Strolling the Agora column from the October 26, 2009 Issue of Shopping Center Digest.
So I’m in the Atlanta Convention Center heading for the ICSC Southeast Conference and I hear this steady hum-- that increases in volume, like a rushing rapids, and then a louder waterfall, and bounces and echoes off the concrete pillars and massive halls until it becomes almost deafening. It’s the roar of dealmaking.
And it’s such a contrast to last year’s “Retailers Meet and Greet” (See SCD, Agora, J227) when a large number of the tables were empty and we graded the entire conference as a D.
Not the case this time, as all the tables were occupied and landlords and brokers eagerly lined up to chat with prospective tenants, trade business cards, and try to schedule appointments for more in-depth discussions and negotiations.
This is not to say that the 2-day event set any records for attendance and overflowing optimism. Far from it. However, the majority of the 2,200 or so dealmakers conceded the fact that due to the economy they had to work harder and longer to make the deal—here and back at the office—and they were not going to get everything they wanted or needed.
But, as one veteran cheerfully said, “It’s something, which is always better than nothing. And this is what we do: ‘Smile and dial’ and a few of those leases will get signed.”
The most common complaint from owners was that “too many retailers were insisting on straight percentage deals. Ask about $1 or $2 added to the gross, and they don’t want to hear from it; straight percentage or forget it, there’s another landlord willing to fill the vacancy.”
One retailer I spoke to admitted his company was taking advantage of the fact that there weren’t that many chains aggressively expanding. “We’re looking for straight percentage leases for three years, if we can get it, and will agree to using the higher payments as the basis for a rent renewal.. If we’re really serious on the location, we’ll drop it to a year or two-year deal.”
Owner-developers generally came in two categories. Either it was “I understand their (the tenant) position and I don’t blame them. I’d do the same thing if I were in their shoes.”
Or “I concede the leverage is overwhelmingly on their side but I don’t like the attitude of their putting a gun to my head. We’ll make the hard deals because we have to, and each party should not be completely satisfied. That’s fair. But we should be left with our dignity.”
Another landlord appraised the current economy which has dampened—to say the least—
dealmaking in the industry and said “Don’t quote me now, but in the long run, it’s probably better for the industry. There’ll be a shakeup and we’ll get rid of a lot of the deadwood and poor projects that should never have been built in the first place.” He added that there may still be some vacant W.T. Grant sites around the country. [Those too young to recall recessions of years past should look it up.]
One strip developer I spoke to said he was getting no action at several vacant stores, except from a Mom and Pop restaurant, who was underfunded. “So, I thought, isn’t it better to put in an operator who will provide good food, and enhance the center? If he makes it, I’ve incubated a good tenant who may remain as a long-time tenant or even expand in the future. And if he doesn’t make it, what have I lost? I couldn’t rent the space to anyway.”
Regarding mergers and acquisitions, one leading owner of smaller centers remarked that “last year we were getting offers of available vacant land. This year, it’s existing shopping centers. But we can’t do anything about these projects because the banks are still overly cautious about lending money.”
Though some private investors and REITs have said they have money in place to acquire centers, many others complained about the lack, at this time, of the availability of adequate financing, which they say is impacting on expansion and new development in areas that may be under-stored.
The consensus: Tenants and landlords both said they had productive meetings, pointed to positive signs in the economy, but warned that a full recovery is still “quite a ways down the road” and much of what happens in 2010 “will depend on how successful the coming
holiday season will be.”
More information on the twice-monthly SHOPPING CENTER DIGEST and our associate publications, the weekly Eflash, EXPANDING RETAILERS and DIRECTORY OF MAJOR MALLS, may be obtained from our website, www.shoppingcenters.com .
Monday, October 26, 2009
Thursday, October 15, 2009
What Is Causing Agita Among Landlords Is The Demand By Tenants For Rent Concessions
Strolling the Agora column from the October 12, 2009 issue of Shopping Center Digest “The Locations Newsletter”
What has been causing agita among landlords in this industry over the last year or so is the pandemic of retailers rushing for rent concessions as an inducement to remain in a shopping center, renew a lease, or to make a new deal. As we’ve said several times before, the balance of power—due to the increasing number of vacant stores and the decreasing number of chains that are aggressively expanding—has for the first time surged to the tenant side.
It’s a basic rule in the ledger of investors and accountants that supply and demand determines what is the “true value” of a retail project, whether a strip, mall, lifestyle center or what have you. Some landlords have used this for years, establishing the “market rent” on what other tenants would be willing to pay for that specific location in a center; some tenants have grudgingly “overpaid” for these locations as a way to keep out a competitor and avoid a loss of market share.
It is certainly not the replacement cost of the brick and mortar and numerous other variables that went into building the development in the first place. Value has been based on ROI, Return On Investment, and been used to establish various “cap rates” for years.
And when a retailer, as Rite Aid did recently, boasts that it obtained rent concessions of 20% on its worst-performing units, or when Finish Line states it is seeking serious reductions from landlords for the nearly 300 units coming up for renewal next year, the value of the centers housing those stores is substantially diminished.
It is why Taubman Centers has said it will write down the value of The Pier Shops at Caesars by $106-$111 million, and Regency Square by $55-$58 million to about $30 million, and now is turning over the Atlantic City project to the lender, Centerline Capital Group.
It is also why a number of landlords are actively seeking tax reductions on the value of their projects, such as Inland Western, owner of Maple Tree Place in Williston, VT; it is in superior court in Chittenden County seeking a $15 million cut in the $80.9 million assessment.
It is also why Standard & Poor’s Rating Services cut its ratings a notch on Regency Centers Corp, a major landlord of supermarket-anchored shopping centers.
It is also why the new owners of Highland Park Village in Dallas, Steve Summers and Ray Washburne, paid $170 million for 200,000 sq. ft. of retail and 50,000 sq. ft. of offices. Annual sales at the National Historic Landmark are over $1,000 per sq. ft., well above national averages and pretty good even for a luxury-oriented complex, that is going to get even more luxury-oriented.
And it’s also why countless, well-funded investment companies are patiently circling overhead waiting for cash-strapped owners “to get real” on the value of their assets and take them to market. When this finally happens, there will be a flood of shopping centers changing hands and the entire landscape of this industry is expected to change, with some landlords getting even larger.
The dismal state of the economy is blamed for just about everything under the sun right now. And numerous state, counties and towns are passing on to their citizens their need for more dollars, either by directly raising taxes, passing new taxes or establishing numerous new kinds of fees, and/or increasing audits on businesses in effort to collect on unpaid back taxes.
And then, there are other methods, related to the above—but not as numerous—that some communities are using as a reaction to these challenges.
In East Alton, IL, village officials have established tax-increment financing and special sales tax districts to improve business areas that include three small shopping centers: Eastgate Plaza, East Alton Plaza, and Wilshire Village. The action is designed to counter the spread of vacant storefronts in parts of the districts, and to retain existing businesses in a currently viable area from going into decline. Tax collections will begin in January, and then it will be determined how much would be spent on revitalizing the areas with better lighting, sidewalks, streets, utilities, and general cosmetic upgrades.
What this is all leading up to, I guess, is that just about everything is inter-connected—a giant, intricate arrangement of dominoes—and when the first one topples it causes numerous others to follow.
More information on the twice-monthly SHOPPING CENTER DIGEST and our associate publications, EXPANDING RETAILERS and DIRECTORY OF MAJOR MALLS, may be obtained from our website, www.shoppingcenters.com .
What has been causing agita among landlords in this industry over the last year or so is the pandemic of retailers rushing for rent concessions as an inducement to remain in a shopping center, renew a lease, or to make a new deal. As we’ve said several times before, the balance of power—due to the increasing number of vacant stores and the decreasing number of chains that are aggressively expanding—has for the first time surged to the tenant side.
It’s a basic rule in the ledger of investors and accountants that supply and demand determines what is the “true value” of a retail project, whether a strip, mall, lifestyle center or what have you. Some landlords have used this for years, establishing the “market rent” on what other tenants would be willing to pay for that specific location in a center; some tenants have grudgingly “overpaid” for these locations as a way to keep out a competitor and avoid a loss of market share.
It is certainly not the replacement cost of the brick and mortar and numerous other variables that went into building the development in the first place. Value has been based on ROI, Return On Investment, and been used to establish various “cap rates” for years.
And when a retailer, as Rite Aid did recently, boasts that it obtained rent concessions of 20% on its worst-performing units, or when Finish Line states it is seeking serious reductions from landlords for the nearly 300 units coming up for renewal next year, the value of the centers housing those stores is substantially diminished.
It is why Taubman Centers has said it will write down the value of The Pier Shops at Caesars by $106-$111 million, and Regency Square by $55-$58 million to about $30 million, and now is turning over the Atlantic City project to the lender, Centerline Capital Group.
It is also why a number of landlords are actively seeking tax reductions on the value of their projects, such as Inland Western, owner of Maple Tree Place in Williston, VT; it is in superior court in Chittenden County seeking a $15 million cut in the $80.9 million assessment.
It is also why Standard & Poor’s Rating Services cut its ratings a notch on Regency Centers Corp, a major landlord of supermarket-anchored shopping centers.
It is also why the new owners of Highland Park Village in Dallas, Steve Summers and Ray Washburne, paid $170 million for 200,000 sq. ft. of retail and 50,000 sq. ft. of offices. Annual sales at the National Historic Landmark are over $1,000 per sq. ft., well above national averages and pretty good even for a luxury-oriented complex, that is going to get even more luxury-oriented.
And it’s also why countless, well-funded investment companies are patiently circling overhead waiting for cash-strapped owners “to get real” on the value of their assets and take them to market. When this finally happens, there will be a flood of shopping centers changing hands and the entire landscape of this industry is expected to change, with some landlords getting even larger.
The dismal state of the economy is blamed for just about everything under the sun right now. And numerous state, counties and towns are passing on to their citizens their need for more dollars, either by directly raising taxes, passing new taxes or establishing numerous new kinds of fees, and/or increasing audits on businesses in effort to collect on unpaid back taxes.
And then, there are other methods, related to the above—but not as numerous—that some communities are using as a reaction to these challenges.
In East Alton, IL, village officials have established tax-increment financing and special sales tax districts to improve business areas that include three small shopping centers: Eastgate Plaza, East Alton Plaza, and Wilshire Village. The action is designed to counter the spread of vacant storefronts in parts of the districts, and to retain existing businesses in a currently viable area from going into decline. Tax collections will begin in January, and then it will be determined how much would be spent on revitalizing the areas with better lighting, sidewalks, streets, utilities, and general cosmetic upgrades.
What this is all leading up to, I guess, is that just about everything is inter-connected—a giant, intricate arrangement of dominoes—and when the first one topples it causes numerous others to follow.
More information on the twice-monthly SHOPPING CENTER DIGEST and our associate publications, EXPANDING RETAILERS and DIRECTORY OF MAJOR MALLS, may be obtained from our website, www.shoppingcenters.com .
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