly cited number for chain store closures that my good friend, Deborah Weinswig at Coresight Research does it's I think 12 or 14,000. I don't dispute that at all. She's counting major chains and again, 50 units or above, the apparel players, all that. Throw in health clubs, 20% of our health clubs failed, 20% of our restaurants failed. And this doesn't even count the independence. We had 27,000 closures that I tracked, nothing close. But here's the tricky thing what's the state of retail today?

Well, let's just start by looking at bankruptcy watch lists, you know, Moody's, Fitch, Credit Intel, all these guys track the underlying economic fundamental of these publicly traded companies. And you know, you reach a certain point and you get on that watch list. So bankruptcy watch list in February, 2020 included these major chains. This is compiled from all those guys. By the time we got to June of 2020, this is page one of the bankruptcy watch list we were looking at page two. Now, many of these players didn't escape without filing. A whole bunch of them did and the thing is these sheer numbers, first off suddenly lenders were more willing to work out debt at lower interest rates for a lot of these players, because nobody wanted to be crushed by this wave.

Secondly, the interesting thing on all those bankruptcies that did occur the previous 20 years, about one in five retail bankruptcies ended up with liquidations like Circuit City, Toys R Us, Payless, the second time out, right? We're basically all right, we don't find a way to work this out, adios, all the stores closed. Last year that number dropped to about 8%. Lenders again because of the sheer volume of the troubles I think were more willing to create creative workouts. So suddenly we have an environment where there's fewer retailers today on bankruptcy watch lists than there were in 2019. And if you look at it, the categories and by the way, these ratings think of it like a report card, A, excellent. B, very good. C, average. D and E is where you start getting into trouble. F, basically you already or you already are in dangerous spot where you haven't been living up to your covenants. You could be sued.

It consistently paints the same picture. Theaters are not getting better necessarily with their credit. Although I know AMC is in the middle of trying to renegotiate a lot of their debt. A few clothing brands that were troubled already, but nearly everybody else, their credits improving. Nordstrom ended up on this list. Nordstrom is an incredible operator. They will be off this list, right? Some of these players, probably not, but we've always had troubled retailers. So one of the things that we've seen year in and year out as I discussed was closures and Michael, I know we've felt it'd be fun to do a few polling questions.

Michael Morris:We have one up for us right here, Garrick. I'll read it out although I could just sit back and listen to you for hours. So some of these are trick questions. You got to be careful when you answer them because Garrick actually put them together. So proceed with caution. Contraction has been the norm for many retail categories prior to the pandemic, when closures and bankruptcy set records. We track roughly 27,000 major chain store closures, which included traditional retailers, restaurants, gyms, health clubs, et cetera. How many major change store closure should we expect from all categories that use retail space in 2022? And we'll give everybody about 30 seconds to answer this.

Garrick Brown:By the way, one thing that I'm really happy I wrong about last year is we thought if this was going to be an 18 month ordeal and it basically has been, and then some that we'd lose 30% of our restaurants, 30% of our health clubs. The losses were staggering, a lot of pain felt, but in both categories it ended up being about 20%. So what really made the difference it was a combination of government aid, I think operator grit. You know, we saw from craft brew guys that suddenly were creating hand sanitizer to my local Mexican restaurant that did a great job of selling these essentially like the wine box bags full of margaritas and government moves like allowing home alcohol delivery stuff like that. And certainly the government aid, but probably the big unsung one was the willingness of landlords to work out special arrangements.

A lot of that was blend and extend deals. Okay. Don't worry about paying rent for the next six months. We'll add six months under the back of your term. Some of that was moving the percentage rents and look to the duration of the pandemic, or maybe the next year, you just report to us your gross sales and instead of that set rental rate mark we'll just make it say 8% of gross sales, that kind of thing. But it really was a big game changer and kept what was catastrophic from becoming even worse.

Michael Morris:Yeah. Well, a lot of our clients, we talked about that and they instituted that philosophy that you're talking about. It's everybody's got to work together through this. Okay. I think we can move on to the next slide. That'll give us our results.

Garrick Brown:Oops. I think we hit the button the same time, Mike. Wow. You have got a savvy crowd. You have got a very savvy crowd or maybe I did a good job on selling my case, but between four and 6,000. Yep. Now this isn't net, this is closures that have been announced. By the way, we are still in closure announcement season and you know, there's been some CVS over next three years is going to close about 10% of its stores. But what's amazing so far is I'm seeing more store opening announcements in January than store closing announcements. And in some big ones, you know, Mattress Firm wants to do 100 stores a year for next five years, even though they declared bankruptcy about four years ago and closed about 800 stores.

So it's that, that back and forth, but that's where we're at right now is 4,100 announced and ones that we're pretty sure are going to happen I think that'll go up by 1,000 before we're all done. But it would basically be one of lower closure rates that we've had in quite a while. And this, again, doesn't take into account store openings. So obviously the pain was differently felt depending on category. The thing for everybody in the investment world, you got to connect is that we traditionally had certain categories. They go for certain types of retail assets, certain types of shopping centers, grocery-anchored felt the least amount of pain, in line their losses were to small shop users, the independents, the restaurants that didn't make it. But being outdoor shopping centers they also had less of a failure rate. A lot of them turned parking lots into outdoor dining and so forth, right?

Malls, lifestyle outlet centers had the categories, largely felt the most pain. Don't get me wrong certain sectors of restaurants really were just hammered so were the health clubs, but there were some categories that actually really benefited. Everything having to do with the home you know, Restoration Hardware is sitting pretty right now, but let's get into a few other things to talk about real quick. Now, right now there's all this stock market volatility going on. This is going to probably, you know, hopefully this ends up just being a correction. We're overdue on a correction in my opinion, better to have corrections than market blowouts. But here's the thing, Wall Street, of course at the beginning of the pandemic was down 6 trillion. All the global markets, 6 trillion in wealth had evaporated. It came back by August 2020. As of a few weeks ago, it actually had reached a point it was up 50% from pre-pandemic levels.

Now, this is 33% as a Monday, but it's been crazy. This is the metric that freaks me out. This Shareholder priced earnings ratio basically we were reaching territory where the price to earnings ratio, the price of a stock was matching in at about 40 times earnings. That's territory we haven't seen since the Tech Wreck. That actually dropped Monday to about 35, but then it bounced back as we keep zig-zagging, who knows where that's going to end up? But here's what's going to happen is almost every stock market analyst that I value their opinion and I keep report cards and their predictions. Everyone says the same things, major stock market volatility this year. So what does that mean? It means that you're going to see a whole lot of people fleeing for the relative safety of real estate.

By the way, we've got about half as many publicly traded companies on the market, on all the indices that we had in the late '90s. And so suddenly we saw the surge of IPOs last year, everybody wanting to get in on the rich stock market valuations. Set records over 1,000 IPOs. I think the last time we saw that was in the '80s, but here's what's interesting. We saw retail IPOs. Now something I should warn everyone about, like right now you might have heard that there's all sorts of stuff going out Kohl's with activist investors that want to spin off their eCommerce. No doubt they could make easily, at least a seven, $8 billion evaluation on that. Even though remember the last 15 years, everything in retail has been about creating a seamless integration of your eCommerce and your stores. So would that be good for Kohl's in the long run?

Maybe they've got some secret sauce I don't know about, but it would buck the trend and you see all these activist investment groups going out for that. The thing that worries me is just the approach as a means to an end that this might be bad for the core business. Who cares if you get an $8 billion evaluation and sell your shares and go off into the sunset? Something to keep an eye on the movement of activist investors warning Nordstrom to spin off Rack, I think is a bit different that doesn't drive their eCommerce. And that actually is where I see Nordstrom getting off of bankruptcy watch list and doing quite well. But because retailers are part of the IPO mix what we've got to remember is once you're beholden to Wall Street, you need to drive that three, four, 5% annual growth.

The nice, easier, well, not very easy way. The nice way, the safe way is same store sales going up every year, right? It's the economy's good we do a great job of merchandising, we get on a hot trend, suddenly we're up 5%. That usually doesn't happen. The other way is to open stores. That's how we became over retail to begin with. So suddenly with all these retailers coming in, all of these players are suddenly getting into opening more stores. Allbirds, 300 stores in the next five years, this digital native brand. By the way, a lot of this is digital native players. Some of it are players that were in financial trouble, or even in bankruptcy recently like Claire's or Guitar Center is going to go from bankruptcy to being IPO suddenly probably opening more stores and tweaking concepts.

All of these players are suddenly in the market to grow. And I bring this up just for one other thing, all the unemployment stuff I was telling you, you want other investment that I think is rock solid VC is dealing with robotics because automation, every single retail and restaurant chain that I know of is looking into ways that they can deal with the staffing issues, particularly the restaurants.

So whether it's Flippy the robotic burger flipper, you know, I think that that runway for growth is huge. And as you see, VC totals blew away all previous records. By the way, we're going to make these slides available to you so I know I zip through a lot of these pretty quickly, but you can use these as a reference later on. But here's another thing that made me very pleasantly surprised about what happened. Seems counterintuitive, startups surge during the pandemic. In the financial crisis of 2008, we saw a similar trend in that all these laid off business professionals that had means we saw a surge of franchising. Subway saw their greatest franchise years after that. They were doing 1,000 new stores a year.

 Well, we saw new business formations shoot through the roof, retail shot through the roof as well. A lot of these were digital native brands. A lot of these might be mom and pops going to swap meets, right? But the thing is, if you look over the last two years, retail startups have increased almost 75%. Many of these are going to eventually need space. Many of them all already needs space. New business formation for restaurants. Again, one of the hardest hit categories up over 50%. A lot of these startups are doing the food truck route. They're the reason why food halls are searching virtually every two week. I'm tracking a new food hall that's coming online. And some of these are in small towns, things that when food halls were just a Manhattan thing, no one would've predicted, except for me. Okay. I'm kind of a jerk on that one, but all of this is coming to market.

And here's the other thing to keep in mind if you track retail sales just month over month, first off, don't read the headlines to always focus on monthly change. That's the least important number that comes out with monthly retail sales. Why on earth the media always reports that? I don't give a crap that retail sales changed 1% from the month before. What I'm interested in is the bigger picture trend where are they from the year before? We average 3% the last 20 years, more or less, if you look at where we are year over year today, we're up 17% almost. And if you compare where we're at today to the last normal year, 2019 up almost 20%, that's amazing growth. That's more than eCommerce was growing before the pandemic each year. Even department stores are up. I mean, they're down slightly from 2019 so I think their surge is going to be limited, but year over year, they're up considerably.

And of course the big winners for traditional retail, general merchandise. This includes the Big Boxes, the discounters and all that. All of those numbers are through the roof. And again, talking about credit scores, here's where you just see the progression of these credit scores and the turnaround. The discounters and dollars stores on the right. Okay. They've been sitting pretty for a while, by the way, all of these are ramping up growth. Costco just announced 28 new stores this year, yesterday 28, 28, big, big, big boxes. They usually average about 10. Okay. So something I would want everyone to think about is how will this play out? So Michael, take it away.

Michael Morris:Okay. Here's our question, of all the business categories that utilize has announced the most planned growth in 2020 of new store units. I mean, we know what Costco's doing and I believe it. That place is killing it, but please feel free to answer that.

Garrick Brown:It's a zoo. It's a zoo.

Michael Morris:I know. I mean, I love Mattress Firm is doing 100 units. One of our clients is a tenant and tow developer for those smaller retail pieces. And that is definitely one of their clients that they work with. So I'm sure that's music to his ears.

Garrick Brown:Well, one thing too, you know, as people are voting. So when you look at where the damage was for closures, the thing you got to keep in mind, the easiest thing to replace in retail is the smaller space. There are more tenant opportunities say 2,000 square feet, or less than there are say 2,000 to 5,000 square feet or 5,000 to 10,000 square feet. And as you move up, when you cross 50,000 square feet, you are starting to deal with very few tenant leasing opportunities. Hobby Lobby is active, Costco usually just builds their own building. You know, sometimes they'll lease secondhand space, but they're pretty unique and they're very big. But when you get to 100,000 square feet or more, now you're just talking home improvement stores, Costco, et cetera.

Everyone is shrinking their boxes for the most part. Certainly Burlington would do 80,000 square feet stores now they're going very strong on a 35,000 square foot template. Kohl's which normally was 80,000 square feet is exploring a smaller template as well. Best Buy, which is still right sizing, right? They're going to be reducing their store count by about 2% a year for the next few years that comes out to about 20 stores. But they're also starting a new small format concept that they're testing in Canada. So there might be some swapping out there, but what's amazing to me is nearly every category has got growth lined up. The only difference is, is it's still going to be a bit of a challenge, you cross that 50,000 square foot threshold and you've only got a few categories that ever do those right now. Grocery department really aren't ramping up, although I'll get into some more of that in a second. So looks like we've got about a little over half of our attendees have voted.

Michael Morris:I think we can move on.

Garrick Brown:Yeah. Okay. Discounters, dollar stores. Well, now I'm not going to give you the answer just yet. You know, dollar stores 10 years ago, there were about 22,000 of them in the US. Now there's moving in on 40,000. 40,000 dollar stores, but of course they're not dollar stores anymore. They're dollar 25 stores because of inflation. This is going to be a big year for the differentiated dollar store. Here's the thing, their runway for growth is kind of maxing out. There's only so many markets left to grow and where the growth is, is suddenly to have the idea of a dollar store that appeals to higher income consumers. That also means different real estate. So the success of Five Below, which is doing 170 stores a year, we see Popshelf by Dollar General, which is very interesting concept. It's more like these are $5 stores. This is going to be an interesting year there, but we're still seeing a lot of growth from those guys.

And by the way, I hadn't had a chance to update that Costco number when that info came up. Apparel, we still have some challenges. Okay. Men's dress apparel still has some issues because casual Fridays just got accelerated significantly during the pandemic, but off-price apparels has been killing it. What's interesting is a lot of those players in the middle where the challenges had been are in a better credit spot. The growth story of the last few years been off-price, and it's been Aritzia, Lululemon, et cetera. But we also see some traditional players coming back to it. And this is because retail sales for apparel really rebounded. This is one I need to watch in the future because this might just be a we went back to work and we have to go get some clothes situation. It might be a short term surge, I think a long term trend of off-price apparel, really driving things. And it's certainly more casual wear being dominant.

To me, that's a no-brainer, but we see some big growth. I mean, Lululemon 45 stores, plus Allbirds that told you about which mainly shoes, some apparel. Psycho Bunny, new kind of funky hipster concept ramping up growth at malls. Athletic shoes, you know, when it comes to shoes, if it runs, it works. If it's dress shoes, not so much. I think, I don't know if you're like me, but I put my Bostonians away at the beginning of the pandemic and now I really struggle to wear anything but sneakers because my feet hurt like hell, when I put the dress shoes on.

And of course, anything doing with nesting, home improvement, boom, through the roof, up 30% from where it was in 2019, because we were all cooped up. Furniture, furnishings, et cetera. Hence, I throw Mattress Firm into that category, but also whole bunch of other places that we're going to see some ramped up growth coming out of. At Home is a great example. The big mega, big box player that was actually on a bankruptcy watch list last June. Well complete turnaround in their economics and they're ramping up growth. So that's one of those few players that's above that 50,000 square foot range, looking for space actively.

Even electronics and office supplies, which has been a challenge category. Now Best Buy does everything, right? They're still right sizing, but their numbers are good. But Office Depot and Staples there was that real challenge of do we need these stores when people are buying so much online? That's why Staples has been dominant. Their online presence but they got a boost because people had to basically build out home offices. All of this, more growth than I've seen in the last seven years. And this is just the major growth plan announcements, right? Of course, it's across the board and it's not everything. Theaters are deeply, deeply challenged. Again, that acceleration theme prevalent through the pandemic. Streaming was already cutting into theater revenues and let's face what's really happened here. It's like everything else where a middle has disappeared.

You know in retail it's become about the luxury high end or the experiential versus the discount and the stuff in the middle was convenience. Well that all went online. I view to some extent the same thing has played out in theaters. Hollywood's abandoned the adult drama because we just don't show up the way the kids do. So everything there is about men in tights and great big things blowing up. And meanwhile, I can't watch enough Netflix because I like drama. So all of that's been accelerated. Literally the amount of streaming hours globally tripled during the pandemic. And they've only started to moderate slightly. They're not going back. Don't worry about the Netflix stock issues that's just because they're pricing for the future and they've already achieved their growth. But I expect one in four theaters to close over the next five years.

The other thing is that theaters are clamoring to boost the experience to stay relevant. So while this is happening, you're going to see consolidation in the industry, bankruptcies, some players buying each other out, but a lot more dine-in theaters coming back, Alamo Drafthouse, their largest franchisee worked out their bankruptcy in near record time. And immediately had two locations lined up for new theaters. So at everything is going to be, we have to give them a reason to show up. So I don't bet against dine-in theaters, but if you don't have a special offering. What about eCommerce? Okay. Look, Jeff Bezos, the year before the pandemic went through a divorce, cost him a record, the most expensive divorce in human history, was over I think it was 38 billion. I'm just guessing here. I think that's roughly right. Well, his value in June of 2020 paid off that divorce one month. Thanks COVID.

Now of course his wealth is paper and he's been taking some hits lately, but you know, eCommerce growth prior to the pandemic had been averaged 15, 16, 17% a year, and it shot through the roof. It shot through the roof. It's still up 28%, but here's what I'm seeing 10 years ago, 3% of all apparel sales were done online. It was almost 30% before the pandemic, now it's 40, 45%. How much more market penetration is there? Because I don't believe we're going to be in a world ever where 70% of clothes are sold online. Now there's still some categories that can be disrupted, but that acceleration, I think moved eCommerce further ahead and closer to a stabilization point.

And we washed out so many store locations that suddenly that whole problem the last 15 years, which is, oh, how do we rebalance our store fleet against our eCommerce? We're much further ahead in the resolution of that. In fact, I think now retail for the first time in 20 years is in a point where our biggest threats are economic and cyclical. They are not structural anymore. I can't say that for office space. Office space and the rise from work from home is their digital disruption. And I don't think it's going to be catastrophic, but if suddenly everyone needs because of flexible work, maybe 20% less space on their renewal, when that comes around, that's real disruption that's barely hit that marketplace.

Now, don't get me wrong, there's a lot of organic growth in the office world. A lot of VC money I showed you went to tech startups, right? So there's new sources of demand. But if the average office user doesn't need as much space, you're going to need a lot of organic growth to make up for that without feeling some pain. But here's the other thing about eCommerce space that I want to put out to everyone. And that's that remember all those startups I showed you about 80% of those retail startups were digital. Okay. If you want to be online and reach consumers, you basically have Google or Facebook advertising.

Those are the players. What do you think happened to their advertising costs? Skyrocketed through the roof. Now, if you're a mature eCommerce digital-made brand, let's just say Allbirds, but before the IPO. We already had a robust consumer base, how much further were you going to go with your traditional means of advertising as those costs are skyrocketing to acquire more customers? It suddenly becomes the 80/20 rule where to acquire 20% more customers you're spending 80% more than you did before you became a mature retailer.

So suddenly we had this issue of customer acquisition costs impacting eCommerce and that customer's curve. Well, all of this is driving more and more digital native brands to open stores. And I want people to think about this, Jeff Bezos has spent hundreds of billions of dollars at record deal levels for industrial real estate the last few years. With them literally driving about a third of the activity, right? Proximity, proximity, proximity. The challenge for retail always was, well, how do we compete with this? No one's going to be able to build this infrastructure ever again. That's part of Jeff Bezos' genius. 20 years before the retail part of Amazon give or take made a profit, being able to get his investors to go along with reinvesting all of that to this infrastructure that's made them unstoppable now.

Well, you've got this challenge now you've got all of these players that are coming to market, looking for stores, the digital native brands. You have existing players that are saying, how do I keep up with Amazon? All of that's going to drive a great big change I'm get into in a second that worthy of keeping an eye on as an investor. But here's what's playing out is the last five or six years if you track retail, we've made such a big deal and a hoot and holler about Warby Parker opening stores. Hey yeah, digital natives are going physical. Woo, woo, woo. And the sheer numbers, so few. Half of these stores ended up in Soho for God's sake. Okay. They had little impact on the market outside of a couple of New York high streets, LA, San Francisco, Chicago, maybe Seattle, once in a while, maybe Boston once in a while, maybe Miami, that was it.

It was good to see these guys going physical, but this year it really takes off for real, for real, and Amazon is driving it. They're highly secretive, but what I've tracked just in their Amazon fresh grocery concept so far suggest a hundred of those. And you may have heard at the Americana at Brand down in Glendale, which is a great project that is the highest sales per square foot mall. Really a lifestyle center in the United States. Amazon is opening a 30,000 square foot apparel store called Amazon Style. So they've gone from Amazon, the destroyer to Amazon, the really, really, really active tenants. And that doesn't include Amazon Go, which is ramping up. That doesn't include Amazon 4-star, which is ramping up. And most likely we might see another couple of concepts coming out of them. Beyond them we see this huge drive back to market.

That's critical to keep an eye on. By the way before I finally give the answer to that question. Groceries were the other big winner, their sales shot up 17%, two years ago. And that was at the expense of restaurants, which you can see the crazy zig-zags. Right now though, restaurants are up from 2019, right? 41% year over year. Well that's 41% over a psycho year, just a horrible year. You know, at one point restaurant traffic in April, 2020 was down 60%, 60% decreased in sales. But again, the carnage was real, not as bad as originally feared. I have it at 135,000 restaurants closed permanently.

There are still some in trouble and the big challenge right now is the labor shortage you throw in Omicron. I mean, every neighborhood I go into has a restaurant that's been impacted enough to have to close one day unexpectedly because of those two factors, meaning that they couldn't operate that day, but the impacts were vastly different. The damage for retail depended literally on where you sat, if you were sit down or not, if you're a concept that was about taking it home, going through a drive through you killed it. If you were a fine dining concept, you got killed and everything in the middle, it all depends on your ability to get into delivery. And other means of serving the consumers.

Now food delivery was, was a differentiator, but here's something. When I get into that final mile thing, I brought up and the changes ahead, investors need to keep an eye out. We saw DoorDash, for example, revenues, double skyrocketed. The nice thing they only lost about 350 million last year while doubling their revenues. Delivery has this challenge, which is, will it be profitable when you build enough scale? Probably. Here's how I think this is going to play out though. Every one of these players is now looking to become the final mile solution for retail stores. DoorDash is actively signing up retailers. Uber just announced, of course, Uber already had the ride sharing and they also had Uber Eats. They just announced yesterday a that they're going to get into retail delivery.

I think there are two things are going to happen. First off all of these delivery verticals, you're going to start to see them before pronged dip their toes into ride sharing, dip their toes into restaurant delivery, grocery delivery, and now being the five mile provider for retailers, which think about that. If Jeff Bezos is spending hundreds of billions of dollars for proximity and suddenly you're like, Hey, well actually I can do this from the store and maybe this store isn't a liability anymore. The way we've been thinking about it for 15 years, that could be a major game changer. I do think you're going to see consolidation within that industry as well. I think you're going to see mergers, buyouts. Eventually I don't think this market is going to be big enough for the scale to be built without both this happening and reducing the number of players to no more than two.

But I think this is the year it starts happening. And back to who's going to grow the most, mind-blowingly, restaurants. Restaurants I'm tracking 6,100 planned units this year. Obviously most of them are QSRs fast food, but a couple of things are white hot people are just going nuts for chicken concepts. You know, it wasn't always this way. It was the Chicken McNugget that did this, but the reality is I'm tracking dozens of new hot chicken concepts in aggressive growth mode, including, you know, the giants Chick-fil-A et cetera.

Coffee is off the hook, Dutch brother. I mean, you name it there's about 15 different major coffee concepts beyond Starbucks that are really racking stuff up. At this point, what we're tracking is overwhelmingly QSRs, but I'm starting to see the casual dining guys come back, including by the way, some have just declared bankruptcy and almost none of them liquidated, Chuck E. Cheese is looking for growth again, Benihana is back in the market. So, food for thought.

Michael Morris:I'm jumping in for one last question here, and our clock is ticking because it's 9:55 out here. I know you're killing it. Which retail asset class will likely return to pre pandemic vacancy levels in 2022? And I don't think we have to wait too long. Yeah, yeah, yeah, yeah. This year.

Garrick Brown:This year.

Michael Morris:So I don't even think we have to wait, Garrick just keep going buddy. Because we're a little tight.

Garrick Brown:All right. Well, we see it starting to come in and I won't tip my hand, but yes, grocery-anchored we're the big winners and being the least losers during the pandemic. But if you look at essentially the amount of absorption we are already seeing, we're actually having a challenge of not having enough quality class A grocery-anchored shopping center space. I don't foresee development ramping up either significantly. I do think there's opportunities in some markets. The challenge with retail is bad real estate if it's a bad location, it's a bad location, right? So hence the old statement, retail's not overbuilt, we're under demolished.

We don't have enough good real estate for that asset class. Power centers, again, recovering fast. This should be back to pre-pandemic levels by end of 2022. So two of those asset classes, it was a trick question. The challenges here will be larger boxes, but there's not enough 30,000 square foot boxes for all of the concepts that are squeezing down and going for that size and malls, lifestyle outlet centers. Yes, but class A again, the trophy assets, I think by late 2023 and that's back to the whole issue of the mall. I always like to tell this story. Abbreviated version is the guy designed the first indoor mall Victor Gruen up in Edina, Minnesota in the '50s envisioned a giant mixed use project. The developer said, "I just like this parking lot part and the part with the stores. Thank you very much."

Later on two years before he died in the late '70s, biographers writing asked him, what's it like to be the father of the American mall? And he says, "I renounced paternity of these bastards." Well, what happened? We've known for really the last 10 years malls needed to transition to mixed use. Suddenly I'm tracking more than 100 projects that are either adding mixed use elements or going full board to redevelopment as mixed use, and even some of the trophies in class A which we knew all along would be the one part that would recover of this market, where finally people are saying the best use for that dead JCPenney is high end luxury apartments or other elements, hospitality, office coworking, all of these things that are playing in.

Now, all of this data, I'm going to wrap it up with investment. Again, you can get these slides, all the data, you can study it all later. You could always call me or Mike, but investment activity we already saw shoot through the roof for all product types, industrial multifamily have dominated. Office not so much for clear reasons. There's a lot of question marks, right? But look at these cap rates, office and multifamily and industrial cap rates have been compressing so much the real question for me is, as an investor are you looking at park your money or do you want yield? And where can you get yield?

I look at what's happening already is driving, by the way, core cap rates, you know, you are parking your money if you're going to buy a life science building, okay. That's a fact. But it shot demand for net lease and grocery-anchored up through the roof. And I think that demand is only going to increase because there's now fewer question marks at that asset class than any type of retail. If I were looking for a deal, I'd be looking for a center that has a couple of large vacancies so the dealer has some hair on it, but not above the 60,000 square foot range. I'd line up a great leasing plan. I would buy it at a higher cap rate and really make out, but I've got a higher appetite for risk. That said you can read all of my top 10 predictions on here as you go through and Mike, do we have time for questions?

Michael Morris: No we don't. I wish we did because we got some good ones, I apologize. And we are literally running out of time, but you know, that was fantastic. And you talked about it, you do report cards on groups and I'm going to give you a report card, A+ on an excellent presentation. Garrick Brown, a friend, and just a lovely presentation. So informative and I loved Flippy, the automated hamburger flipper, but I'm not giving-

Garrick Brown:But listen, I didn't get to any questions that people have and you're going to be posting this on your website as well?

Michael Morris:Yes. Yeah. Oh yeah. Yeah.

Garrick Brown:Feel free to reach out to me, my email is there to answer questions and then certainly hopefully the data that's in here I know I threw a lot at people would be helpful to everyone.

Michael Morris:That's perfect. Thank you so much, Garrick and I'm going to pass it over to Bella in New York, Bella?

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