Michael Lagazo weighs in on the future of retail in the Golden State.
Is the retail apocalypse upon us? For those willing to adapt to an evolving landscape, Michael Lagazo, Vice President at SRS Real Estate Partners in San Diego and a leading CRE expert, says industry-wide anxieties might be overblown.
Lagazo has spent over a decade immersed in Southern California’s retail market negotiating leases, helping clients procure a durable income, and studying the region’s unique market considerations — and anxieties. In fact, it was his fascination with the complex connections between retail real estate and consumer behavior that led him into the industry to begin with.
We caught up with Lagazo to discuss his experience optimizing clients’ long-term strategies, the influence he believes technology will continue to have on the industry, and what’s next for SoCal CRE.
Experiential On the Rise
While the rise of ecommerce giants like Amazon have undeniably disrupted the retail market, Lagazo believes that doomsday predictions are mostly overstated. “Right now you’re seeing a mature market,” he says. “California has the highest employment and wage growth rates in years; people are still shopping.”
The reality, he says, is that retail is not dead — it’s just changing. Even online-native companies like Warby Parker and ThreadUP are now signing deals for brick-and-mortar stores. The most savvy retailers are offering both robust online and robust in-person experiences.
But as the retail market transitions, new trends are on the rise. Experiential retail, notes Lagazo, is no longer a novelty: tenants are opening movie theaters, art museums, bowling alleys, and restaurants, going against traditional retail trends and facilitating a new demand for bespoke, non-traditional retail properties. The catch? It’s hard to say whether experiential will be a long-term fix.
“The perception is still that there’s a ceiling to how much sales volume experiential retail can generate,” says Lagazo, “especially if it’s something like an indoor skydiving park — there’s only so much business in the market for that sort of use.”
Even if the space were located in a densely populated area with high household income, there’s no guarantee of long-term durable income for the landlords. Landlords are adjusting accordingly by incorporating lease provisions that explicitly address experiential use: “If you can have a more sustainable revenue stream, have your revenue outpace inflation, and be able to fund your next renovation, it doesn’t really matter who’s occupying the space,” says Lagazo.
Many retail landlords are encouraging experiential tenants while shortening leases and including addendums that protect themselves.
Geographic Considerations
Southern California’s CRE market is seeing a number of trends unique to its geography. According to Lagazo, a lot of it has to do with the region’s high population density of over 22 million people. Regardless of changes in the retail sector, SoCal’s sales volumes can easily outperform other regions because of the region’s robust economy and concentration of spending capacity. California is also a finite market geographically — with Mexico to the South and the Pacific Ocean to the West, supply is by necessity concentrated. Some analysts estimate that 98 percent of Southern California’s commercial spaces are currently occupied — a perfect recipe for good tenants and financially solvent landlords.
Lagazo notes that rents are beginning to moderate in this current economic cycle, but as a reflection of a balanced relationship between supply and demand — not symptoms of a coming crash. “The last few years have seen a lot of growth, but it was accompanied by artificial appreciation,” says Lagazo. “People were anticipating wealth and going into debt, either to acquire sites or to acquire assets to grow their portfolio.” Lagazo predicts a correction will occur in the next three or four years as rents and appreciation begin to stabilize.
The Role of Technology In An Evolving Industry
An embrace of technology, Lagazo says, will be critical for brokers hoping to successfully navigate the market in the coming years. Emerging tools have changed the way that landlords, tenants, and brokers find and use information. Commercial real estate data platforms have automated much of the work that goes into finding and evaluating a property — meaning that evaluating an investment costs less in terms of both money and time.
“The transformation is in day-to-day activities,” says Lagazo. “Using technology, a single person can easily take on the work of 3-4 people.”
But that doesn’t mean jobs are in danger. “It’s an opportunity to expand portfolios and decrease upfront costs,” says Lagazo, “but there’s a lot of industry rhetoric that forecasts the end of this model of brokerage.”
That said, Lagazo firmly believes that there will always be a need for the human touch in CRE — at every stage of the process. “While the way we do business may change, there will always be a need for the human element,” he says. “The standard functions will just be streamlined.” Whether it’s evaluating risk, adding a lease addendum, or predicting future market trends, CRE tech won’t be snatching up jobs anytime soon — it will be enhancing them.
An Expert’s Advice
Now that vast amounts of information are available online, young CRE professionals are able to jump in and hit the ground running much faster than their predecessors. Lagazo recommends that people new to the CRE game dive in headfirst.
“Avoiding failure isn’t the same as success,” he says. “If anything, go out there and apply yourself 100 percent.” Even if it doesn’t work out, you’ll learn something valuable from the experience.
“Pursue your career in one direction: forward.”
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