Many of the oldest and most experienced dealmakers in this industry like to stress that when the economy is flourishing, or when it is in a deep decline—as it is now—there are always a large number of people who continue to prosper. Part of it may be attitude, mindset, or the ability to see opportunity and react to it.
Each time this industry has hit bad times, there has been a contraction in the number of active developers and retailers; then new companies have formed to replace them, grown to impressive proportions, and all—tenants, landlords, those servicing the industry—have become even more successful. Even in this, the deepest downturn since the Great Depression, we see signs that the industry will revive and that though many existing companies will disappear, others are expected to take their place, and that current operators may grow even bigger because of the opportunities available.
It is not a contradiction, say some, that many operators will expire, others will grow larger, and new companies will be entering the field.
“We can’t talk of troubled companies,” said one respected consultant, “without pointing to General Growth Properties [a victim of $27 billion in debt due to past acquisitions and has missed several bond payment] who is trying to sell off some of its assets. And see that Simon Property Group and Kimco Realty are selling stock to pay off their debt and put themselves in a better financial position.”
Under-Valued Property
This also means, he continued, that with the drop in value on real estate, “some properties are substantially under-valued and could be picked up by these and other landlords and investors. The trend, therefore, is for large, successful developers to grow larger, and smaller operators now off the radar, to join the mainstream.”
Alex Kopicki of Manekin LLC, traces GGP’s problems to its highly leveraged purchase of The Rouse Company. “I don’t think that anyone would consider this consolidation (in hindsight) a positive result of the last positive real estate cycle. While this is a real estate industry trend on the owner/developer end I believe that you could make some similar comparisons on the retailers end, i.e-Rite Aid. At the end of the day, the world is cracked, large or small, there will be opportunity for those who know where to take advantage of those imperfections.”
One smaller, Midwest developer is very concerned about larger landlords moving into his market. “I have a dominant center in a limited area. If a guy with big pockets acquires a small strip down the road, he has the resources to expand it, upgrade the appearance and tenant list, knock me out of the game. I don’t have the dollars available to acquire that competitor to protect my project.”
John Fox of Fox Real Estate Advisory believes that “strip center space is ripe for consolidation, but needs some capital to free up to help make it happen. Equity One and Ramco-Gershenson [a pending acquisition-merger] is an example. You are going to see more of this. The time has come for more consolidation like what you saw in malls in the 1990s.”
New Companies Formed
Along these lines, a West Coast-based developer noted that new companies have been formed recently to acquire distressed real estate, “and existing, experienced operators have established divisions to advise investors for this purpose, or to buy on their own. There will be great opportunities for third-party management and landlords from other areas to expand into shopping centers and retail.”
James Dearsley, European sales manager of Atlas International, does not consider himself an expert but “I expect that companies move in similar ways. Certainly in the Residential world we have seen this happen with a lot of smaller or [larger] companies that have leveraged themselves terribly, already disappear from the market. Personally I think that it is always good in our industry as it removes the dead wood and allows clients to deal with the solid and trustworthy customers. As the markets stagnate it brings on the ethos of Darwin with the strongest surviving and probably, because of an increase in market share, doing quite well.”
He pointed out that “As markets recover, smaller companies will again enter the market and keep the big boys on their toes and giving them a well timed push to change once more to adapt to changing environments…I wonder how the property industry would be now had it not been for the small start up companies back in the early 00’s who relied on the Internet...”
Along the lines of changing environments, as vacancies increase in shopping centers of all sizes, one of the leading trends are the changes taking place in the tenant lineup and merchandise mix at the high end of the retail scale. With luxury-based retailers suffering as cash-starved consumers shop more extensively at the counters of discounters and dollar stores, some real estate specialists are basking in the glow of being on the receiving end.
Said one Midwest discounter, “I have to admit, I’m enjoying now being courted by some landlords who couldn’t bother to return my phone calls just a year or so ago.”
With the closings of Circuit City, Linen’s n Things, Steve & Barry’s, there are substantial big-box units becoming vacant, and being converted to different uses: broken up into smaller stores, turned into offices, spas and gyms, churches, schools, and the like.
Restaurants, Fast-Food Outlets
Restaurants are hurting now, caused in part by a substantial overbuilding in many markets—except in limited area for casual dining and fast food outlets. Such operators as Panera Bread, Buffalo Wild Wings, Chili’s Grill & Bar are taking advantage of the closings of competing outlets to expand into these units quickly and with better deals. Not all, however.
Chris Arnold of Chipotle Mexican Grill said that many of these locations are sub-par. “We’re finding that people who are closing restaurants tend to close bad locations and keep the good ones. We’re not willing to make concessions.”
An interesting sidebar on this issue is that a large number of the growing unemployed are unable to find jobs. Some have decided to hire themselves, either as entrepreneurs becoming Moms and Pops in the retail industry, or buying a franchise. A good number are turning to franchises in the fast-food category, one of the easiest niches to enter.
Bargaining Power
Size, whether it’s a tenant or a landlord, is one of the most important elements in any negotiation.
Ira Meislik & Meislik said that “Almost everything being a question of ‘bargaining power,’ the current economic turmoil has caused some strong shifts in the balance. Today, money issues are getting more difficult…Our national tenant clients are being most successful where they occupy multiple locations with the same landlord. That allows for horse trading without giving up very much.”
This has always been one of the building blocks of this shopping center/retail chain industry, and it works for the developer with many shopping centers, and the tenant looking to tiedown locations in several different markets.
Though the behemoth landlords may, normally, provide them with overwhelming leverage in negotiations, an established relationship may work also to the benefit of the tenant.
One Southern-based apparel chain stressed that dealing with that type of a property owner can be “very helpful when we expand into a new market or try out a new concept in secondary or tertiary markets. This relationship can be a win-win with our getting short-term leases, especially if the landlord has a large number of vacancies so he’s willing to work with us.”
One national retailer stressed that this is an ideal time for all the industry to be creative, to try something different, to take chances. “One developer I know,” he said, “is trying out a water-park in a vacant big-box store, ala West Edmonton Mall in Canada. With all the vacancies, if it works, great. If it doesn’t, what have you lost, are you worse off?”
After The Recession
One leading developer conceded that he and other landlords have cut back and delayed “substantially” numerous new projects and expansions because of the economy. “And, yeah, most economists and authorities are stressing that it will take years for us to get out of this deep hole.
“However,” he stressed, “even if we have too many centers, too many stores, and that we’ve reached saturation in too many markets, all the predictions are that we’re having a surge in population. Where are they going to buy their necessities? The internet will satisfy only a part of that potential increase.”
More information on SHOPPING CENTER DIGEST and our associate publications, EXPANDING RETAILERS and DIRECTORY OF MAJOR MALLS, may be obtained from our website, www.shoppingcenters.com .
Thursday, April 23, 2009
Tuesday, April 7, 2009
A minor irritation is becoming an important issue for landlords as tenants try to reduce costs by cutting hours and days of operation
Strolling the Agora column from the April 6, 2009 issue of SHOPPING CENTER DIGEST
What was once a long-running and irritating minor bone of contention between landlords and tenants--requiring the latter to give up some control at the store level--has grown to a stronger issue as retailers try to reduce their operating costs. That is, in order to lease space in a shopping center—malls especially—they must abide by agreements determining when they must open and close their stores.
This was a major point made by one national retailer in our column of February 16 concerning ways to get the industry moving again (See SCD, Agora, P. J303): “…we need creative ways to manage expenses to establish a New Norm in terms of the levels of sales we are able to achieve and total occupancy costs that are in line with these sales.” As an industry, he continued, “we should reduce hours of operation, agree to open and close an hour or two later, and closing specific evenings and maybe Sundays. This would save everyone not only on operational cost but it could have a significant impact with energy savings (Think Green).”
Since then, at least two major mall operators, Simon Property Group and Westfield, have begun measures to reduce hours. It also served as topic for discussion by Todd Burton, VP-real estate at Aerosoles, on an industry blog. His question, “Have any retailers been effective in getting reduced hours of operations from landlords in the following venues? Malls, Lifestyle, and Outlet centers?” elicited a number of responses. He noted that existing long hours and work weeks “…in these economic times have become, for many retailers, not just a period of slower business but a financial liability.”
Before getting into some of the replies from concerned dealmakers, a little background.
All tenants leasing space in malls have to abide by the REA (Reciprocal Easement Agreement) made between the owner-developer and the anchors, usually department stores and other large users; this included establishing days and hours when tenants must be open. It was an especially acrimonious issue with Moms and Pops, especially when most malls shifted into operating seven days a week, with late hours on weekdays and during holidays, and early openings before most consumers were ready to shop. Smaller operators either had little free time or vacations, or were forced to add to their occupancy costs by hiring full- and part-time help; larger companies had to increase their staffs and overhead to meet these requirements.
Burton noted that “Morning and evening hours are not historically productive for most retailers, whether national, regional or ‘Moms & Pop’. Further, those hours in these economic times have become, for many retailers, not just a period of slower business but a financial liability.”
Several tenants pointed out that “blue laws” in some communities prohibit most retail sales on Sunday; most notably they point to Paramus, NJ—which has perhaps the highest density of major malls in the industry--where this is still the case, except during the annual Christmas/Hanukkah/Holiday Season. Yet, dealmakers stress, retail sales there are amongst the most productive in the industry.
Mike Zorehkey of Zorehkey & Associates, calls shorter hours “a great idea.” And, “In many cases where we have had poorer performing locations, we the retailers have decided to adjust our operating hours with or without the malls permission.”
He is also in favor of shortening the work week: “…being closed on Mondays would be something that I would highly support. The weekend days is when most of the population is off from working.”
Michael Piazzola of Palatine Asset Management supports “training the consumer with market sensitive, consistent operating hours…” He contended that “Executives, under the ruse of ‘offering the customer more choices’, when the goal is to drive percentage rents, whip out hours [then amend them when anchors wail] that mall teams and retailers wince at during holiday periods, and sometimes all year round.”
“Doesn’t it make sense,” he asks, that the individual malls should “survey the 100 or 200 tenants under their roofs in establishing hours within which retailers perform at their best? And then let regions establish market-by-market mall hours that satisfy consumers, retailers, and mall operators?”
Kaan Keri of Corio NV agreed that modifying hours and days may be efficient and useful, but should be studied carefully. “…there will be great difference in properties which are in metropoles and in other urban areas. The regulation should be applicable in every property within a portfolio of a company, in terms of putting standards.”
On the impact on Moms and Pops, Burton points out that “they are often the ones bringing fresh new ideas to the market. Isn’t it in the best interest of the landlord to facilitate healthy conditions [for] them for that very reason? They may just be the landlord’s most important customer tomorrow.”
Several tenants have approached their landlords on the subject, but though some developers concede it would help reduce operating costs to their tenants, and suggest it could be an alternative to rent reductions, others nod their heads and “take it under advisement,” said dealmakers.
There are indications, however, that the movement to shorten hours could spread.
Said Chuck Breidenbach of MDC Retail Property Group at Mountain Development Corporation: “It makes perfect sense to everyone’s bottom line right now. I’ve been considering this for awhile now.”
More information on SHOPPING CENTER DIGEST and our associate publication, DIRECTORY OF MAJOR MALLS, may be obtained from our website, www.shoppingcenters.com .
What was once a long-running and irritating minor bone of contention between landlords and tenants--requiring the latter to give up some control at the store level--has grown to a stronger issue as retailers try to reduce their operating costs. That is, in order to lease space in a shopping center—malls especially—they must abide by agreements determining when they must open and close their stores.
This was a major point made by one national retailer in our column of February 16 concerning ways to get the industry moving again (See SCD, Agora, P. J303): “…we need creative ways to manage expenses to establish a New Norm in terms of the levels of sales we are able to achieve and total occupancy costs that are in line with these sales.” As an industry, he continued, “we should reduce hours of operation, agree to open and close an hour or two later, and closing specific evenings and maybe Sundays. This would save everyone not only on operational cost but it could have a significant impact with energy savings (Think Green).”
Since then, at least two major mall operators, Simon Property Group and Westfield, have begun measures to reduce hours. It also served as topic for discussion by Todd Burton, VP-real estate at Aerosoles, on an industry blog. His question, “Have any retailers been effective in getting reduced hours of operations from landlords in the following venues? Malls, Lifestyle, and Outlet centers?” elicited a number of responses. He noted that existing long hours and work weeks “…in these economic times have become, for many retailers, not just a period of slower business but a financial liability.”
Before getting into some of the replies from concerned dealmakers, a little background.
All tenants leasing space in malls have to abide by the REA (Reciprocal Easement Agreement) made between the owner-developer and the anchors, usually department stores and other large users; this included establishing days and hours when tenants must be open. It was an especially acrimonious issue with Moms and Pops, especially when most malls shifted into operating seven days a week, with late hours on weekdays and during holidays, and early openings before most consumers were ready to shop. Smaller operators either had little free time or vacations, or were forced to add to their occupancy costs by hiring full- and part-time help; larger companies had to increase their staffs and overhead to meet these requirements.
Burton noted that “Morning and evening hours are not historically productive for most retailers, whether national, regional or ‘Moms & Pop’. Further, those hours in these economic times have become, for many retailers, not just a period of slower business but a financial liability.”
Several tenants pointed out that “blue laws” in some communities prohibit most retail sales on Sunday; most notably they point to Paramus, NJ—which has perhaps the highest density of major malls in the industry--where this is still the case, except during the annual Christmas/Hanukkah/Holiday Season. Yet, dealmakers stress, retail sales there are amongst the most productive in the industry.
Mike Zorehkey of Zorehkey & Associates, calls shorter hours “a great idea.” And, “In many cases where we have had poorer performing locations, we the retailers have decided to adjust our operating hours with or without the malls permission.”
He is also in favor of shortening the work week: “…being closed on Mondays would be something that I would highly support. The weekend days is when most of the population is off from working.”
Michael Piazzola of Palatine Asset Management supports “training the consumer with market sensitive, consistent operating hours…” He contended that “Executives, under the ruse of ‘offering the customer more choices’, when the goal is to drive percentage rents, whip out hours [then amend them when anchors wail] that mall teams and retailers wince at during holiday periods, and sometimes all year round.”
“Doesn’t it make sense,” he asks, that the individual malls should “survey the 100 or 200 tenants under their roofs in establishing hours within which retailers perform at their best? And then let regions establish market-by-market mall hours that satisfy consumers, retailers, and mall operators?”
Kaan Keri of Corio NV agreed that modifying hours and days may be efficient and useful, but should be studied carefully. “…there will be great difference in properties which are in metropoles and in other urban areas. The regulation should be applicable in every property within a portfolio of a company, in terms of putting standards.”
On the impact on Moms and Pops, Burton points out that “they are often the ones bringing fresh new ideas to the market. Isn’t it in the best interest of the landlord to facilitate healthy conditions [for] them for that very reason? They may just be the landlord’s most important customer tomorrow.”
Several tenants have approached their landlords on the subject, but though some developers concede it would help reduce operating costs to their tenants, and suggest it could be an alternative to rent reductions, others nod their heads and “take it under advisement,” said dealmakers.
There are indications, however, that the movement to shorten hours could spread.
Said Chuck Breidenbach of MDC Retail Property Group at Mountain Development Corporation: “It makes perfect sense to everyone’s bottom line right now. I’ve been considering this for awhile now.”
More information on SHOPPING CENTER DIGEST and our associate publication, DIRECTORY OF MAJOR MALLS, may be obtained from our website, www.shoppingcenters.com .
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