Interview with Ben Haverty, Colliers.
As the cost of buying, owning and operating stores increases in 2023, there are still opportunities for retailers to create wealth by making smart real estate decisions.
Retailers have plenty of questions about the future of their businesses and many of the answers hinge on what may happen in the real estate market. Furniture World asked Ben Haverty, with the Furniture Industry Real Estate Group at Colliers, to share his insights into opportunities and difficulties retailers should be looking out for in the coming year. Colliers is a leading diversified professional services and investment management company. But first, we asked him to provide some background on himself and his experience in the furniture industry.
A Retailing Family
“Like many second and third-generation members of furniture retailing families,” he said, “I grew up talking furniture around the dinner table and working at our local warehouse. After college, I attended Haverty’s management training program to get exposure to every part of the business, from merchandising to home delivery. From there, I became an assistant store manager, was transferred back to the corporate office for a while, then ultimately managed the entire Georgia region. Haverty’s is a wonderfully run company and a great place to work.”
Haverty, eventually left the company his great-grandfather, James Joseph Haverty, founded in 1885 to found Ben’s Brands for Less, with a retail model that sold furniture through brick-and-mortar pop-up stores. “At the time, there was an abundance of vacant real estate as well as an oversupply of product,” he recalled. “In those years, I probably did 70 real estate transactions with local brokers and quickly found out that people would pay me to help them find great real estate locations.”
By the way, he added, “variations on the pop-up theme are still around. I’ve recently seen vacant warehouses and empty retail spaces used for serial one-day events. Companies that do this bring in attractive merchandise, such as RH knockoffs priced at half to one-third off. These operations often have lines of customers waiting to get in to join the buying frenzy. It’s like a treasure hunt. When the event is over, they load up what’s left to sell another day at the same location or elsewhere.”
“We all know that furniture retail came back with a roar once the worst of the pandemic subsided,” Haverty said. “Furniture retailers had plenty of money in their pockets and wanted to grow as fast as possible. The trouble was that lots of the big-box base had already been gobbled up. There just weren’t enough big vacant boxes lying around.
“The supply situation is starting to work its way out, but the current interest rate situation has dramatically affected every category of real estate, from residential to warehouses and retail. At the same time, the cost of buying and trading property has increased along with the operational costs associated with maintaining larger retail footprints. It’s become much more expensive to buy property, maintain it and lease it.”
What Business Are You In?
“The first question any retailer needs to ask when looking at real estate is if they want to be in the furniture business or the real estate business,” said Haverty. “How do they plan to create wealth? It’s one of the first questions I ask clients to consider. Many independent retailers respond that they are debt free, have significant real estate equity and don’t have anyone who wants to take over their businesses when they retire. The plan is to exit and give up their retail lifestyles, sell or lease their properties, move to the sunbelt and live off real estate income. These folks think they are in the furniture business but are actually in the real estate business. Their model is to build wealth by selling furniture to pay for their real estate holdings.
“Most public companies like Bob’s or Haverty’s do the exact opposite. They use real estate as a means to sell furniture. While smaller companies may be in the market to buy, large retailers scout for solid locations to lease.” Haverty said there are other factors that favor leasing. For example, in urban areas where sellers are scarce and it’s more difficult to build.
Real Estate IQ
“Since real estate decisions are such an integral part of being a furniture retailer,” he continued, “I find that CEOs and COOs generally have a solid working knowledge of real estate transactions. Most are self-taught, sophisticated novices. People say that it’s unwise to go to court and represent yourself. The same is true in the real estate market. In most cases, landlords pay the broker’s fee so it doesn’t cost retail companies anything to hire a firm to help them find the best locations. Companies like Rooms To Go and Ethan Allen—which have in-house real estate departments—engage local brokers who know local markets inside out to help them find the best locations and deals.
“However, retailers with less real estate experience are often reluctant to hire professionals to represent their interests because they suspect it will add to their purchase cost. Here’s how that scenario plays out. A store owner sees a vacant furniture store with a for sale sign in the window. They call the listed broker, who is professional, friendly and asks the right questions. They may even be genuinely interested in helping the prospective buyer. But at the end of the day, that broker has a fiduciary responsibility to the owner of the building.”
Furniture World asked Haverty if certain kinds of stores are more attractive buys for retailers given current market conditions.
“It depends on the retailer,” he observed. “Some big-name retailers, especially those owned by leveraged private equity, downsize as sales slow and the cost of refinancing becomes untenable. Also, downsizing becomes the only option for operations when their retail brick-and-mortar models become less viable. Companies such as Home Depot, Office Depot and Staples, whose sales have moved online, are walking away from leases as they come up for renewal. That was certainly the case with retailers like Art Van and Toys “R” Us. It’s happening now to Bed Bath & Beyond. This can create opportunities for home furnishings retailers with healthy balance sheets and cash in the bank who are looking to expand.”
Building From Scratch
Is it best to buy an existing retail space right now or consider finding a prime location to build? “Again, it depends,” Haverty explained. “The assumption right now is that the real estate market is weakening. No property owner wants to sell at the bottom. So, unless someone is in a desperate situation, there’s a tendency for landowners to pull their properties off the market.
“Building is a custom solution, but it’s not necessarily cheap. The cost of new construction is down from peak levels seen a year ago but is still quite high. When considering a building option, furniture retailers need to weigh a number of factors. Can they find the right piece of land? Does it need to be rezoned and, if so, how complicated is that process likely to be? Properties in wetland areas continue to create difficulties for retailers who may need to purchase 20 acres to get five that are buildable. It’s a difficult hurdle to overcome for the many retail operations looking to build in Florida.
“Companies such as Home Depot and Staples, whose sales have moved online, are walking away from leases
that come up for renewal.”
The Right Decisions
Getting specific about how Furniture World readers should approach real estate decision making in 2023, Haverty advised them to make the hard choices. “In a slowing economy,” he said, “retailers may need to consider jettisoning under-performing locations—even legacy locations—to take advantage of real estate deals that present themselves.
“During black swan moments, it’s the prepared retailer who benefits. Rooms To Go is an excellent example of a smart real estate cyclical buyer. Years ago, they gobbled up Florida properties when the market was at a low point. The result was vast wealth creation. Haverty’s also expanded via acquisition during tough times.
“At the end of the day, the adage ‘location, location, location,’ is still a great rule of thumb. Choosing the best location with the right demographics and easy accessibility goes a long way toward providing high visibility and traffic counts. That’s true whether you own or rent.”
Flexibility is Key
“Management flexibility will be critical in 2023. Many retailers we work with feel strongly that a particular store footprint, say 30,000 square feet, allows them to show optimal selection to get maximum returns. But that might not be their best option, given the current real estate market. Right now, CEOs are experimenting with smaller footprint spaces. Express stores can be a great way to get exposure in lucrative markets where purchase and rental prices are sky-high, there’s a lack of availability or zoning restrictions. Instead of that 30,000-foot space, it can make sense to open a 12,000-foot store and double down on in-store technology to make that smaller footprint work.
“At the same time, some are looking for superstore formats. They want to increase their 30,000-foot space to 60-, 80-, or 90,000 to ‘kill them’ with selection. A retailer may have been in business for a very long time, but there are many ways to try something new to attract customers, become more profitable and efficient.”
There’s been mass migration to places like Austin, Atlanta, Charlotte, Raleigh and Miami, where people are moving for safety and a lower cost of living. Despite recent downsizing, large tech companies, like Facebook and Google, have built large regional campuses in some of these cities, fueling lots of furniture sales and strong competition for store locations.”