DJM’s Acquisition Strategy For A Recessionary Market: Buy Lifestyle Centers

“People are pivoting,” said John Miller, founder and CEO of DJM. “In California, we created destination places where people want to be as well as satisfying their daily needs. With the impact of e-commerce, this is now a revelation, this departure from traditional retail. We’re all about daily needs because there’s a flight to the suburbs by Millennials.”

Miller said he talks about daily needs with his teams often. “We talk about the importance of a five sensory experience,” he said. “Smelling the donuts or the sounds of music ricoceting off the walls of the mall.”

Lido Marina Village is jam-packed with “placemaking and activations with five-sense experiences. We improved spaces with green space,” Miller said. “It’s a pivot to converge. Lido Marina Village was a dead project Vornado Realty Trust invested in. It was a dead retail and residential project that we took over.”

DJM improved the quality of tenants and “created the amazing spaces overlooking the water,” Miller said. “DJM, a San Jose-based privately-held developer, investor and manager of commercial real estate, shifted its acquisition strategy during the pandemic in a way that is now helping it navigate the impending recession.”

DJM is best known for investing in high-profile redevelopment projects including open-air shopping centers and troubled assets such as Hollywood & Highland, which has undergone a $100 million renovation and rebranding as Ovation Hollywood.

For various reasons, DJM started to acquire daily needs centers, in particular grocery-anchored shopping centers. This shift in strategy came about during the pandemic as grocery-anchored centers continued to flourish despite the shutdowns where other kinds of retail struggled.

Since the pandemic, DJM has invested in six grocery-anchored 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 Viejo.

It was a smart move. The retail category of grocery-anchored properties has continued to outperform other types of properties post-pandemic. Foot traffic to grocery stores nationwide rose 3.6% in 2021 compared with two years ago, and foot traffic to grocers continued to remain strong even after restaurants reopened and in-person dining picked up steam.

On the other hand, national brick-and-mortar declined by 0.2% in June of 2022. In fact, DJM’s own grocery-anchored centers continued to see strong increases in foot traffic across the board from 2021 to 2022 with Adams Marketplace increasing by 26%, Deer Creek Village increasing by 21%, and Montalvo Square, 24%.

This is a far cry from DJM’s pre-pandemic strategy, which focused on acquiring large, time-consuming redevelopment projects such as Ovation Hollywood and Lido Marina Village. For instance, DJM’s deal to acquire Hollywood and Highland, now called Ovation Hollywood, totaled $320 million and involved a multi-year renovation.

For both of these projects, DJM worked to completely overhaul these properties including major construction and redesign, property rebranding, tenant refocus, and more. DJM worked for years and invested capital to complete these projects, ensuring the DJM touch was seen in every aspect of the redevelopment. The company has a great track record as a turn-around specialist.

DJM still touts its ability to inject value into struggling shopping centers but it’s added these other types of assets to its portfolio. DaiDAI
ly needs centers might lack the cache of renovating a landmark shopping center, but its less capital-intensive, faster to turn around and more recession-proof, which will be crucial in the upcoming months. In addition, the new strategy has many benefits, including high foot traffic and less risk for investors in a time when investors are leaning toward safer bets.

The goal of this strategy initially was to close more deals and put more assets under management. But the other benefit is market resilience in the face of inflation and a recession. DJM is continuing to invest in more grocery-anchored shopping centers where overall, visitor traffic continues to be strong, contributing to increased tenant sales.

“There’s a lot of demand for the right projects in the right locations,” Miller said. “It’s almost like comparing it with the lack of success of remote learning. It proved to be a complete dud. Students are back in the classroom and consumers are back at Lido and Ovation. There’s more pressure on rents and more of a focus.

“We’re seeing more retailers going into more unique projects,” Miller said. “The demand is there. I can only speak to California, but there continues to be a flight to the suburbs. Our focus is the coastal western U.S., but it’s primarily Southern California.

“Homelessness and the whole issue of social policies that have roiled the market continue. The Covid-19 pandemic, homelessness and remote work. If the question is is there going to be a return to work in the office, GoogleGOOG
still has 5 million square feet of office space. Another developer is building 3 million square feet of office space. That’s 9 million square feet of offie space. Things are not nearly as dire as a lot of the media makes it out to be.

Miller said the commercial real estate industry has to deal with the negativity of rising interest rates and the rise of e-commerce. “The only real difference with the recession is people are able to consume. Notwithstanding the inflationary impact on cost of living, We’re not seeing an increase,” Miller said, “in all the politics and social and interest.

According to Miller average sales per square foot varies throughout the portfolio, from over $1,000 a square foot at Lido, to $600 per square foot at daily needs projects. “Our occupancy rate is 97%,” he said. “Look at tech. We’re very tech centric in Silicon Valley.

“When you listen to the VCs, it’s almost like our retail concept of socialization,” Miller added. “There’s something to be said for spontaneous socializing in the office despite all of the collatoral benefits that go along with remote work.

“What happens when people socialize spontaneously,” he added. “It’s almost like a primeval need to socialize. We’ have been back to 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.”