Strolling the Agora for Jan. 6, 2009 Issue of SHOPPING CENTER DIGEST--(Recap of ICSC NY Dealmaking In December ‘08)
“We have been through many hard times since I negotiated my first lease in this industry over 40 years ago,” said Cuthbert, “but it has never been so rough and terrifying for landlords, tenants, and lenders. And, it will be a longer, wilder ride to recovery than anyone anticipated just a few months ago,” he told the Dinosaur Chowder and Marching Society as it recapped results after the ICSC New York Dealmaking.
“Yeah,” said Developer Dan. “The only time I spoke to a retailer was when he was asking to re-negotiate a lease and threatening to close his store.”
“What’s my alternative?” asked Expanding Ed. “My costs are up, my sales are down, the customers are coming and looking and not buying despite deep discounting.”
“Fine,” said Dan. “Show me your sales figures from last year, your P & L, and certainly if they’re legitimate, we can reason together and re-structure a deal that we can both live with, maybe extend the lease for a couple of years.”
“But,” chimed in Roger the REIT, “if I see that your sales are up 5%, or in some cases 10 and 12%, no way am I gonna drop the rent because your home offices says get a reduction because everyone else is getting one. It’s not fair or right and we’re partners in this shopping center.”
“You can’t base it only on increased sales figures,” said Ed. “I’ve had to compete against competitors who are liquidating, so I’ve cut my prices, have almost no profit margin, and my distribution and marketing costs have gone through the roof. And I’m also competing against internet-based companies that don’t pay for brick and mortar, and are offering free shipping. My sales may be up, but not my income.”
On The Other Foot
"And what about a few years ago,” said Apparel Al, “when you landlords had all the leverage and I needed this location and you said ‘take it or leave it,’ Joe over there is willing to pay $2 more a foot? You said then that you owed it to your Wall Street investors and stockholders to get the most possible for them. Now you can’t take it when the shoe’s on the other foot.”
“If you’re not going out of business and you try to close this store, in which you’re making money, go ahead, I dare you, I’ll sue your ass and I’ll win,” shouted Roger.
“Relax, hold it, calm down,” said Cuthbert. “We’ve negotiated thousands of tough deals over the years and have managed to remain friends and continue a working relationship.
We’ve done it so often that we can punch in all our operating costs, the financing, taxes, anticipated sales, bumps, terms, put it all together and come up with the numbers. It was a science. Now, however, all of that has gone by the wayside and we have to go back to the drawing board-- leasing has become an art again.
“There’s no question,” he continued, “that the smart retailers understand what’s taking place and are exploiting it as much as possible. They’re making long-term deals with no bumps, percentage rents, turnkeys with allowances folded into the rent, that’ll be paying off for them years down the road. I’ve heard of new deals where it’s straight percentage for three years, then they’ll average out the monthly rent and that’s what’ll be for the next seven years.”
Right On Both Sides
“I’ve been told that the deals have to be incredible in order to get them approved by the real estate committee,” said Statistics Sam. “So if I hear that the landlord is covering the full cost of fixturing and finishing the store, and the tenant doesn’t start paying back for 2 ½ years, why shouldn’t I ask for it also?”
“Or,” says Listening Lenny, “a friend tells me he’s paying nothing, zero, period, because he threatens to leave and that’ll trigger more vacancies as other retailers exercise co-tenancy clauses to close their stores? It becomes almost a herd instinct,; if he gets it why shouldn’t I?”
“It’s rough here, and that’s part of the reason more retailers are looking at Canada,” said Toronto-based Canuck Carl. “Most of my retail clients used to be Canadians wanting to do business in the US. Now, only one is; all the rest are Americans looking for locations from Ontario to British Columbia, even to Nova Scotia, Newfoundland and the whole eastern seaboard.”
“There’s a lot of right on both sides of the negotiating table,” said Reasonable Ruth. “Much of the friction is caused by the uncertainty; the situation is changing daily, we don’t know where we stand, we’re out of our comfort zone, and with so much up in the air, we don’t even know how to structure the deal.”
“You got a point there,” said Acquiring Al. “I’ve been talking to a few owners for a while on buying some properties. They have no concept that times are changing and there’s a wide gap between price and value today compared to a short time ago. They insist on taking out their total investment in a center, and I tell them it’s not worth that today. We’re maybe 5% apart from making a deal. Now, comes January and more of their tenants go dark and out of business, and their vacancies increase, the value of the project is going to drop even more. If the occupancy is at 95%, and in a month it drops to 85%, where’s the value? What do they do on price then if they still want to sell?”
Lot Of Cash Waiting
“And,” added Vulture Victor, “with some of the big owners being forced to sell off important parts of their portfolios to cover their debt, and the stock prices of these REITs going in the toilet, that’s all the more reason for me to sit back and make ‘em come to me. I have the cash right now, and I can buy from anyone.”
“Quite true,” said Cuthbert. “There are a number of new investment companies formed within the last few months to take advantage of the current recession and begin buying real estate from strapped owners. Even the banks that were given federal money to lend and put into the economy, are sitting back waiting to buy or to invest.
“No matter what side you’re on, there’s not going to be instant gratification. Most dealmakers I’ve been talking to don’t see any light at the end of the tunnel until 2010, and if it’s approaching quickly it could be an oncoming freight train.”
“I have a long memory,” said one major landlord. “What goes around, comes around.”
Further information on Shopping Center Digest and a sample copy of a recent issue may be obtained by going to our website, www.shoppingcenters.com.
Tuesday, January 27, 2009
Monday, January 26, 2009
State Of The Shopping Center Industry
You don’t have to be an inspired prodigy or a master dealmaker to recognize that “it’s rough out there.” However, it does take experience and imagination and fortitude to recognize the opportunities—“Hey, even in the worst of times, someone is able to make a buck”—and take advantage of them.
And, said one veteran, “The challenge is to survive until a rising tide lifts all boats.”
We all know that the dismal holiday season, with a substantial drop in shopper traffic, retail sales and overall consumer buying—despite steep discounting--is forecasting major retail bankruptcies and store vacancies within the next few weeks; mavens involved in market research are predicting 200,000 store closings this year.
These increased vacancies to shopping center landlords mean reduced revenues, higher CAM costs, more pressure on them to cut rents on new deals and re-leasing; these result in lower values on their portfolios, causing higher interest rates for re-financing—if money is even available. Some have been selling off some centers to assist in re-financing or to raise money for debt coming due, or to put themselves itself into a better position to acquire other properties from competitors.
Some investors have formed new entities designed to take advantage of the turmoil and acquire distressed properties, or choice properties that cash-strapped owners have to take to market. They have advance financing in place so they can move quickly to finalize these deals.
Staff Cutbacks
Retailers and developers have been cutting back on staff across the board to stay viable, letting go some dealmakers with 30 years and more of experience. Some consultants have been moving their offices into their homes to reduce costs; others have started divisions to diversify into other areas of commercial real estate besides shopping centers, such as offices, industrial, warehousing, or residential. And, high on the list for tenants, going back to their landlords for rent relief, improved allowances for fixturing, re-modeling, and the like.
One surprising—and positive-- effect on new development, one major landlord pointed out to us, is that some of their projects—expansions, renovations, and new construction—have been coming in under budget due to lower costs for materials and labor.
Another interesting sidelight is that some younger professionals are returning to college for specialized or advanced degrees, with plans to return to the shopping center/retail industry when the economy and dealmaking improve.
Some industry professionals are anticipating the federal stimulus package by the new administration will begin to impact on the economy by mid-spring and help to improve consumer confidence. They expect, therefore, the positive effect on dealmaking should begin shortly after and carry on through the rest of the year and into 2010.
“Those retailers able to make deals now will be in a better position to take advantage of opportunities to increase their market share over their competitors,” said one.
Current Environment
This, therefore, in very general and simplistic terms, is the current environment. What is being done by tenants, owner-developers, those involved in dealmaking to continue to operate and remain in business?
They are making deals—certainly fewer, harder, and not as lucrative. Some retailers and landlords are pushing for early renewals on existing stores. For the tenant, they can extend the benefits of the existing climate to years into the life of the lease; for the landlord, it helps keep occupancy rates higher and maintain a strong negotiating position for future deals with other retailers.
In order to obtain rent relief, some tenants are agreeing to modify lease terms that are unfavorable to landlords, such as exclusives, co-tenancies or use clauses or renewal options. One developer said he’s agreeing to reduce the rent, provided the tenant agrees to return to the original rent or terminate the lease if a third party offers to lease the store at the original or a higher rate; other requirements could include lease extensions, that the tenant remain responsible for the original amount owed on the lease if he were to default, that the reduction is a one-time deal, and that confidentiality is maintained.
In some instances, a rent reduction may help the tenant stay in business until the economy improves. It saves the landlord from the cost and effort to find a replacement tenant in a challenging environment, and helps him maintain a higher occupancy level in the center; another important consideration: it may deter other retailers from going dark.
Early Agreements
Several more landlords have formed in-house committees which meet regularly to review requests from tenants requesting rent relief, since we first mentioned this in an earlier column, (See SCD, Agora, Page J242).
On new leasing deals, both landlords and tenants speak of the advantages of reaching early agreements now, for openings later in 2009 or even 2010. The tenant gets a lower initial rent, using his current negotiating leverage to keep this expense down, and the owner-developer receives a solid commitment putting him in a better negotiating position with other potential tenants coming to the table later in the process.
Right now, those retailers best poised to continue expansion are the discounters, lower-end chains, those focused on teens and younger adults, and fast-food and family restaurants. Also, for landlords, alternative users who rarely, if ever, sought locations in shopping centers: churches, schools, offices, health-related services.
This column is re-printed from the January 19, 2009 issue of Shopping Center Digest “The Locations Newsletter.” A sample copy of a recent issue of this twice-monthly publication covering development and leasing in the shopping center/retail chain industry in the US and Canada may be obtained from our website, www.shoppingcenters.com.
And, said one veteran, “The challenge is to survive until a rising tide lifts all boats.”
We all know that the dismal holiday season, with a substantial drop in shopper traffic, retail sales and overall consumer buying—despite steep discounting--is forecasting major retail bankruptcies and store vacancies within the next few weeks; mavens involved in market research are predicting 200,000 store closings this year.
These increased vacancies to shopping center landlords mean reduced revenues, higher CAM costs, more pressure on them to cut rents on new deals and re-leasing; these result in lower values on their portfolios, causing higher interest rates for re-financing—if money is even available. Some have been selling off some centers to assist in re-financing or to raise money for debt coming due, or to put themselves itself into a better position to acquire other properties from competitors.
Some investors have formed new entities designed to take advantage of the turmoil and acquire distressed properties, or choice properties that cash-strapped owners have to take to market. They have advance financing in place so they can move quickly to finalize these deals.
Staff Cutbacks
Retailers and developers have been cutting back on staff across the board to stay viable, letting go some dealmakers with 30 years and more of experience. Some consultants have been moving their offices into their homes to reduce costs; others have started divisions to diversify into other areas of commercial real estate besides shopping centers, such as offices, industrial, warehousing, or residential. And, high on the list for tenants, going back to their landlords for rent relief, improved allowances for fixturing, re-modeling, and the like.
One surprising—and positive-- effect on new development, one major landlord pointed out to us, is that some of their projects—expansions, renovations, and new construction—have been coming in under budget due to lower costs for materials and labor.
Another interesting sidelight is that some younger professionals are returning to college for specialized or advanced degrees, with plans to return to the shopping center/retail industry when the economy and dealmaking improve.
Some industry professionals are anticipating the federal stimulus package by the new administration will begin to impact on the economy by mid-spring and help to improve consumer confidence. They expect, therefore, the positive effect on dealmaking should begin shortly after and carry on through the rest of the year and into 2010.
“Those retailers able to make deals now will be in a better position to take advantage of opportunities to increase their market share over their competitors,” said one.
Current Environment
This, therefore, in very general and simplistic terms, is the current environment. What is being done by tenants, owner-developers, those involved in dealmaking to continue to operate and remain in business?
They are making deals—certainly fewer, harder, and not as lucrative. Some retailers and landlords are pushing for early renewals on existing stores. For the tenant, they can extend the benefits of the existing climate to years into the life of the lease; for the landlord, it helps keep occupancy rates higher and maintain a strong negotiating position for future deals with other retailers.
In order to obtain rent relief, some tenants are agreeing to modify lease terms that are unfavorable to landlords, such as exclusives, co-tenancies or use clauses or renewal options. One developer said he’s agreeing to reduce the rent, provided the tenant agrees to return to the original rent or terminate the lease if a third party offers to lease the store at the original or a higher rate; other requirements could include lease extensions, that the tenant remain responsible for the original amount owed on the lease if he were to default, that the reduction is a one-time deal, and that confidentiality is maintained.
In some instances, a rent reduction may help the tenant stay in business until the economy improves. It saves the landlord from the cost and effort to find a replacement tenant in a challenging environment, and helps him maintain a higher occupancy level in the center; another important consideration: it may deter other retailers from going dark.
Early Agreements
Several more landlords have formed in-house committees which meet regularly to review requests from tenants requesting rent relief, since we first mentioned this in an earlier column, (See SCD, Agora, Page J242).
On new leasing deals, both landlords and tenants speak of the advantages of reaching early agreements now, for openings later in 2009 or even 2010. The tenant gets a lower initial rent, using his current negotiating leverage to keep this expense down, and the owner-developer receives a solid commitment putting him in a better negotiating position with other potential tenants coming to the table later in the process.
Right now, those retailers best poised to continue expansion are the discounters, lower-end chains, those focused on teens and younger adults, and fast-food and family restaurants. Also, for landlords, alternative users who rarely, if ever, sought locations in shopping centers: churches, schools, offices, health-related services.
This column is re-printed from the January 19, 2009 issue of Shopping Center Digest “The Locations Newsletter.” A sample copy of a recent issue of this twice-monthly publication covering development and leasing in the shopping center/retail chain industry in the US and Canada may be obtained from our website, www.shoppingcenters.com.
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