DJM Acquisition Strategy for Slack Market: Buying Lifestyle Centers
“People are turning into a hub,” said John Miller, founder and CEO of DJM. “In California, we’ve created destination places that people want to be in as well as meet their daily needs. With the impact of e-commerce, this is now a revelation, this break away from traditional retail. All we have are everyday needs because there’s a trip to the suburbs by millennials” .
Miller said he talks about daily needs with his teams a lot. “We’re talking about the importance of the five sensory experience,” he said. “Smell the smell of cakes or the sounds of music bouncing off the walls of the mall.”
Lido Marina Village is full of “place-making and activations with pentagonal experiences. We’ve improved the spaces with green spaces,” Miller said. Lido Marina Village was a dead project that the Vornado Realty Trust invested in. It was a dead commercial and residential project that we took over.”
Miller said DJM has improved the quality of its tenants and “created stunning waterfront spaces.” “DJM, a San Jose-based private developer, investor and commercial real estate manager, has changed its acquisition strategy during the pandemic in a way that now helps it weather the impending recession.”
DJM is best known for investing in high-profile redevelopment projects including outdoor malls and distressed assets like Hollywood & Highland, which has undergone a $100 million renovation and rebranded as Ovation Hollywood.
For various reasons, DJM has started to acquire centers of daily needs, particularly shopping malls associated with groceries. The shift in strategy came during the pandemic as grocery-based centers continued to thrive despite shutdowns as other types of retail suffered.
Since the pandemic, DJM has invested in six monitored grocery properties all located in California: Bridgeside in Alameda, Warner Marketplace in Fountain Valley, Adams Marketplace in Huntington Beach, Montalvo Square in Ventura, Deer Creek Village in Petaluma, and Gateway Center In Mission Vigo.
It was a smart move. The retail category of grocery-related real estate continued to outperform other types of real estate after the pandemic. Foot traffic to groceries nationwide increased 3.6% in 2021 compared to the previous two years, and foot traffic to groceries continued to be strong even after restaurants reopened and in-person dining increased.
On the other hand, the brick and mortar market declined 0.2% in June of 2022. In fact, DJM grocery centers continued to see strong increases in foot traffic across the board from 2021 to 2022 with the Adams market increasing by an amount 26%, Deer Creek Village 21%, and Montalvo Square, 24%.
That’s a far cry from DJM’s previous pandemic strategy, which focused on acquiring large, time-consuming redevelopment projects like Ovation Hollywood and Lido Marina Village. For example, DJM’s deal to acquire Hollywood and Highland, now called Ovation Hollywood, totaled $320 million and included a multi-year renewal.
For both projects, DJM has worked on an entire overhaul of these properties including major construction and remodeling, property renaming, tenant refocusing, and more. DJM has worked for years and invested capital to complete these projects, ensuring DJM touch vision in every aspect of the redevelopment. The company has a proven track record as a transformation specialist.
DJM is still touting its ability to inject value into struggling malls but has added these other types of assets to its portfolio. Day
Initially the objective of this strategy was to close more deals and put more assets under management. But the other advantage is market resilience in the face of inflation and stagnation. DJM continues to invest in more well-established grocery shopping centers as overall visitor traffic continues to be strong, contributing to increased tenant sales.
“There is a huge demand for the right projects in the right locations,” Miller said. “It’s almost like comparing it to distance learning not working. It proved completely worthless. Students are back in the classroom and consumers are back in Lido and Ovation. There’s more pressure on rents and more focus.”
“We’re seeing more retailers getting into more unique projects,” Miller said. “The demand is there. I can only speak to California, but there’s still a flight to the suburbs. Our focus is on the US West Coast, but it’s primarily Southern California.”
Homelessness and the whole issue of social policies that disturbed the market continues. The COVID-19 pandemic, homelessness and remote work. If the question is will there be a return to work in the office, Google
Miller said the commercial real estate industry must deal with the negativity of rising interest rates and the rise of e-commerce. “The only real difference with a recession is that people are able to consume. Despite the inflationary impact on the cost of living, we are not seeing an increase in all political, social and interest areas,” Miller said.
According to Miller, average sales per square foot vary across the portfolio, from over $1,000 per square foot at Lido, to $600 per square foot in daily needs projects. “Our occupancy rate is 97%,” he said. “Look at the technology. We are focusing on technology in Silicon Valley.
“When you listen to venture capitalists, it’s almost like our retail concept of socialization,” Miller added. “There is something to be said for spontaneous socializing in the office despite all the combined benefits that come with telecommuting.
“What happens when people socialize spontaneously,” he added. “It’s almost like a primal need to socialize. We’ve been back in the office for over two years. We need to integrate different departments. It’s a philosophical perspective for sure. We see that people just want to be together.”