"Strolling the Agora..." the blog posts of Murray Shor, Shopping Center Digest

Monday, February 22, 2010

"What Impact Will Expected Acquisitions By Large Landlords Have On Leasing?"

This is the topic for the Strolling the Agora column in the February 22, 2010 issue of SHOPPING CENTER DIGEST


Sooooooooooo, when’s it gonna happen? I and another coupla hundred others in this shopping center/retail chain industry have been holding our breath for so long that our faces are turning blue.

Does the following item, from these pages in the last August 17th issue, sound at all familiar? “We’ve been writing for months now about the larger landlords reducing their debt and positioning themselves to acquire new properties and mortgages from strapped owners forced to sell or liquidate their holdings. So far, few ‘large’ acquisitions have been made.”

Today, six months later, the situation hasn’t changed. Numerous companies and partnerships have been formed since then to acquire distressed properties; some have even made buys, but nothing that will awe or grab major interest.

Except, of course, for the Feb 16 offer by Simon Property Group to acquire financially troubled General Growth Properties for $10 billion.

Rather than foreclose on A properties or even large portfolios, numerous lenders have granted loan extensions. Just this past week, for example, mortgage holders did this for the $550 million debt on Pyramid Co’s very successful Palisades Center, just a few minutes from us in West Nyack, NY; this was its fourth extension.

“Observers And Mavens”

I’m not even going to touch on the numerous “observers and mavens” who state foreign investors still consider US properties provide the best opportunities for capital appreciation—especially strong interest from Canadian operators, not least of which is RioCan. Or that the REITs are flush with cash and have few opportunities to spend, or desire at current prices: Kimco, DDR, Regency, for instance, though many
REITSs did have a rocky road in the last quarter.

Let’s look at this a lot closer to our main concern: If this logjam ever breaks and the large landlords in this business get even larger, what impact will it have for future leasing and dealmaking? To the more nervous and paranoid tenants, “It’ll keep rents up and make it more difficult to close a deal, especially if these behemoths are dominant in key markets,” said one national apparel chain.

To another leading specialty tenant, “Not a hell of a lot. I will always have alternative options and we will not return to some of our past errors where we overpaid on rents in the mistaken belief we were protecting our market share.”

In considering grocery-anchored strip and community centers—which many landlords and tenants still consider the most reliable and recession-proof part of our universe—strong regional chains such as discount-oriented dollar and grocery stores, pet foods and supplies, fast-food restaurants, and the like, hobbies, arts and crafts, drugs, here is where they are focusing most of their attention for growth.

Competing Landlords

Perhaps the main concerns expressed about further acquisitions from giant owner-developers are from competing landlords. One felt that larger owner-developers have deeper pockets, are able to spend more on marketing and advertising their shopping centers, and can also bundle deals to prospective tenants, negotiating five, six, or even more leases at one time. “In a specific market, or even a large region, they can
offer special deals to retailers so rents, distribution, advertising and the like would reduce these overall costs proportionally. This would force us to reduce rents to below the market rate.”

“There’s no question, also,” said another dealmaker, “a national retailer can visit the home office of a top developer and through scheduled video conferences talk to its leasing representatives around the country to do a lease or iron out details. In cases like this, size does make for more efficient use of time and can reduce
overall costs for both tenant and landlord.”

But yet, contended a local shopping center developer, “We know the specific market better, and can react much more quickly because we don’t have as many levels and approvals. This is true at any of the regional ICSC dealmaking events, for example; you rarely find the top leasing people from the giant landlords even attending for that personal contact.”

Whether it’s the 800-lb gorilla or the nimble sportscar—hey, sometimes you have to stretch for the appropriate analogy—there’s much to be said for both extremes.

What’s certain, however, as we and others have said, in the current economy, no one is forced to make a deal. Landlords are more agreeable to make concessions—reduce rents and terms of leases, for example—and retailers are considering new locations and opportunities that were not available just a year or two ago.

More information on SHOPPING CENTER DIGEST, EXPANDING RETAILERS, our weekly EFLASH, DIRECTORY OF MAJOR MALLS, and our other products may be obtained from our website, www.shoppingcenters.com .

Monday, February 8, 2010

Will The Focus By Luxury Retailers On Outlets Have An Impact On Mainstream Shopping Centers?

This Strolling the Agora column appears in the February 8, 2010 issue of SHOPPING CENTER DIGEST

Outlets have always been a niche within a niche. Despite our admittedly biased personal perspective, shopping centers and retailing are actually only a small part of the entire real estate industry. And even in its heyday of some 25 years ago--when every failed shopping center was going to be re-vitalized as an outlet center, and every tourist destination was going to support beaucoup outlets, and optimistically only 1 in 10 of these projects were ever built—outlets captured a significant part of our consciousness.

The largest estimate of existing projects today is from ICSC, 401—and that’s globally. In the US and Canada, experienced dealmakers put it at less than 300, and that’s only by expanding the definition of “outlet centers” to include numerous hybrids combining traditional retailers, discounters, with those who avoid mainstream brick and mortar, and even some “lifestyle” centers. To Credit Suisse, there are about 150 upscale outlet centers. And to one veteran dealmaker who’s been specializing in the outlet industry for some 22 years or so, “after eliminating some junk, there are only about 97 centers that can be called premium outlets.”

So, with no one acceptable definition, under this overall umbrella we include out-of-the-way complexes with 10-12 tired stores, those of over 1 million sq. ft. like the granddaddy Potomac Mills in Woodbridge, VA--and all the other “Mills”--to those like Woodbury Commons in Central Valley, NY, where sales volumes per sq. ft. rival that of the top selling machines in the entire industry. The better ones have become tourist destinations attracting busloads of bargain-hungry shoppers and tourists in a splurge of black-belt buying.

So, why this rambling discourse now?

High-End Focus

Simple, the recent announcements that high-end retailers like Bloomingdale’s, Lord & Taylor, and New York & Co are entering this market, joining such familiar name brands that are also veteran outlet merchandisers, like Nieman-Marcus, Nordstrom, Ralph Lauren, Liz Claiborne, Oscar De La Renta. Armani, Prada, etc., etc. And, on the landlord end, that the mighty Simon Property Group, whose Chelsea division is already one of the three main owners in this niche, is getting even more dominant with its purchase of Prime Outlets for $2.24 billion; the other top owner-developer is Tanger Factory Outlet Centers.

The origin of the concept was to provide another channel for retailers/manufacturers to dispose of excess inventory, last-season’s goods, irregulars, and the like. Now, with so much consumer emphasis on quality, branded merchandise, deep discounts, and value shopping, even mainstream retailers are looking at the lower rents and reduced operating costs of outlet centers.

A number of branded retailers, who early came to this niche, still manufacture a lower-quality, substantial portion of their stock specifically for their “outlet stores.” And some discounters and off-pricers are getting better-quality merchandise from vendors unable to sell all their product to their traditional, high-end retailers.

“Any US expansion by retailers...should be viewed as a positive trend,” according to
John Cirillo, market planner at KeyBank. “Many of these concepts have reached the saturation point with respect to full price outlets…but we should keep in mind there is a limited universe of these projects, particularly strong ones that would attract the likes of NYCO, Bloomies, etc.”

Said Kevin So, director at MD Property and Investment Consultants Ltd, who is familiar
with the market in Asia: “Outlet seems to be on a better spot for the retail side, where everything else seems to be in some sort of trouble…It is no longer a new concept in the US…[in Asia] outlets is picking up heat and will be a big thing in the coming years. It is interesting that no major player has committed to this area.”

To Charles Devine of Devine Realty, “There has been a lot of these projects built that should never have been built, and we’ve shaken out most of the junk. For the ultra, high-end outlet retailers, except for a few extreme cases, they want to be at least three hours away from their main markets. Some projects being talked about in upstate New York, near the Canadian border, or even in the middle of the state, may be questionable.”

Strong Dominance

One national retailer with various brands, who has been involved in the outlet niche for many years, is troubled that one landlord is now so dominant. It controls 77 centers totaling 26.6 million sq. ft. “Of course I’m concerned that 80% of the top 50 outlet centers are owned by one landlord,” he said…“it gives us very little leverage in lease negotiations.”

Another agreed, pointing out that this is especially true in Florida, the highest producing market, “where just about every important outlet center is controlled by SPG.”

The niche, like the rest of the shopping center/retail industry has high points and low points, aside from that involving the heavy-hitters. Example: Craig Realty Group, which considers its Citadel Outlets the only outlet shopping center in Los Angeles, is expanding from 276,210 sq. ft. and will add 157,000 sq. ft. Or, Sembler Co, now planning a $400 million, upscale “luxury manufacturers” project in Hardeeville, SC.

On the other hand, in Gainesville, TX, a group of 11 lenders just bought the foreclosed 319,653 sq. ft. Gainesville Factory Shops and are considering converting it to a medical center and/or residential, mixed-use.

And always the question of a blurred terminology. Burlington Coat Factory, definitely an outlet retailer, opening a store of 64,428 sq. ft. in 454,000 sq. ft. Marshfield Plaza in South Chicago. Is that an outlet center now?

“Labels are just that,” said one cynical dealmaker. “If it makes it easier for me to lease a center, I’ll call it anything necessary to gain attention.” He pointed to the most recent example, ‘lifestyle centers,’ which was tacked on to numerous projects that were not enclosed, were not large malls, and could not attract an important anchor. “And many of these that opened are in serious trouble now.”

But as an important niche, outlets can be extremely profitable for both tenants and landlords.

Further information on SHOPPING CENTER DIGEST, EXPANDING RETAILERS, the weekly EFLASH , the DIRECTORY OF MAJOR MALLS and our other publications and products may be obtained from our website. www.shoppingcenters.com .