[co-author: David Mirharooni]
With investors expressing optimism, the retail sector is steady or improving across California. Residential-serving retail is a key bright spot, with specialty stores and restaurants potentially entering a new growth cycle, while big-box retail is stable. David Mirharooni, principal at Brickstar Capital, spoke with Allen Matkins Partner Spencer B. Kallick about his approach to retail investing and how the sector is faring as a whole.
Spencer B. Kallick
How are you seeing tariffs impact retail?
David Mirharooni
I see more impact from the tariffs, not because of the price of goods, but the sentiment of the outside world toward America, and tourists not coming to America because of that sentiment. And so I think it is fairly significant to see the amount of tourism decline over the last year. Is it because people don’t feel safe in the US or LA specifically? What we need to do, not only in LA but nationwide, is to find a way to get tourists to come back. And that's more important than tariffs because at the end of the day, if you have people wanting to come to America, and you have a pool of people that are here, they'll find a way to spend.
SBK
So you're not seeing a direct impact of tariffs on retail. What are you seeing in terms of uptick? Are there certain subclasses of retail that are on the upswing right now or are you seeing more interest from potential tenants?
We see a lot of interest from specialty fitness, Pilates, yoga, and local high-end gyms. We see interest from hairstylists, salons, those types of things. For instance, we recently bought an office building in Florida that we converted to retail. We’re now curating what that mix looks like. For instance, we just signed a trendy Pilates, salon suites, and juice concepts as tenants. We're also in negotiations with a 12,000 square-foot experiential gym, featuring high-end amenities like cold plunge, pool, and sauna. Those are the types of businesses that are knocking on our door.
SBK
With everything going on, what is happening with rents?
DM
I think the answer depends on where you are. Hollywood office is not doing great. Beverly Hills retail is doing really well, and we have office in Vegas that is also doing well. So, I think it just depends on where you are in the market.
SBK
In the retail space, a revenue share is more and more common. How do you typically structure those kinds of deals? Do you think about whether it's a new concept or a well-established brand name?
DM
So, we look at where market rent is, and we never try to beat it. We're not here to extract every single dollar, but the way that we pitch our idea and how we want to do business, whether it's retail, whether it's services, whether it's restaurants, is that you have a certain occupancy cost that will make you successful. The pie is 100%, and let's say 40% goes to labor. In restaurants, you want a 20% profit margin, and 10% goes to rent. There are those buckets. And those buckets are obviously different depending on who the tenant is. And even within restaurants, whether you're a fast food concept or high-end. So, we go to them, and we ask questions: What are your occupancy costs? Ultimately, we figure out that number they are happy with. If we can provide an environment where they are blowing through their sales above and beyond what they thought they were going to be at, we should get a cut. And we've been pretty successful there. And sometimes we don't get that cut because they're not doing well. But then what happens is that as an owner of the real estate, we're partners. And as a partner, we’re highly invested in making sure that they do well. That's our goal.
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