JLL, Gordon Brothers Executives Talk About Their New Partnership to Help Struggling Retailers
Is this a sign of the times for the challenging retail sector?
By Liz Wolf | Originally published in National Real Estate Investor
Chicago-based JLL, one of the biggest commercial real estate brokerage firms in the world, is partnering with restructuring consultant Gordon Brothers to help flailing retail chains stay afloat in this challenging retail environment. Boston-based Gordon Brothers is an advisory, restructuring and liquidation firm.
The partners say they’ll also work with healthy retail chains looking to grow and seeking their help. For example, even relatively healthy retailers often trim some locations after evaluating their weakest-performing stores.
The move to join forces appears indicative of where the retail sector is heading. The alliance will help retailers minimize lease liabilities, maximize the value of their underperforming assets and retain or migrate customers.
While the partners say the headlines “retail Armageddon” and “apocalypse” are overstated, there are retailers still struggling with mounting e-commerce competition, shifting shoppers’ buying habits and increasing demand for experiential retail. Retailers continue to close stores, and at least seven major retail chains have already filed bankruptcy in 2019.
“There are plenty of brands that have just failed to adapt,” says Walter Wahlfeldt, executive vice president of retail corporate services at JLL. “Decades of overexpansion with the same concept that doesn’t adapt and change to consumers’ changing needs—regardless of the internet or not—can’t last forever.
“The internet is not the death of brick-and-mortar retail,” he adds. “However, there are definitely situations of distress out there… And we can provide a service in those situations and for their shareholders.”
The combined services will include portfolio reviews; lease mitigations, terminations and restructurings; property management; fee-owned property sales; valuations and asset dispositions. The alliance will also offer brand licensing and conversions, customer migration, financing, location scouting, site analytics and retail research. The partners say it’s a one-stop shop to help retailers.
JLL has already been working with distressed retailers. In December, for example, Sears Holdings Corp. hired the firm to gauge interest in its real estate portfolio following the department store’s bankruptcy filing in October.
NREI spoke with Wahlfeldt and Kenneth Frieze, CEO of Gordon Brothers, to learn more about the partnership. The Q&A has been edited and condensed for clarity.
NREI: What prompted the creation of this new partnership and what does it say about the current state of retail?
Walter Wahlfeldt: Times are what they are with the retail marketplace. What we saw coming was this need for retailers to adapt. I see the headlines of ‘apocalypse.’ I don’t think of it as an apocalypse, but I do see it as a time of major change. Some of our clients were coming to us with requirements where we recognized that these are across-the-portfolio changes, and with those types of changes, there are unique needs that a Gordon Brothers could fill that JLL could not.
JLL does no lending, for example. We really don’t underwrite anything. We don’t appraise inventory. In fact, we don’t work with a retailer’s inventory. But in a major restructuring, a retailer may say, ‘We’re no longer going to move forward with that brand and focus on this other brand,’ for example. We were certainly aware of Gordon Brothers and through some conversations, we thought this alliance could benefit us both.
Kenneth Frieze: I would agree with Wally. We don’t see the retail market as apocalyptic or an Armageddon. We just see an accelerated pace of change and transformation. The retail sector is going through more innovation, more change than in any time of its history. But there have been other moments in history for retail where substantial change and disruption happened. Think about when Walmart rolled [out] across the U.S. In this case, it’s been well-reported, but it’s driven by the growth in e-commerce, the shift toward experiences, the shift toward value, demographics, etc.
What the impact has been on an existing retailer—whether it’s growing, stressed or distressed—is they have to be on their toes looking at their store fleets much more regularly. It could be a healthy retailer that has a less healthy subsidiary that they want to divest. It could be a healthy retailer that’s just going through the proactive, natural churn of the bottom 10 percent of its store base or changing formats or store size. Or it could be a distressed retailer where they’re really struggling, because maybe they’re over-levered or the business model is more of the past than the future.
In all of these cases, you’re having store fleet changes, and that’s when JLL and Gordon Brothers can come together and be a partner to that retailer to help get ahead of that transformation.
NREI: So, you don’t foresee working only with extremely distressed retailers?
Kenneth Frieze: Quite the opposite. We’re so well-known at Gordon Brothers for working with distressed companies, but it would be surprising for most to know that 80 percent of our retail clients are healthy. The firm may be healthy, but they may have a portion of assets that just aren’t performing or leases that they want to get out of.
And as to why this alliance now? You’ve got a country that’s substantially overbuilt in retail square feet. That’s been built up over 30 years. But the last five years, you see mall traffic down by 50 percent and anchor tenant bankruptcies, and all of this disruption. So that’s causing this opportunity. That’s why Gordon Brothers and JLL coming together now is so important for the clients we’re serving.
NREI: How much business do you anticipate seeing; how much need is out there?
Walter Wahlfeldt: It’s coming. It’s definitely a trend that we’ve seen over the last couple of years, which is why this alliance made sense. And as Ken said, we’re very similar because the majority of our retail clients—for which we provide a range of services, including terminations and restructures—are healthy, and yet they’re recognizing everyone has ‘weeds in their garden.’ You pull those weeds out, and your garden is healthier.
We like to approach retailers and say, ‘Let us do an assessment of your portfolio.’ We have boots on the ground in various markets, and we understand there are certain situations where the best thing for the retailer is to leave a store alone. But there are other situations where we might know, for instance, they’re well above market and there’s an opportunity to reduce that rent and do an extension, and ultimately, it’s a win-win for the landlord and for that retailer.
There are other situations where they might be under market and they’re underperforming, and we might say, ‘Let’s get you out of that. It will be best for you and it will be best for the landlord, because they can backfill that slot with a higher-performing retailer.’
A lot of it is assessing change that’s happening in the retail real estate environment. There are definitely distressed situations, and we want to be able to offer those retailers services where if we can get out ahead of it, maybe they go through bankruptcy and come out of it and survive. That’s really the ideal situation for this alliance.
And then there are situations where the best thing for the shareholders is to take this thing through bankruptcy and liquidate it. That’s a situation where a team approach by JLL and Gordon Brothers would help that retailer as well.
NREI: Who will be your first clients?
Kenneth Frieze: We were already working on a number of projects before we even announced this alliance. There are projects where we’re working together. There are projects where we referred it over to JLL, because it’s really in their wheelhouse, and vice versa where they referred things over to us.
You know you have a good strategic alliance when that’s already happening, even before you formalize it into an agreement and into a public announcement.
Of course, as you would expect and our clients would want, we can’t reveal their names during the time we’re actually working on their projects. Once something is complete, you’ll be hearing some announcements.