What Happened to the Retail Apocalypse? | Top of Mind Series

This is the Invest Like a Billionaire podcast, where we uncover the alternative investments and strategies that billionaires use to grow wealth. The tools and tactics you'll learn from this podcast will make you a better investor and help you build legacy wealth. Join us as we dive into the world of alternative investments, uncover strategies of the ultra-wealthy, discuss economics, and interview successful investors. Welcome back to the Invest Like a Billionaire podcast. Thank you so much for listening. And today we're going to do something a little bit different. So we're going to launch a new series called Top of Mind, and these are going to be short little nuggets where we're going to share just some thoughts that we've been having. We're always talking about different trends going on in the market and different asset classes and just things we're noticing. And, you know, sometimes it's not worthy of a full episode, and sometimes it's very timely, and sometimes we just want to do a little more bite-sized, um, information. So these are going to be shorter little segments. We're going to highlight, um, one particular thing that is just intriguing to us and just share it, and hopefully you get some value out of it. So, um, one of the things that we wanted to, uh, talk about is something we've been hearing a lot about at all the different real estate conferences we've been going to, in different podcast episodes that we've been having, and it just seems like it's everywhere. And I know it's not, but it's just wherever we're at, we keep hearing this, and it's all about retail real estate. And so when we say that, there's generally two very polarized responses, where retail is dead, the apocalypse has happened, and e-commerce is going to take over brick-and-mortar retail. And the other side of it, well, maybe there's opportunity. One of the great quotes from Warren Buffett is, "When there's blood on the streets, when everyone's scared, that's the best time to be looking." It's actually JP Morgan. Oh, I mixed— what was the— Warren Buffett.

Different guy. But yeah, so when everybody hates an asset, Guess what? It trades at a big discount. Okay? And so when everybody hates an asset is exactly the time when you want to buy it. And so we want to be trained as investors to identify hated but good assets that have a good value. And we were alerted, one of our first podcast episodes with Gary Stash, who's a billionaire, a billion-dollar broker, and he said, "Bob, the best opportunity right now is in retail." And so we're actually going to look at some of the retail here. So, Ben, go through these charts.

Yeah. And just full disclosure, we 100% stole these charts from a great presentation that we saw at the Best Ever Conference a month or two ago by Spencer Levy, who is a well-known economist. And he's talking about all the different asset classes, and retail is where he's saying, "This is where the opportunity is. This is where investors need to be looking because it's not very often you see the opportunity like this. And so here's a couple charts. We will recommend that if you're listening, we'll try to describe them, but if you have a chance to go back and watch it on YouTube, that's going to be really helpful because we are referencing charts as we do this. So this first one is called Is the Retail Apocalypse Still Here? Is it going to completely eradicate all retail real estate? And what we're seeing here on this chart is the percent of total retail sales that is being made online, so from e-commerce. And so we've been seeing over the last really decade, the amount of purchases made online has substantially increased. But really, you know, a year or two years ago it spiked, and then it's really plateaued, and it hasn't really done anything. In fact, it's actually gone down. And so it's been been plateauing right around 24%, 22% of total sales being made on e-commerce. And so the trend has definitely slowed. And what we're seeing and where a lot of investors, the conversations we have is the whole retail apocalypse has been overplayed. It's this big headline that is really easy for the news channels to promulgate. And it's you know, retail is dead. But there's certain types of retail that is not dead. There's certain types of things that you can't get online, right? What are some of those ones?

Like, like, yeah, the liquor store, right? You're, you're getting your dog groomed, getting your nails done, getting your hair cut, those things, you don't go to Amazon for those things. And so yeah, so what this chart shows, it shows steady increase for years. This is the share of pure e-commerce retailers eating into taking the total e-commerce pie and steady increase, huge spike in COVID, and then it's been a falling off and plateaued. And, uh, we're actually seeing that, that the e-commerce sales is actually— has actually been slowing recently. So show the next slide.

Yeah, so this one was pulled from literally just a couple days ago, a big article on CNBC. And obviously the stock market's been struggling this year, 2022, um, and especially e-commerce stocks, they're plummeting because ecommerce transactions, if you can see here on the highlighted part of my screen, have declined 1.8% year over year. So ecommerce sales actually declined while in-store sales are up 10%. Up 10%.

So there's like just corroborating.

Yeah, it's— there's again, there's this part of retail where people, you know, one, there's maybe a big push coming back from COVID people would be out in person again, but there's also these irreplaceable type of businesses that can't be fully replaced by online sales. This is a chart, US retail sales are resilient. So this is total retail sales, both e-commerce and in person. And you can see here, really since the beginning of 2020, a pretty big growth trend in total sales, right? There's been very healthy appetite. We have other charts we've seen, not in this, uh, deck, but other charts we've seen where a lot of retail actually did really well through COVID. You know, there's certain retailers that did not, and we'll talk about that as we go along.

As we see, so the chart shows— I'll just, for those listeners, the chart shows kind of steady, steady, slow growth until COVID hit, and then 2 months where it dropped to nothing, and then a trajectory change. It increased to where it was before, back to where it was before, but then at a steeper increase in curve. So you're seeing retail sales have just— are really very resilient through COVID.

Yeah. So there's a lot of strong demand, obviously. You know, we said on many podcasts before, you know, the GDP, the gross domestic product of the US, is made up 70% by consumer spending. So a healthy consumer, a strong consumer that's spending, is very good for the economy. We're seeing that right now. There's a lot of opportunity there. And this next chart is investors are seeing opportunity, right? So this is the capital markets for retail real estate over the past about 3 years. And we're seeing the last really 2 quarters, Q3 and Q4 of 2022, a pretty big increase in transaction volume in retail real estate. So this is the big money. These are big investors that are seeing these trends. And wanting to capitalize on it. And again, Invest Like a Billionaire, the whole point of this podcast is to do what the ultra-wealthy, the billionaires of the world are doing, the smart money, and they're definitely seeing some opportunity here.

So, and we're seeing this too. We're actually about to add to this chart and piling in. So just the deal, latest deal we're looking at. So if we're going to buy a multifamily value-add deal right now, we're going to pay a 3.5 cap for that. So that means, you know, if we bought a $10 million deal, it's going to earn what, $35,000 a year? Did I do that math right, Ben?

Yeah, we were talking about it earlier today. So on a property that says earns $1 million of NOI at a 3.5 cap, to purchase that, we're going to be paying close to $30 million. —right?— to get the $1 million.

And so the same level of earnings in retail, I'm paying $10 million instead of $30 million. I'm paying $10 million for this. So it's on sale. Retail is on sale and literally is earning at a 10% rate. And when something is like that, you can tell just how hated it is. And I want to be buying stuff that's hated. I want to be buying stuff that is on sale that no one wants, but there's nothing wrong with it. Right? Everyone knows the markets are fad-oriented. There are things that in favor and out of favor, and everybody knows retail sucks. Well, when everybody knows retail sucks, that's exactly when you want to be buying retail. Okay? Right. There is going to be a day when everybody knows multifamily sucks, and that's when you want to be buying that. Everything sucks at some point in its lifespan, right? And everything is a darling at some point in its lifespan. So anyhow, So we're super excited about, about, about retail.

Especially exciting when you're seeing the fundamentals supporting this as well, right? It's because it's purely headlines and it's people that are not seeing the opportunity. I finally remember the Buffett quote, so I got confused, but he says, be fearful when others are greedy and greedy when others are fearful. That was the one. But, but it's really, it's being contrarian, right? It's being smart contrarian investors. That's how Buffett has made all his money. He's seen opportunity that people have not seen, capitalizing on it in a big way. And this last chart is really interesting because this is breaking down the different types of retail. And one that a lot of people may be familiar with, or maybe the one that trades at the lowest cap rate or what would be considered maybe the lowest risk is grocery anchored.

Makes sense. So this is retail where there's a grocery store, so people have to go. And so that trades at, I mean, it's showing here a 5 or a 5.5 cap rate.

Right, so it's definitely kind of low in the lower range, maybe even in the more classy multifamily range. But what Spencer Levy and other economists we've heard are making the point is this is actually the most susceptible to being e-commerce, right? Right.

Is it possible that you'd order your groceries online? And the answer is Absolutely, yes.

My wife has started doing that more. And so the other chart here on this page you can see is that the, the estimated grocery e-commerce sales, so the amount of groceries that are going to be purchased online, right, is forecasted to grow pretty substantially over the next few years. Um, it's already been growing a lot, and this is where a lot of people are seeing where e-commerce still has running room, right? That's where it has some ability to continue to eat into the brick and mortar. And so we're not super excited about the grocery anchored because of this trend that we're seeing. We love more of the kind of the neighborhood retail where these are kind of the bread and butter businesses that are really close to residential housing that are needed, that are things you can't get online, some of the things that Bob Fraser mentioned, and something that we're super excited about. So again, this is one of our top of mind series on the podcast. We're going to be sharing nuggets, hopefully, every, every week or every other week when we can find a good chart to break down and a good trend that we're seeing and that we want to highlight to our listeners. So thanks so much for listening. Be sure to check in for future episodes, and here's to your success.