Real estate finance experts at ICSC NEW YORK this week predicted a tough macroeconomic climate in the first half of 2023. “There will be a mild recession next year,” said CBRE global client strategist and senior economic advisor Spencer Levy. The federal interest rate likely will top out at 5% in 2023, he said, and the consumer price index will decrease slowly throughout the year. Cap rates on retail property transactions will peak in the second quarter, then trickle down 50 to 100 basis points, he added. “Things will start getting a whole lot better in the second half of 2023. “But until the CPI comes down, we are not out of the woods.”

Smart investors, property managers and retailers will adjust their strategies accordingly. “If you are in investments, put an exit cap rate of flat to negative on your deal,” Levy advised. Maintaining a robust cash reserve is essential, said Rappaport CEO Gary Rappaport, a past ICSC chair. After working through six recessions, he has seen many owners go out of business in high-interest rate environments because they did not have enough liquidity to outlast the cycle. Since the pandemic, each Rappaport property has had three months of operational costs in reserve in case of a cash crunch. To make sure owners have enough cash to deal with rising interest rates during times of inflation, he advised them to put off dividend payments to investors, delay unnecessary capital expenditures and prioritize debt payments. If necessary to close deals, he advised offering tenants some free rent in lieu of spending on space updates.

Cash is just one piece of the puzzle. Strategic property management is crucial, too. Track tenant payments closely to see if they’re paying even one day late, and if they are, approach the tenant and offer it an early exit, advised ShopCore Properties executive vice president and COO Lauren Holden. “It allows you to proactively move out weak tenants.” Getting new tenants into their stores and thus getting rent payments coming in as quickly as possible is key, she added. Thus, to stay ahead of a slow supply chain, ShopCore has ordered HVAC equipment before leases are inked. “Once a deal is approved in committee, we will go ahead order it,” she said. “We can always use the equipment elsewhere if the deal falls through.”

“People make more money in bad times than good,” Rappaport said, meaning that opportunistic buyers can take advantage of over-leveraged owners to get valuable properties for low prices. Holden and Levy agreed that there’s opportunity to buy value-add properties, especially open-air centers with no supermarkets. For open-air centers, the sales price delta for grocery-anchored properties and non-grocery-anchored is too wide, Levy said. It’s bound to narrow, he added. And you always can add a grocer, Holden pointed out.

6. Digital ordering is here to stay.

At Jersey Mike’s, 40% of sales come from digital channels. Half the digital orders come from the company’s app, and the other half from third-party apps like DoorDash, according to Jones. He said the company expects digital to become an even bigger slice of the pie in future years. At Chipotle, 60% of sales are digital, according to chief development officer Tabassum Zalotrawala, pictured speaking at top. Chipotle recently opened its first digital-only unit, in Ohio.

Downtown zoning laws favor office development, whereas residential space now may be more appropriate, said Streetsense managing director Larisa Ortiz, who called for central social districts rather than central business districts. “We need people living downtown,” she said. Residential and other uses might bring more visitors during daytime hours, too. “We need to accept that the office traffic might never come back,” said Zalotrawala. “We don’t want a one-time visit. Unless there’s housing, there’s no daytime population spend. We need to find uses that are complementary.” Downtown landlords have not reduced rents as much as they should to reflect lighter traffic, she added. More legislation supporting adaptive reuse of office buildings is in order, said New Orleans Downtown Development District president and CEO Davon Barbour: “We need to look at downtown as more than office.”

Companies eager to foster diversity, equity and inclusion among their suppliers and service providers can start with smaller projects to enable minority companies to show their capabilities and test the water for larger contracts, advised Mildred Tolentino, president of M To-Pros Development. Tolentino pointed out that many minority-owned suppliers and service providers, including her own, are run by executives who have past experience at larger firms and thus are up for the task. Small minority-run firms can be more nimble and responsive than larger competitors, too. “We’re not asking for a handout. We just want the same opportunities,” said MCCGUSA managing director Jason Martin. Those serious about recruiting diverse suppliers should ensure that the executive in charge of procurement and hiring them serves on the firm’s DEI committee and has a passion for it, advised ICSC COO Valerie Richardson.

Expanding restaurants will take a pass on spaces that don’t have outdoor patios, even in wintry climates, said CBRE senior vice president and restaurant practice leader for emerging concepts Jessica Curtis. Today’s operators need a patio that is 20% to 25% of the restaurant’s interior space, she said.