This “Strolling the Agora” is from the December 21, 2009 issue of Shopping Center Digest, the last issue being printed in “hard copy” as it goes completely Online
We’ve been stressing the importance of timely, detailed, accurate information since before we first started publishing Shopping Center Digest. And the need for an organized, simple format so you can react immediately to start that deal..
So, before any other publication in the shopping center/retail industry, in 1973 we began providing contact names, mail addresses and telephone and fax numbers for each item where available; the twice-monthly newsletter format compressed production and shortened delivery time to days compared with the weeks then required by magazines.
The whole concept, design and presentation came from experienced landlords, retailers, consultants, brokers—friends and acquaintances we deal with on a daily basis. Get rid of unnecessary verbiage; present the bare facts in a simple order and abbreviated form; size of project, alphabetized by state and town; retailers by category; existing centers with space available.
An example of early input: At first, we were not considering accepting advertising. Shortly after the first twice-monthly issues, while at the then 2-day Christmas Party run annually by Melvin Simon & Associates (now Simon Property Group), it was Ken McGuire, then president of Bresler’s 33 Flavors, who suggested: “Ya know, you should take advertising.” Bresler’s then held that cover position for each of our special issues for years until the company was sold some 20 years later.
Most important in providing information, however, you told us, “Get rid of the fluff and puff, and then get out of the way so a dealmaker could begin to deal.” This we continue to do.
And we constantly tweaked the Digest. As projects were being developed that couldn’t be categorized only on the basis of size of GLA, we added another column: Upscale Specialty, Lifestyle, Mixed-Use, Entertainment. Then we added another column dealing with Financials and Sales Reports from retailers and the many owner-developers who became public companies.
We refined the process even more and began adding email addresses and websites to the listings, both for new and existing shopping centers, and for the retailers who were looking to expand into new markets and nationally. Again, making it even easier to begin working that deal.
Best of all, to get this to you even faster, a few years ago we started delivering it to you online, sending you an email with your username and password so when the issue was posted, you could access it immediately from your computer: while out of the office, on the road or at home. This, you told us, gave you a jump on your competitors since the information was delivered a week, 10 days, earlier than the “hard copy” being delivered through post office.
Even better, this means you can link in seconds and email someone about a deal from the Digest directly from your computer even though you’re away from the office.
What are we doing now? Bluntly, this is the last hard copy of Shopping Center Digest we will be mailing to you.
Beginning with the first issue in January, our twice-monthly newsletter will be emailed online directly to you and your computer. No username, no password.
The advantages: We email it ourselves without the delay required by sending to a middleman to post online; it cuts another couple of days off important leadtime--and eliminates the problems a few subscribers reported when they were unable to access the issue after inputting the username and password. We will continue, however, with both online presentations until we’re certain the kinks have been worked out.
Especially for our subscribers in foreign countries, you will now receive the issue at the same time as our domestic readers—though I have to admit the need for speed there may not be as vital.
Emailing the issue directly to you eliminates having to deal with the numerous individual post offices around the country, and their varying levels of efficiency. The one in Bellingham, WA, for example, at first refused to mail our last ICSC New York Issue because it contended we had an “incorrect” ISSN number—though it’s the same one we’ve been using since FOREVER!—but relented “just this once” after the pleading from our local printer.
And, where it hits you, the reader, with great, personal impact, it means that we can avoid a subscription increase . maintaining the same rates we’ve had for the last three years.
For those readers whose companies have very strict requirements regarding size of emails, spam blockers may prevent the issues from getting through, you must inform whoever is responsible to accept Shopping Center Digest as an approved sender, perhaps adding us to your address book.
Now a major warning to you few readers who have not yet given us your email address. Please, please, please, I beg you, send it to me so I can update your record so you don’t miss a single issue. Email it to me directly at mshor@shoppingcenters.com .
And another request: Let’s hear some feedback, pro and con, on the new format and approach. If you want to comment, suggest ways we can improve the Digest, and make it a better tool for you—that wouldn’t hurt either. We need your input.
Further information on Shopping Center Digest, our weekly Eflash, Expanding Retailers, and the annual Directory of Major Malls may be obtained from our website, www.shoppingcenters.com .
Friday, December 18, 2009
Monday, November 23, 2009
Resilience, Positive Attitude Are Universals From Dealmakers--And Anger That ICSC has "Lost Touch" With Its Members
This “Strolling the Agora” Column Is From The November 24, 2009 Issue Of Shopping Center Digest Being Distributed At The ICSC Conference In New York
Though there are universals present in each ICSC regional conference around the country focusing on leasing and development, there are also distinct differences in themes and outlooks expressed by these real estate professionals. So it was in Chicago last month and--I expect-- it will be in New York at the National Conference and Deal Making in the next few weeks; the ultimate connector being a resilience and positive attitude:“We’re working harder than ever for a lot less, but we’re still vertical and will get through this (the recession).”
A side issue, but strongly expressed by a number of landlords and tenants was anger at ICSC for “losing touch with the needs of its members” and “operating as a business rather than a trade association.” More on this later.
Even before the beginning of brisk, official dealmaking, many were already expressing optimism on the rising economy, basing much of it on rising retail figures just released by a number of leading chains. However, these should be taken with a touch of reality, stressed one top department store executive.
“In retailing,” he pointed out, “we’re zooming down the highway at 100 miles per hour looking backward through our rearview mirror and competing against last year’s figures. It’s great if our same store sales are up 3 or 4%—but last year they were down 15, 16 or 17%. You must consider what we’re competing against.”
Said another retailer: “In that context, we’re still behind where we were two years ago.”
More Time For Recovery
Though some of the national sales figures being released indicate the recession is over, industry observers contend that it hasn’t convinced the average consumers who are still being very cautious on spending for non-essential goods. “Unemployment is still rising around the country and the average shoppers are still fearful of losing their jobs,” said another chain VP. “It’s going to take a lot more time for a full recovery.”
For landlords with troubled properties difficult to rent, it may be worthwhile to “give the space away,” said one strip operator. “We’ve made deals with free rent for some Mom and Pops, with the tenant paying only operating costs for a couple of months,” he said. “It keeps the center active, stops the domino effect of other stores leaving. But,” he stressed, “the jury is still out as to whether it is effective. It depends on whether he can start paying the rent after the free period expires.”
One retail consultant was exuberant about the number of deals he had made recently. “Last year was awful and I really thought we could go belly-up. I was forced to lay off some people; then we increased our marketing, worked harder and longer than I ever have before, and it’s beginning to pay off. It’s re-vitalized me and our entire operation.”
Another agreed, and pointed out that with computers and the internet, “it’s a lot easier to operate and connect. It doesn’t completely replace face-to-face, but it does enable us to cut travel expenses and still negotiate with major landlords, get answers, and satisfy the needs of our retail clients.”
One broker pointed out that she and others “were re-tooling their business plan and dumping the unproductive stuff.”
“Part of the problem of poor retail locations that exist today,” said one veteran dealmaker, “is that many national chains had all these real estate people at the home office signing store leases who never even looked at the site. There are too many coffee or pizza shops on the wrong side of the street, or restaurants in odd-shaped parcels with inadequate parking that are difficult or unable to provide for drive-up windows.”
Wandering In The Exhibit Area
Wandering through the exhibit area, I see it’s crowded with rushing, intense dealmakers networking or heading for appointments, and was struck by several rented but unoccupied booths. On the upper level, where historically six much larger dealmaking rooms were occupied previously by some heavy-hitters, only three were occupied: CBL, Developers Diversified, Jones Lang LaSalle. And these landlords brought a substantially fewer number of leasing professionals than last year, 6 compared with 13 in 2008, said one owner-developer.
Another aspect setting this Midwest meeting apart from other recent ICSC regional meetings was the heavy concentration of booths operated by small cities, villages and counties that were actively seeking retail tenants to help revitalize downtown business districts. Represented by local economic development officials, they highlighted the marketing potential of these communities, and stressed how public moneys, stimulus funds and special tax incentives were earmarked to restore once vital centers that had been deteriorating for years; they pointed to improved lighting, roads, signage, public utilities, transportation, parking, and the like.
“If,” said one planning director, “we can attract a few solid retailers, it would add substantially to our tax base and help us to stop a slide caused by such factors as the admitted local neglect, poor management of past administrations, and the national economic crisis.”
Second Day A Disaster
Though the level of dealmaking opening day in Chicago was impressive and ongoing until the reception that evening, the second day was a disaster. A substantial number of dealmaking booths were left unmanned that morning as many budget-conscious real estate professionals flew or drove home the night before to avoid the extra cost of high hotel rates; many of these neglected booths did not have even token amounts of company literature. Company representatives who were at their booths outnumbered those dealmakers wandering around still trying to connect.
One retail consultant from Atlanta who operates only in the Southeast said he was in Chicago due to a new client of his interested also in expanding into the Midwest market. “I can connect him to a few good sources and contacts and be a hero.”
A number of tenants, landlords, and brokers were outspoken in criticizing ICSC for maintaining high prices and “gouging” its members.
“In these hard times, ICSC should lower its ridiculously high registration fees to only cover the costs,” said one retailer. “They have $90 million sitting in a slush fund for a rainy day. Don’t they know it’s raining out there?”
Another said he hadn’t registered because of budgetary cutbacks forced by national headquarters, and visited the landlords upstairs—where a badge was not required for admission—and did meet with a few others in the lobby to look at leasing plans and talk deals. “In New York [the upcoming conference Dec 7-9] Simon told me to call them when I’m at the Sheraton and they’ll send someone out with a badge to bring me in.”
Arbitrary Decisions
It was understood, one dealmaker confided, that several major owner-developers have already cancelled plans for exhibit space “at the Hilton and Sheraton hotels, and others may be wavering.”
One landlord accused the trade association of arbitrarily making decisions on schedule changes without consulting its membership. “In Las Vegas next year,” he said, “they’ve already changed the convention dates so we have to come in on the weekend. Don’t they know that’s when hotel and travel costs are at the highest, and how short of cash many companies are?”
One VP of real estate and construction with a national chain told me he normally did not attend these regional meetings but sent area leasing reps. “I’m here only because of a retail committee meeting, but ICSC seems to have lost touch with reality and is functioning with no regard to the needs or wants of its members,” he said.
Overall, registrants felt attendance and the number of exhibitors were down from that experienced over previous years. But the overall sentiment was still a strong, positive outlook throughout the conference.
Especially for the seasoned brokers and consultants, who have been through past market downturns and are using the lessons learned from their past experiences to help weather the current storms and control the existing crisis. “Look,” said one, “I’ve cut back before and operated out of my home when necessary. I did it before, I can do it again. We’re survivors. It’s the younger people who have never faced such rough times before who are the most terrified.”
Further information on Shopping Center Digest, our weekly Eflash, Expanding Retailers, and the annual Directory of Major Malls may be obtained from our website, www.shoppingcenters.com .
Though there are universals present in each ICSC regional conference around the country focusing on leasing and development, there are also distinct differences in themes and outlooks expressed by these real estate professionals. So it was in Chicago last month and--I expect-- it will be in New York at the National Conference and Deal Making in the next few weeks; the ultimate connector being a resilience and positive attitude:“We’re working harder than ever for a lot less, but we’re still vertical and will get through this (the recession).”
A side issue, but strongly expressed by a number of landlords and tenants was anger at ICSC for “losing touch with the needs of its members” and “operating as a business rather than a trade association.” More on this later.
Even before the beginning of brisk, official dealmaking, many were already expressing optimism on the rising economy, basing much of it on rising retail figures just released by a number of leading chains. However, these should be taken with a touch of reality, stressed one top department store executive.
“In retailing,” he pointed out, “we’re zooming down the highway at 100 miles per hour looking backward through our rearview mirror and competing against last year’s figures. It’s great if our same store sales are up 3 or 4%—but last year they were down 15, 16 or 17%. You must consider what we’re competing against.”
Said another retailer: “In that context, we’re still behind where we were two years ago.”
More Time For Recovery
Though some of the national sales figures being released indicate the recession is over, industry observers contend that it hasn’t convinced the average consumers who are still being very cautious on spending for non-essential goods. “Unemployment is still rising around the country and the average shoppers are still fearful of losing their jobs,” said another chain VP. “It’s going to take a lot more time for a full recovery.”
For landlords with troubled properties difficult to rent, it may be worthwhile to “give the space away,” said one strip operator. “We’ve made deals with free rent for some Mom and Pops, with the tenant paying only operating costs for a couple of months,” he said. “It keeps the center active, stops the domino effect of other stores leaving. But,” he stressed, “the jury is still out as to whether it is effective. It depends on whether he can start paying the rent after the free period expires.”
One retail consultant was exuberant about the number of deals he had made recently. “Last year was awful and I really thought we could go belly-up. I was forced to lay off some people; then we increased our marketing, worked harder and longer than I ever have before, and it’s beginning to pay off. It’s re-vitalized me and our entire operation.”
Another agreed, and pointed out that with computers and the internet, “it’s a lot easier to operate and connect. It doesn’t completely replace face-to-face, but it does enable us to cut travel expenses and still negotiate with major landlords, get answers, and satisfy the needs of our retail clients.”
One broker pointed out that she and others “were re-tooling their business plan and dumping the unproductive stuff.”
“Part of the problem of poor retail locations that exist today,” said one veteran dealmaker, “is that many national chains had all these real estate people at the home office signing store leases who never even looked at the site. There are too many coffee or pizza shops on the wrong side of the street, or restaurants in odd-shaped parcels with inadequate parking that are difficult or unable to provide for drive-up windows.”
Wandering In The Exhibit Area
Wandering through the exhibit area, I see it’s crowded with rushing, intense dealmakers networking or heading for appointments, and was struck by several rented but unoccupied booths. On the upper level, where historically six much larger dealmaking rooms were occupied previously by some heavy-hitters, only three were occupied: CBL, Developers Diversified, Jones Lang LaSalle. And these landlords brought a substantially fewer number of leasing professionals than last year, 6 compared with 13 in 2008, said one owner-developer.
Another aspect setting this Midwest meeting apart from other recent ICSC regional meetings was the heavy concentration of booths operated by small cities, villages and counties that were actively seeking retail tenants to help revitalize downtown business districts. Represented by local economic development officials, they highlighted the marketing potential of these communities, and stressed how public moneys, stimulus funds and special tax incentives were earmarked to restore once vital centers that had been deteriorating for years; they pointed to improved lighting, roads, signage, public utilities, transportation, parking, and the like.
“If,” said one planning director, “we can attract a few solid retailers, it would add substantially to our tax base and help us to stop a slide caused by such factors as the admitted local neglect, poor management of past administrations, and the national economic crisis.”
Second Day A Disaster
Though the level of dealmaking opening day in Chicago was impressive and ongoing until the reception that evening, the second day was a disaster. A substantial number of dealmaking booths were left unmanned that morning as many budget-conscious real estate professionals flew or drove home the night before to avoid the extra cost of high hotel rates; many of these neglected booths did not have even token amounts of company literature. Company representatives who were at their booths outnumbered those dealmakers wandering around still trying to connect.
One retail consultant from Atlanta who operates only in the Southeast said he was in Chicago due to a new client of his interested also in expanding into the Midwest market. “I can connect him to a few good sources and contacts and be a hero.”
A number of tenants, landlords, and brokers were outspoken in criticizing ICSC for maintaining high prices and “gouging” its members.
“In these hard times, ICSC should lower its ridiculously high registration fees to only cover the costs,” said one retailer. “They have $90 million sitting in a slush fund for a rainy day. Don’t they know it’s raining out there?”
Another said he hadn’t registered because of budgetary cutbacks forced by national headquarters, and visited the landlords upstairs—where a badge was not required for admission—and did meet with a few others in the lobby to look at leasing plans and talk deals. “In New York [the upcoming conference Dec 7-9] Simon told me to call them when I’m at the Sheraton and they’ll send someone out with a badge to bring me in.”
Arbitrary Decisions
It was understood, one dealmaker confided, that several major owner-developers have already cancelled plans for exhibit space “at the Hilton and Sheraton hotels, and others may be wavering.”
One landlord accused the trade association of arbitrarily making decisions on schedule changes without consulting its membership. “In Las Vegas next year,” he said, “they’ve already changed the convention dates so we have to come in on the weekend. Don’t they know that’s when hotel and travel costs are at the highest, and how short of cash many companies are?”
One VP of real estate and construction with a national chain told me he normally did not attend these regional meetings but sent area leasing reps. “I’m here only because of a retail committee meeting, but ICSC seems to have lost touch with reality and is functioning with no regard to the needs or wants of its members,” he said.
Overall, registrants felt attendance and the number of exhibitors were down from that experienced over previous years. But the overall sentiment was still a strong, positive outlook throughout the conference.
Especially for the seasoned brokers and consultants, who have been through past market downturns and are using the lessons learned from their past experiences to help weather the current storms and control the existing crisis. “Look,” said one, “I’ve cut back before and operated out of my home when necessary. I did it before, I can do it again. We’re survivors. It’s the younger people who have never faced such rough times before who are the most terrified.”
Further information on Shopping Center Digest, our weekly Eflash, Expanding Retailers, and the annual Directory of Major Malls may be obtained from our website, www.shoppingcenters.com .
Monday, October 26, 2009
Roar Of Dealmaking, Demands For Percentage Deals At Core of ICSC Atlanta Event
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 .
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 .
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 .
Tuesday, September 29, 2009
Landlords, Tenants, Brokers Begin Drive For New Deals At ICSC Conference In Philly
Strolling the Agora column from the September 28, 2009 issue of Shopping Center Digest “The Locations Newsletter”
To many dealmakers on the Eastern Seaboard, the ICSC Philadelphia meeting serves as a landmark, the first official session after Labor Day and a formal statement that summer is over and with fall comes the full-court press to get some leases signed.
So it was that some 1,200 landlords, tenants and brokers involved in New Jersey, Pennsylvania, and Delaware—with quite a bit of leakage into Ohio, New York and Maryland-- converged on the City of Brotherly Love for two days of meeting, greeting, and the drive to fill vacant space.
Many tried to maintain a cheerful, optimistic outlook. But…….
“We’re working a lot harder for a lot less.”
“It’s what we do—keep plugging away with the anticipation that a few of the deals we’re working on will come through. I used to have pending deals up to here [signaling up to his brow] and now they’re only up to here [signaling knee high].”
“There are a lot of hungry people out there looking for jobs, but very few openings available.”
“We’re treading water and hope we don’t sink.”
And, “It’s getting nasty and a little more vicious, especially amongst brokers in the same office. Though it has always been a problem, there is a lot more poaching of clients, trying to steal deals, attempting to horn in and share commissions that are undeserved.”
Said one veteran dealmaker, “This is not unique for just this market. I’ve been hearing similar stories over the last few months from friends around the country.”
Higher Concentration Of Brokers
As far as the quality of those in attendance, a substantial majority of mostly local brokers—which is always the case for these ICSC events covering a localized region—representing landlords and tenants involved in small, strip centers. However, there was almost no representation from large mall operators or national tenants, even those who have a substantial presence in the market.
As for national chains, it was pointed out that many of them are farming out a lot of the drudge work to willing brokers in the immediate area.
Beyond just the areas involved in leasing, there was also a lot of speculation about the increasing number of new funds being created daily for potential acquisition of distressed shopping centers that may soon be going into default. However, there are few large portfolios or sales taking place. The sellers are holding on for a better price, and the potential buyers are in no hurry to buy at current values, which they expect to drop even more.
“The owner still has a price in mind that conflicts with reality,” said one veteran who acknowledged he has several large investors, a good number of them with financing coming in from Israel, China, and various European countries, and is waiting for a better deal.
“We’re eye to eye, waiting to see who blinks first, and there’s no pressure on us to blink at all.”
Growing Numbers Of Vacancies
One owner: “We have a good center and have been paying our monthly mortgage all along. But we lost a couple of key tenants and technically, therefore, we’re in default. We look at the situation, are leasing a lot of available to offices, and see we can pay it off in four years.
“Mortgage lender sees this, too, and tells us he’s going to foreclose. Luckily, we can come up with the cash and pay off the loan. Now, we’re looking for similar landlords who are being foreclosed on who cannot come up with the cash.”
The problems of growing vacancies has made many landlords eager to negotiate and strike deals to fill space they never would have considered before. We’ve remarked on this in numerous columns over the past year. And it’s the reason why medical and dental offices are becoming a greater presence in major malls. They always wanted the visibility and the access to the affluent customers, but could never meet the rental demands; now they can as rents have dropped many dollars below last year’s asking price.
It has even affected retailers whose customers are blue collar, low-income ethnics, and whose main locations are small strips and storefronts in the inner cores.
Said one leasing director for a major apparel chain, “We now have so much more to choose from. No way, are we going into malls; but because there are so many more opportunities coming to us out there, and the rents are so low, we’re able to expand at a much greater rate than we anticipated. We’re locking in those low rents now, and will be in a much better position in one or two years when the industry gets back to normal.”
Speed Dating
The main purpose of the two-day session was dealmaking, with several hundred booths set up mainly by landlords, brokers, and tenants for the Thursday session. The day before, though, there were a number of workshops and panels on various topics of interest to early arrivals. The best attended and popular was the called Speed Dating, where some 19 retailers held court at individual tables, explained who they were, the demographics of their markets, size of stores, and what they were looking for in new locations, handed out fact sheets and exchanged business cards. Among those were Chipotle, Great Clips, Ikea, Subway, Panda Express, and a number of local supermarkets.
After a few minutes, the presenters stayed in place and the landlords went on to another table and took some more notes.
It was something, said owner-developers and brokers who participated, and certainly “better than nothing. But it was still,” said one hungry landlord, “like having a nibble at a banquet. Still it gives us something to work with. And, we’re dealmakers, which means we have to always look on the positive.”
P.S.---One sad note, which brought back so many memories to us old farts in Philly: the passing of Mel Simon, one of the stalwarts in the industry, a hard-driving, fun guy, and with Herb and Fred built a great company. Here’s to ya!
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.
To many dealmakers on the Eastern Seaboard, the ICSC Philadelphia meeting serves as a landmark, the first official session after Labor Day and a formal statement that summer is over and with fall comes the full-court press to get some leases signed.
So it was that some 1,200 landlords, tenants and brokers involved in New Jersey, Pennsylvania, and Delaware—with quite a bit of leakage into Ohio, New York and Maryland-- converged on the City of Brotherly Love for two days of meeting, greeting, and the drive to fill vacant space.
Many tried to maintain a cheerful, optimistic outlook. But…….
“We’re working a lot harder for a lot less.”
“It’s what we do—keep plugging away with the anticipation that a few of the deals we’re working on will come through. I used to have pending deals up to here [signaling up to his brow] and now they’re only up to here [signaling knee high].”
“There are a lot of hungry people out there looking for jobs, but very few openings available.”
“We’re treading water and hope we don’t sink.”
And, “It’s getting nasty and a little more vicious, especially amongst brokers in the same office. Though it has always been a problem, there is a lot more poaching of clients, trying to steal deals, attempting to horn in and share commissions that are undeserved.”
Said one veteran dealmaker, “This is not unique for just this market. I’ve been hearing similar stories over the last few months from friends around the country.”
Higher Concentration Of Brokers
As far as the quality of those in attendance, a substantial majority of mostly local brokers—which is always the case for these ICSC events covering a localized region—representing landlords and tenants involved in small, strip centers. However, there was almost no representation from large mall operators or national tenants, even those who have a substantial presence in the market.
As for national chains, it was pointed out that many of them are farming out a lot of the drudge work to willing brokers in the immediate area.
Beyond just the areas involved in leasing, there was also a lot of speculation about the increasing number of new funds being created daily for potential acquisition of distressed shopping centers that may soon be going into default. However, there are few large portfolios or sales taking place. The sellers are holding on for a better price, and the potential buyers are in no hurry to buy at current values, which they expect to drop even more.
“The owner still has a price in mind that conflicts with reality,” said one veteran who acknowledged he has several large investors, a good number of them with financing coming in from Israel, China, and various European countries, and is waiting for a better deal.
“We’re eye to eye, waiting to see who blinks first, and there’s no pressure on us to blink at all.”
Growing Numbers Of Vacancies
One owner: “We have a good center and have been paying our monthly mortgage all along. But we lost a couple of key tenants and technically, therefore, we’re in default. We look at the situation, are leasing a lot of available to offices, and see we can pay it off in four years.
“Mortgage lender sees this, too, and tells us he’s going to foreclose. Luckily, we can come up with the cash and pay off the loan. Now, we’re looking for similar landlords who are being foreclosed on who cannot come up with the cash.”
The problems of growing vacancies has made many landlords eager to negotiate and strike deals to fill space they never would have considered before. We’ve remarked on this in numerous columns over the past year. And it’s the reason why medical and dental offices are becoming a greater presence in major malls. They always wanted the visibility and the access to the affluent customers, but could never meet the rental demands; now they can as rents have dropped many dollars below last year’s asking price.
It has even affected retailers whose customers are blue collar, low-income ethnics, and whose main locations are small strips and storefronts in the inner cores.
Said one leasing director for a major apparel chain, “We now have so much more to choose from. No way, are we going into malls; but because there are so many more opportunities coming to us out there, and the rents are so low, we’re able to expand at a much greater rate than we anticipated. We’re locking in those low rents now, and will be in a much better position in one or two years when the industry gets back to normal.”
Speed Dating
The main purpose of the two-day session was dealmaking, with several hundred booths set up mainly by landlords, brokers, and tenants for the Thursday session. The day before, though, there were a number of workshops and panels on various topics of interest to early arrivals. The best attended and popular was the called Speed Dating, where some 19 retailers held court at individual tables, explained who they were, the demographics of their markets, size of stores, and what they were looking for in new locations, handed out fact sheets and exchanged business cards. Among those were Chipotle, Great Clips, Ikea, Subway, Panda Express, and a number of local supermarkets.
After a few minutes, the presenters stayed in place and the landlords went on to another table and took some more notes.
It was something, said owner-developers and brokers who participated, and certainly “better than nothing. But it was still,” said one hungry landlord, “like having a nibble at a banquet. Still it gives us something to work with. And, we’re dealmakers, which means we have to always look on the positive.”
P.S.---One sad note, which brought back so many memories to us old farts in Philly: the passing of Mel Simon, one of the stalwarts in the industry, a hard-driving, fun guy, and with Herb and Fred built a great company. Here’s to ya!
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.
Thursday, September 10, 2009
With Leverage Finally On The Side Of Tenants, How Are Landlords Reacting?
Strolling the Agora column from the September 14 special issue of SHOPPING CENTER DIGEST
As long as this shopping center/retail chain industry has been around—at least for the last 40-some years—the leverage at the negotiating table has been overwhelmingly with the owner-developers. That is until this massive recession hit, new development came almost to a standstill, and vacancies from the smallest strip to the biggest mall began to go through the roof (pun intended).
Tenants, and it’s not just the discount/dollar stores, the fast food and restaurant chains, the sporting goods operators or electronics retailers still in business, or the teen-oriented specialty chains that are taking advantage of this new-found power. It has spilled over to regional operators, Mom and Pops, temporary retailers, innovative merchants wanting to test new concepts and markets, and even those not normally interested in locating in a shopping center but lured by rock-bottom rents, central location, and numerous other reasons and concessions. Franchising is a big source of potential retailers as numerous operators eye entrepreneurs as likely partners due to their access to off-shore financial markets.
Oh sure, some may contend the landlords never had overwhelming muscle when it came to striking a deal, because they “really needed that anchor, or that dominant retailer, or that high-prestige fashion plate” to make the project happen. And there’s a lot to be said for the need by high-profile merchants to have some say in how the center or mall is marketed, or what other retailers would be permitted in, and what prime locations they would have.
Heavyweights Of The Past
This is behind the retail heavyweights of the past, such as Sears or May Stores or Dayton-Hudson for malls, or Giant Foods, Acme Stores, Safeway Stores or Gamble-Skogmo for grocery-anchored strips, establishing their own development divisions. Or why discounters like Wal-Mart or Kmart designated operators in key markets to be their prime developers.It was all done to protect their substantial financial investment and to be able to control their destiny within the shopping center.
These were the exceptions. In most instances, the landlord set the rules and Triple-A or national tenants got the best deals, the earlier they signed the better; they were necessary to hit that 70% of signed leases to obtain financing, but they still had little, real bargaining power. And the other retailers provided most of the profit for the project. With the surge to the formation of REITs and the creation of behemoth landlords, the balance was tipped even more to the side of the owner-developers.
Now, pointing to the depressed economy and declining retail sales and profits that have caused many competitors to close up, the remaining merchants still in business and looking for locations are relishing this change of fortune. A cliché: “In the country of the blind, the one-eyed man is king.” A viable tenant who used to open 50 stores annually and is now looking only for 20 when others aren’t ‘open to buy’ has a lot of muscle.
So rent reductions, and fixture allowances, and “finished stores” and dozens of other demands that a few years ago would cause a landlord to ask for a sanity hearing, are now part of the opening gambit in negotiations.
How The Landlords React
So, how is the landlord, more used to a “take it or leave it” approach reacting to this? How is he and his leasing representatives working to turn the tide and make those deals that will keep the tenant list filled and the shopping center viable?
Among the first steps is getting existing tenants to renew, which both sides are agreeable to, with rent reductions, tenant improvements, reducing operating hours, co-tenancy clauses, and numerous other concessions and details being hammered out.
With many empty big-box stores and prime locations going dark, landlords are eager to fill the gaps with almost any tenant offering a basic rent. This is why many of these locations are going to “pop up” stores, temporary and specialty tenants, salvage grocers, kiosk-oriented tenants, retailers looking to test new concepts and new markets, deals with permanent chains offering very short-term leases of two or three years, permitting “kickouts,” percentage rents, finished stores, etc., etc.
An interesting trend is that many discounters, home improvement chains, ethnic-oriented merchants, even dollar stores, are willing to take a risk on major downtown locations in large cities they usually ignored, cities like New York, Chicago, Miami, Los Angeles, Portland, Dallas.
In essence, on the table are any concessions a viable tenant is willing to ask for. And many times, to their surprise, they are being accepted by landlords.
They are eager add medical and dental offices, schools, libraries, municipal agencies, to try new concepts, such as water slides or indoor go kart tracks in place of empty “canyons,” nearly-new shops, pawn shops, and they may even look the other way when merchandise edges out into the common area—unless there’s a strong complaint from a retail neighbor.
Hoping For A Turnaround
Many in the shopping center/retail community are optimistic that there will be a turnaround next year, with the most cautious not expecting it until the second half of 2010. As reasons for their optimism, they point to more positive financial results from key retailers, polls showing a rise in consumer confidence, improvements in numbers from Wall Street, drops in the increases of jobs lost, rising home prices in some areas around the country, and the like.
Though back-to-school was not a great success for the majority of tenants, some were gratified with better-than-expected sales. However, all mavens are holding their breath awaiting sales figures for the most important selling season of all, November-December holiday sales.
No matter what their expectations and plans are now, all can change if those few weeks produce dismal results. However, if sales improve and are better than expected, the optimism may spill and result in more leasing and development deals from early 2010 and beyond.
It may take years though, many contend, before all the current empty stores are filled and a big push for new development and shopping center expansion swings leverage back to the side of the landlord.
More information on the twice-monthly SHOPPING CENTER DIGEST and our associate publications, EXPANDING RETAILERS and DIRECTORY OF MAJOR, may be obtained from our website, www.shoppingcenters.com .
As long as this shopping center/retail chain industry has been around—at least for the last 40-some years—the leverage at the negotiating table has been overwhelmingly with the owner-developers. That is until this massive recession hit, new development came almost to a standstill, and vacancies from the smallest strip to the biggest mall began to go through the roof (pun intended).
Tenants, and it’s not just the discount/dollar stores, the fast food and restaurant chains, the sporting goods operators or electronics retailers still in business, or the teen-oriented specialty chains that are taking advantage of this new-found power. It has spilled over to regional operators, Mom and Pops, temporary retailers, innovative merchants wanting to test new concepts and markets, and even those not normally interested in locating in a shopping center but lured by rock-bottom rents, central location, and numerous other reasons and concessions. Franchising is a big source of potential retailers as numerous operators eye entrepreneurs as likely partners due to their access to off-shore financial markets.
Oh sure, some may contend the landlords never had overwhelming muscle when it came to striking a deal, because they “really needed that anchor, or that dominant retailer, or that high-prestige fashion plate” to make the project happen. And there’s a lot to be said for the need by high-profile merchants to have some say in how the center or mall is marketed, or what other retailers would be permitted in, and what prime locations they would have.
Heavyweights Of The Past
This is behind the retail heavyweights of the past, such as Sears or May Stores or Dayton-Hudson for malls, or Giant Foods, Acme Stores, Safeway Stores or Gamble-Skogmo for grocery-anchored strips, establishing their own development divisions. Or why discounters like Wal-Mart or Kmart designated operators in key markets to be their prime developers.It was all done to protect their substantial financial investment and to be able to control their destiny within the shopping center.
These were the exceptions. In most instances, the landlord set the rules and Triple-A or national tenants got the best deals, the earlier they signed the better; they were necessary to hit that 70% of signed leases to obtain financing, but they still had little, real bargaining power. And the other retailers provided most of the profit for the project. With the surge to the formation of REITs and the creation of behemoth landlords, the balance was tipped even more to the side of the owner-developers.
Now, pointing to the depressed economy and declining retail sales and profits that have caused many competitors to close up, the remaining merchants still in business and looking for locations are relishing this change of fortune. A cliché: “In the country of the blind, the one-eyed man is king.” A viable tenant who used to open 50 stores annually and is now looking only for 20 when others aren’t ‘open to buy’ has a lot of muscle.
So rent reductions, and fixture allowances, and “finished stores” and dozens of other demands that a few years ago would cause a landlord to ask for a sanity hearing, are now part of the opening gambit in negotiations.
How The Landlords React
So, how is the landlord, more used to a “take it or leave it” approach reacting to this? How is he and his leasing representatives working to turn the tide and make those deals that will keep the tenant list filled and the shopping center viable?
Among the first steps is getting existing tenants to renew, which both sides are agreeable to, with rent reductions, tenant improvements, reducing operating hours, co-tenancy clauses, and numerous other concessions and details being hammered out.
With many empty big-box stores and prime locations going dark, landlords are eager to fill the gaps with almost any tenant offering a basic rent. This is why many of these locations are going to “pop up” stores, temporary and specialty tenants, salvage grocers, kiosk-oriented tenants, retailers looking to test new concepts and new markets, deals with permanent chains offering very short-term leases of two or three years, permitting “kickouts,” percentage rents, finished stores, etc., etc.
An interesting trend is that many discounters, home improvement chains, ethnic-oriented merchants, even dollar stores, are willing to take a risk on major downtown locations in large cities they usually ignored, cities like New York, Chicago, Miami, Los Angeles, Portland, Dallas.
In essence, on the table are any concessions a viable tenant is willing to ask for. And many times, to their surprise, they are being accepted by landlords.
They are eager add medical and dental offices, schools, libraries, municipal agencies, to try new concepts, such as water slides or indoor go kart tracks in place of empty “canyons,” nearly-new shops, pawn shops, and they may even look the other way when merchandise edges out into the common area—unless there’s a strong complaint from a retail neighbor.
Hoping For A Turnaround
Many in the shopping center/retail community are optimistic that there will be a turnaround next year, with the most cautious not expecting it until the second half of 2010. As reasons for their optimism, they point to more positive financial results from key retailers, polls showing a rise in consumer confidence, improvements in numbers from Wall Street, drops in the increases of jobs lost, rising home prices in some areas around the country, and the like.
Though back-to-school was not a great success for the majority of tenants, some were gratified with better-than-expected sales. However, all mavens are holding their breath awaiting sales figures for the most important selling season of all, November-December holiday sales.
No matter what their expectations and plans are now, all can change if those few weeks produce dismal results. However, if sales improve and are better than expected, the optimism may spill and result in more leasing and development deals from early 2010 and beyond.
It may take years though, many contend, before all the current empty stores are filled and a big push for new development and shopping center expansion swings leverage back to the side of the landlord.
More information on the twice-monthly SHOPPING CENTER DIGEST and our associate publications, EXPANDING RETAILERS and DIRECTORY OF MAJOR, may be obtained from our website, www.shoppingcenters.com .
Monday, August 24, 2009
The Fine Points Of Finance That Are Driving This Industry
Strolling the Agora column for August 17, 2009 issue of SHOPPING CENTER DIGEST
In broad strokes, I can understand only some of the financial workings that have been driving this industry for so long—certainly not the fine points--and I’m somewhat comfortable with that. Though there are times I wish I had the expertise and understanding of Milt Cooper, who led Kimco and the landlords of this industry into the REIT market in ’91, rescuing it from the lack of funding that was crippling development and growth.
There’s no doubt that we may be heading into a similar situation dealing with money now --though slightly different. According to First American CoreLogic, “almost $165 billion in U.S. commercial real estate loans will mature this year and need to be sold or refinanced as rents and occupancies fall…”
Also, according to the index developed by MIT’s Institute of Technology Center for Real Estate, there has been an increase in commercial sales, but also a record drop of 22% on the price sold by institutional investors.
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. There have been numerous new companies or divisions formed by savvy investors and private equity companies to acquire distressed properties, but with few actual large deals being made, and there are many confusing signposts out there.
Extend Rather Than Sell
One financial maven said “we’re seeing lenders generally extending their loans when possible to avoid having to sell properties at current low prices and into a market where potential buyers are having difficulty arranging new financing.”
Sure, it was just announced that Cadillac Fairview Corp (owned by Ontario Teachers’ Pension Plan, is paying Macerich Co $150 million for 49% of its very successful Queens Center, and its $342 million mortgage; this is the first of three joint ventures by Macerich to cut its $7.9 billion debt by $1 or $2 billion within two or three years. And earlier this year Simon Property Group sold $1.7 billion in stock, and numerous others--Forest City, CBL, Kimco, etc., etc.—have put themselves into a more comfortable financial position by reducing their debt. Thus far, General Growth Properties is the only major developer that was forced into bankruptcy when it couldn’t re-finance and control its debt.
It’s interesting how GGP’s troubles have impacted on statistics for our industry. Delinquency rates for securitized mortgages on shopping malls fell in July to 4% from 5.9% a month earlier. Mainly, according to debt-rating firm Realpoint LLC, because the landlord resumed paying interest on several of its delinquent mortgages after filing for bankruptcy in April. In June, GGP accounted for 43% of delinquent mortgages in retail; in July, that shrank to 18%.
Not Looking To Wall Street
Now, if you listen to the pronouncements, some shopping center developers won’t be looking any longer to Wall Street for funding, at least for the time being. Kimco, said CFO Michael Pappagallo, will not “look to the equity market to bail us out. I don’t think our investors are going to keep buying into massively dilutive equity issuances solely to pay down debt.”
He continued: “Down the road, there will be circumstances where value-creating shopping center opportunities will be available. Issuing equity at that point would make sense if our price and” returns supported such a transaction.
Then there’s Equity One, stating that there weren’t too many bargain real estate deals out there, saying it’s shifting its focus from property purchases to manage existing properties and paying down debt. And Regency Centers also says it will avoid debt and will be cautious on acquisitions.
Financial advisor Ernst & Young released a recent survey finding that though 53% of its respondents had acquired non-performing properties or loans in the last 18 months, 45% of those who have not believe it’s too early to even attempt to purchase distressed properties or loans.
So, essentially, large acquisitions and mergers may not be happening for a while, at least regarding shopping centers and real estate. As for residential, PennyMac Mortgage Investment Trust—founded by former execs at infamous Countrywide Financial Corp—was able to raise only $335 million from the hoped-for $700 million IPO it announced in May.
Then, The Tenants
But then, on the other side of the negotiating table, are the tenants.
Among its annual list of Hot 100 Retailers, said STORES magazine, 7 of the top 10 earned that position through acquisition, rather than growing “organically” through opening new stores; to be eligible, the chains had to have at least $300 million in annual sales.
Those that had impressive boosts through opening stores and increasing its revenue from its units were American Apparel, ranked No. 2, with a sales jump of 57.6% through organic growth; Apple Stores, ranked No. 5, increased its sales by 46%; and the third retailer was jeweler Finlay Enterprises, No. 8 (Bailey Banks & Biddle, Carlyle, and Congress jewelry stores). [Interesting commentary on this last: Finley has just filed for Chapter 11 and plans an auction to sell its business and assets].
Leading this Hot list is DineEquity, formed by the merger of Applebee’s and IHOP. And the supermarket mergers, Susser Holdings (Town & Country and Village Market) No. 3, A&P (acquisition of Pathmark) No. 4; Wendy’s/Arby’s (No. 6).
Granted, there have been many instances over the last year of household names disappearing from the list of tenants in our shopping centers. Some of these brands may live again as internet retailers, or as a division of another mainstream retailer: Goody’s and Sharper Image, for example.
And then, there may be more acquisitions and mergers and investors on the horizon for successful retailers. Several financial mavens have said that Kohlberg Kravis Roberts, a leading private equity company, is considering an IPO to take Dollar General public. Also, Irving Place Capital Management, parent of, Vitamin Shoppe said it plans to raise $143.8 million from an IPO to double the number of its stores, now at 425.
And jvs are still being considered by owners of malls and other shopping centers. Macerich, for example, expects to announce one or two more agreements with institutional investors within a month or two, and says it will receive more than $500 million from investors for the year.
So even if many dealmakers say there’s isn’t that much leasing and developing taking place, never let it be said that there isn’t any activity going on in this industry.
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.
In broad strokes, I can understand only some of the financial workings that have been driving this industry for so long—certainly not the fine points--and I’m somewhat comfortable with that. Though there are times I wish I had the expertise and understanding of Milt Cooper, who led Kimco and the landlords of this industry into the REIT market in ’91, rescuing it from the lack of funding that was crippling development and growth.
There’s no doubt that we may be heading into a similar situation dealing with money now --though slightly different. According to First American CoreLogic, “almost $165 billion in U.S. commercial real estate loans will mature this year and need to be sold or refinanced as rents and occupancies fall…”
Also, according to the index developed by MIT’s Institute of Technology Center for Real Estate, there has been an increase in commercial sales, but also a record drop of 22% on the price sold by institutional investors.
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. There have been numerous new companies or divisions formed by savvy investors and private equity companies to acquire distressed properties, but with few actual large deals being made, and there are many confusing signposts out there.
Extend Rather Than Sell
One financial maven said “we’re seeing lenders generally extending their loans when possible to avoid having to sell properties at current low prices and into a market where potential buyers are having difficulty arranging new financing.”
Sure, it was just announced that Cadillac Fairview Corp (owned by Ontario Teachers’ Pension Plan, is paying Macerich Co $150 million for 49% of its very successful Queens Center, and its $342 million mortgage; this is the first of three joint ventures by Macerich to cut its $7.9 billion debt by $1 or $2 billion within two or three years. And earlier this year Simon Property Group sold $1.7 billion in stock, and numerous others--Forest City, CBL, Kimco, etc., etc.—have put themselves into a more comfortable financial position by reducing their debt. Thus far, General Growth Properties is the only major developer that was forced into bankruptcy when it couldn’t re-finance and control its debt.
It’s interesting how GGP’s troubles have impacted on statistics for our industry. Delinquency rates for securitized mortgages on shopping malls fell in July to 4% from 5.9% a month earlier. Mainly, according to debt-rating firm Realpoint LLC, because the landlord resumed paying interest on several of its delinquent mortgages after filing for bankruptcy in April. In June, GGP accounted for 43% of delinquent mortgages in retail; in July, that shrank to 18%.
Not Looking To Wall Street
Now, if you listen to the pronouncements, some shopping center developers won’t be looking any longer to Wall Street for funding, at least for the time being. Kimco, said CFO Michael Pappagallo, will not “look to the equity market to bail us out. I don’t think our investors are going to keep buying into massively dilutive equity issuances solely to pay down debt.”
He continued: “Down the road, there will be circumstances where value-creating shopping center opportunities will be available. Issuing equity at that point would make sense if our price and” returns supported such a transaction.
Then there’s Equity One, stating that there weren’t too many bargain real estate deals out there, saying it’s shifting its focus from property purchases to manage existing properties and paying down debt. And Regency Centers also says it will avoid debt and will be cautious on acquisitions.
Financial advisor Ernst & Young released a recent survey finding that though 53% of its respondents had acquired non-performing properties or loans in the last 18 months, 45% of those who have not believe it’s too early to even attempt to purchase distressed properties or loans.
So, essentially, large acquisitions and mergers may not be happening for a while, at least regarding shopping centers and real estate. As for residential, PennyMac Mortgage Investment Trust—founded by former execs at infamous Countrywide Financial Corp—was able to raise only $335 million from the hoped-for $700 million IPO it announced in May.
Then, The Tenants
But then, on the other side of the negotiating table, are the tenants.
Among its annual list of Hot 100 Retailers, said STORES magazine, 7 of the top 10 earned that position through acquisition, rather than growing “organically” through opening new stores; to be eligible, the chains had to have at least $300 million in annual sales.
Those that had impressive boosts through opening stores and increasing its revenue from its units were American Apparel, ranked No. 2, with a sales jump of 57.6% through organic growth; Apple Stores, ranked No. 5, increased its sales by 46%; and the third retailer was jeweler Finlay Enterprises, No. 8 (Bailey Banks & Biddle, Carlyle, and Congress jewelry stores). [Interesting commentary on this last: Finley has just filed for Chapter 11 and plans an auction to sell its business and assets].
Leading this Hot list is DineEquity, formed by the merger of Applebee’s and IHOP. And the supermarket mergers, Susser Holdings (Town & Country and Village Market) No. 3, A&P (acquisition of Pathmark) No. 4; Wendy’s/Arby’s (No. 6).
Granted, there have been many instances over the last year of household names disappearing from the list of tenants in our shopping centers. Some of these brands may live again as internet retailers, or as a division of another mainstream retailer: Goody’s and Sharper Image, for example.
And then, there may be more acquisitions and mergers and investors on the horizon for successful retailers. Several financial mavens have said that Kohlberg Kravis Roberts, a leading private equity company, is considering an IPO to take Dollar General public. Also, Irving Place Capital Management, parent of, Vitamin Shoppe said it plans to raise $143.8 million from an IPO to double the number of its stores, now at 425.
And jvs are still being considered by owners of malls and other shopping centers. Macerich, for example, expects to announce one or two more agreements with institutional investors within a month or two, and says it will receive more than $500 million from investors for the year.
So even if many dealmakers say there’s isn’t that much leasing and developing taking place, never let it be said that there isn’t any activity going on in this industry.
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.
Monday, August 3, 2009
"Running Like Crazy And Trying To Stay In The Same Place," Is How Some Dealmakers Describe Their Efforts To Fill Ever-Growing Vacancies In Centers
Strolling the Agora column for the August 3, 2009 Issue of SHOPPING CENTER DIGEST
“You know,” a top real estate executive with a major owner-developer of shopping centers told me, “it’s as if I were a tiny hamster racing around one of those wheels in a cage. I’m going like crazy and at the end of all that rushing and running I’m still in the same place—if I’m lucky.”
What he was referring to was that most of his efforts and energy are being spent re-negotiating existing deals--trying to find new ways to retain tenants, preventing them from closing stores and contributing to the ever-growing increase of vacancies in his shopping centers—than prospecting for new tenants. “And trying to locate new retailers to fill the holes… we’re trying, but it’s very difficult to tell our story to them, or their reps, if we don’t already have a relationship with them. There aren’t enough hours in the day for that.”
This struck very close to home last week when I was discussing the reasons why a high-end, specialty retailer had not renewed her subscription to Shopping Center Digest. “We’ve been told by the home office to cut all expenses,” she said, “and why do I need a publication about new shopping centers or expansions when so little is happening now. And I’m besieged with offers of great locations and great, new deals by my current landlords and people I’ve never done business with?
“However,” she added, “when developers start building and expanding malls, and I need that information before my competitors, we’ll be back.”
Nick Lillo of SLF Associates, who specializes in restaurant leasing in malls and life-style centers, admitted that “…but for a very precious few, our business remains in limbo…requests for rent relief, closings, cautious lease renewals with operating ‘safe bailout contingencies’, are the talk of the day.”
Landlords Being Realistic
Paul Fetscher of Great American Brokerage, another dealmaker specializing in the restaurant niche, is making some new deals. “Fortunately,” he said, “I am spending plenty of time with active franchisees…and landlords willing to be realistic and those who realize that yesterday’s rents weren’t the real rents—are coming to the table and willing to cut reasonable deals.”
A veteran leasing professional with a national apparel chain explained that with the slowdown in his company’s growth plans, “we’re focusing primarily on leases coming up for renewal in the next three years. This enables us to offer an early renewal to the landlord in return for reductions. It helps with making the process a bit less contentious.”
With so many big box stores going dark because of the disappearance of Circuit City, Linen ‘n Things, Comp USA, numerous department store anchors, category killers, etc., etc., many landlords fear that excessive percentage of vacancies could trigger other tenants from using their co-tenancy clauses as a reason to close their stores. This is part of the reason why, as we mentioned at the end of last year, some key retailers were being allowed to remain in their locations by paying only percentage rent, or in some cases, without paying any rent.
But many of these vacant stores, a leading broker stressed, “are ideal locations for value-oriented, expansion-minded retailers like T.J.Maxx, Kohl’s, Target, Home Depot, Lowe’s, Babies R Us, numerous supermarket chains, and the like.”
Opportunities Not Available Before
Which is an important reason, said Lillo, “for new space being negotiated on an entirely different, much lower ‘sales pro-forma’ base than even one year ago…reduced hours of operation, fixed pricing, ‘smaller plates’…all now a big part of our new playing field to lure customers back. Burgers, Wings, the QSR are now being given opportunities in locations, shopping centers that would have been impossible only a year ago.”
Among the brands he expects to “lead the charge back into the light…[are such moderate-priced, family friendly operators as “Darden, Cheesecake, CPK, Changs, Bravo, Brinker, B.J’s…”
One VP with an apparel chain echoed the comments about landlords becoming more reasonable in their demands: “In the past year or so, I haven’t lost a deal to a competitor who was willing to pay more—and it’s not because we’re stretching our maximums. We’ve also been able to lower our rent as a percentage of sales, down to single digits in a few instances.”
Another national tenant said part of the reason for his company’s slowdown of new development is due to the lack of financing which have delayed or killed some projects, or landlords are reluctant or not able to provide “sizable tenant allowances we have become accustomed to…”
Despite all the doom and gloom we’re hearing today, it is far from all negative, with numerous dealmakers seeing future opportunities on the horizon.
The retailers with vision, said a national consultant, are the ones taking advantage of the current economy and willing to make great deals now. “Spaces aren’t going to ‘The Greater Fool’…They are going to those who are willing to step forward in this market. I haven’t spoken to anyone who doesn’t believe that in the next decade, we will have numerous years of prosperity. So let’s lock in a good deal today and lock in those rents!”
More information on SHOPPING CENTER DIGEST, and our associate publications, EXPANDING RETAILERS and the DIRECTORY OF MAJOR MALLS may be obtained from our website, www.shoppingcenters.com.
“You know,” a top real estate executive with a major owner-developer of shopping centers told me, “it’s as if I were a tiny hamster racing around one of those wheels in a cage. I’m going like crazy and at the end of all that rushing and running I’m still in the same place—if I’m lucky.”
What he was referring to was that most of his efforts and energy are being spent re-negotiating existing deals--trying to find new ways to retain tenants, preventing them from closing stores and contributing to the ever-growing increase of vacancies in his shopping centers—than prospecting for new tenants. “And trying to locate new retailers to fill the holes… we’re trying, but it’s very difficult to tell our story to them, or their reps, if we don’t already have a relationship with them. There aren’t enough hours in the day for that.”
This struck very close to home last week when I was discussing the reasons why a high-end, specialty retailer had not renewed her subscription to Shopping Center Digest. “We’ve been told by the home office to cut all expenses,” she said, “and why do I need a publication about new shopping centers or expansions when so little is happening now. And I’m besieged with offers of great locations and great, new deals by my current landlords and people I’ve never done business with?
“However,” she added, “when developers start building and expanding malls, and I need that information before my competitors, we’ll be back.”
Nick Lillo of SLF Associates, who specializes in restaurant leasing in malls and life-style centers, admitted that “…but for a very precious few, our business remains in limbo…requests for rent relief, closings, cautious lease renewals with operating ‘safe bailout contingencies’, are the talk of the day.”
Landlords Being Realistic
Paul Fetscher of Great American Brokerage, another dealmaker specializing in the restaurant niche, is making some new deals. “Fortunately,” he said, “I am spending plenty of time with active franchisees…and landlords willing to be realistic and those who realize that yesterday’s rents weren’t the real rents—are coming to the table and willing to cut reasonable deals.”
A veteran leasing professional with a national apparel chain explained that with the slowdown in his company’s growth plans, “we’re focusing primarily on leases coming up for renewal in the next three years. This enables us to offer an early renewal to the landlord in return for reductions. It helps with making the process a bit less contentious.”
With so many big box stores going dark because of the disappearance of Circuit City, Linen ‘n Things, Comp USA, numerous department store anchors, category killers, etc., etc., many landlords fear that excessive percentage of vacancies could trigger other tenants from using their co-tenancy clauses as a reason to close their stores. This is part of the reason why, as we mentioned at the end of last year, some key retailers were being allowed to remain in their locations by paying only percentage rent, or in some cases, without paying any rent.
But many of these vacant stores, a leading broker stressed, “are ideal locations for value-oriented, expansion-minded retailers like T.J.Maxx, Kohl’s, Target, Home Depot, Lowe’s, Babies R Us, numerous supermarket chains, and the like.”
Opportunities Not Available Before
Which is an important reason, said Lillo, “for new space being negotiated on an entirely different, much lower ‘sales pro-forma’ base than even one year ago…reduced hours of operation, fixed pricing, ‘smaller plates’…all now a big part of our new playing field to lure customers back. Burgers, Wings, the QSR are now being given opportunities in locations, shopping centers that would have been impossible only a year ago.”
Among the brands he expects to “lead the charge back into the light…[are such moderate-priced, family friendly operators as “Darden, Cheesecake, CPK, Changs, Bravo, Brinker, B.J’s…”
One VP with an apparel chain echoed the comments about landlords becoming more reasonable in their demands: “In the past year or so, I haven’t lost a deal to a competitor who was willing to pay more—and it’s not because we’re stretching our maximums. We’ve also been able to lower our rent as a percentage of sales, down to single digits in a few instances.”
Another national tenant said part of the reason for his company’s slowdown of new development is due to the lack of financing which have delayed or killed some projects, or landlords are reluctant or not able to provide “sizable tenant allowances we have become accustomed to…”
Despite all the doom and gloom we’re hearing today, it is far from all negative, with numerous dealmakers seeing future opportunities on the horizon.
The retailers with vision, said a national consultant, are the ones taking advantage of the current economy and willing to make great deals now. “Spaces aren’t going to ‘The Greater Fool’…They are going to those who are willing to step forward in this market. I haven’t spoken to anyone who doesn’t believe that in the next decade, we will have numerous years of prosperity. So let’s lock in a good deal today and lock in those rents!”
More information on SHOPPING CENTER DIGEST, and our associate publications, EXPANDING RETAILERS and the DIRECTORY OF MAJOR MALLS may be obtained from our website, www.shoppingcenters.com.
Wednesday, July 22, 2009
Though Many Are Directing Their Expansion Offshore, They And Many Others Are Preparing For Major Growth in the U.S. and Canada
Strolling the Agora column for the July 20 edition of SHOPPING CENTER DIGEST
For months now, we and a multitude of very experienced people in the real estate industry have been directing our attentions to high-profile activity offshore—especially those larger landlords and tenants with the financial capabilities to grow and expand their brands. No question, it was a lot sexier to talk of building in China, Brazil, Russia, and the like--when we could all see that no new development or retail expansion of any note was taking place here--and that numerous projects announced just months ago have now been placed on the back burner.
Right now, the opportunities domestically have been limited due to the economic crisis, said these senior sages, consultants, investors and developers.
However, that does not mean that many of them are not now positioning themselves to take advantage of these falling values when “all the ducks line up.”
In fact, one investor, Tom Shapiro of Golden Tree InSite Partners, classifies the US as the new emerging market. Moody’s/REAL National All Property Type Aggregate Index states that the value of real estate domestically has dropped to levels not seen since September 2004. And others are predicting that these prices could be 50% off the values established just before the economy tanked.
The latest of the heavy-hitters entering this now crowded field is Vornado Realty, which expects to raise $1 billion to fund distressed real estate acquisitions in New York and Washington, DC.
Based on their record-breaking, positive performance over the second quarter, the larger, established REITS are expected to lead the way in aggressive acquisitions [Simon, Macerich, Developers Diversified, CBL]. Granted these funds with their returns of well over 100% have achieved these levels because they were among the hardest hit when stocks plummeted; but by refinancing and reducing their debt, they are now in a good position to buy for cash and avoid the trap of chasing properties using highly leveraged instruments.
And numerous others have formed new companies or divisions for this purpose. According to one marker, some $13 billion has already been raised in the stock market since March just for this purpose.
Financing new projects, said Simon Ziff of Ackman-Ziff Real Estate Group, is still a major challenge. Two years ago, he continued, the average loan his company made was $75 million; today it is $15 million, “and you have to go to 100 lenders to get a deal done.”
To this mix, now, add the foreign investors who are beginning to consider shopping centers ripe for investing and acquisitions, with most of their attention being directed at strips, mainly those that are anchored by financially sound, chain supermarkets, and with high occupancy rates.
The biggest obstacle right now, though, is that despite all the talk of substantial vacancies, foreclosures, distressed properties and the like, there really isn’t that much in the shopping center/retail industry that is available right now for these buyers-in-waiting. Lenders have been easing payment requirements to numerous strapped landlords, many through short-term extensions; but with increasing vacancies in these properties, and the rent decreases being demanded by retailers, landlords may still not be able to service these loans.
Many anticipate, therefore, that even these loans that have been re-negotiated may be in trouble unless the economy begins to pick up. The more conservative are estimating that it could take three years; most, however, are hopeful that activity will begin to improve later in the year or by early spring.
What most, however, are in agreement on is something we noted earlier (See Agora, May 11, 2009, P. J385): The landscape is changing and as it contracts more shopping centers will be controlled by fewer and larger owner-operators.
So, those with the cash are facing off against those who need it, and the question is who’s going to blink first? There’s little question that the more financially sound companies can afford to wait and have no reason to open their wallets until they think the price is right.
More information on Shopping Center Digest “The Locations Newsletter” and our associate publications, Expanding Retailers and the Directory of Major Malls, may be obtained from our website, www.shoppingcenters.com.
For months now, we and a multitude of very experienced people in the real estate industry have been directing our attentions to high-profile activity offshore—especially those larger landlords and tenants with the financial capabilities to grow and expand their brands. No question, it was a lot sexier to talk of building in China, Brazil, Russia, and the like--when we could all see that no new development or retail expansion of any note was taking place here--and that numerous projects announced just months ago have now been placed on the back burner.
Right now, the opportunities domestically have been limited due to the economic crisis, said these senior sages, consultants, investors and developers.
However, that does not mean that many of them are not now positioning themselves to take advantage of these falling values when “all the ducks line up.”
In fact, one investor, Tom Shapiro of Golden Tree InSite Partners, classifies the US as the new emerging market. Moody’s/REAL National All Property Type Aggregate Index states that the value of real estate domestically has dropped to levels not seen since September 2004. And others are predicting that these prices could be 50% off the values established just before the economy tanked.
The latest of the heavy-hitters entering this now crowded field is Vornado Realty, which expects to raise $1 billion to fund distressed real estate acquisitions in New York and Washington, DC.
Based on their record-breaking, positive performance over the second quarter, the larger, established REITS are expected to lead the way in aggressive acquisitions [Simon, Macerich, Developers Diversified, CBL]. Granted these funds with their returns of well over 100% have achieved these levels because they were among the hardest hit when stocks plummeted; but by refinancing and reducing their debt, they are now in a good position to buy for cash and avoid the trap of chasing properties using highly leveraged instruments.
And numerous others have formed new companies or divisions for this purpose. According to one marker, some $13 billion has already been raised in the stock market since March just for this purpose.
Financing new projects, said Simon Ziff of Ackman-Ziff Real Estate Group, is still a major challenge. Two years ago, he continued, the average loan his company made was $75 million; today it is $15 million, “and you have to go to 100 lenders to get a deal done.”
To this mix, now, add the foreign investors who are beginning to consider shopping centers ripe for investing and acquisitions, with most of their attention being directed at strips, mainly those that are anchored by financially sound, chain supermarkets, and with high occupancy rates.
The biggest obstacle right now, though, is that despite all the talk of substantial vacancies, foreclosures, distressed properties and the like, there really isn’t that much in the shopping center/retail industry that is available right now for these buyers-in-waiting. Lenders have been easing payment requirements to numerous strapped landlords, many through short-term extensions; but with increasing vacancies in these properties, and the rent decreases being demanded by retailers, landlords may still not be able to service these loans.
Many anticipate, therefore, that even these loans that have been re-negotiated may be in trouble unless the economy begins to pick up. The more conservative are estimating that it could take three years; most, however, are hopeful that activity will begin to improve later in the year or by early spring.
What most, however, are in agreement on is something we noted earlier (See Agora, May 11, 2009, P. J385): The landscape is changing and as it contracts more shopping centers will be controlled by fewer and larger owner-operators.
So, those with the cash are facing off against those who need it, and the question is who’s going to blink first? There’s little question that the more financially sound companies can afford to wait and have no reason to open their wallets until they think the price is right.
More information on Shopping Center Digest “The Locations Newsletter” and our associate publications, Expanding Retailers and the Directory of Major Malls, may be obtained from our website, www.shoppingcenters.com.
Monday, July 6, 2009
Cash Is King, As Dealmakers Say The Biggest Obstacle To Making A Deal Is The Lack Of Financing
This column of Strolling the Agora appears in the July 6 issue of Shopping Center Digest
Whether you want to build a shopping center or expand it, grow your retail empire by entering a new market or open another store or two, cash is king. Without it, forget it. Nothing new here. We’ve been hearing this refrain from many dealmakers around the country: “It’s the economy, stupid.”
It’s the main reason, for months now, dealmakers have been complaining about the lack of movement and deals are being frozen, even those that “were made” just recently at the Las Vegas RECon. And few of them are optimistic about the freeze lifting in the near future—though we are now in summer and there are many economists and mavens in and out of the administration who are pointing to positive signs.
“Even if there are some convincing signs,” said one investor, “these have not filtered down yet to commercial real estate such as shopping centers and retailing. First there has to be enough positive movement in other areas to be considered a trend, and that will have to take place primarily in a reduction in unemployment, and an uptick in residential values.”
The biggest obstacle to moving forward?
To Kenneth Roosth of Roosth Construction: “I am finding that Financing is the biggest hurdle right now.”
To Ira Meislik of Meislik & Meislik: “…the most common barrier is the inability to obtain financing. Principals are calculating ROIs based upon leverage, and it seems that the numbers don’t work without leverage.”
To Mary Farwell of Noteworthy Investments and Managemednt: “Financing, financing, financing. Working on now that is less than 50% LTV with perfect credit and clean environmental but they still have taken excessive time and, just today, hit my client with an extra point. Now is definitely the time to be creative in our financial side and specialize in exchanges, owner-finance, lease purchase, etc.”
In addition to financing problems, Alan Smith of Bourn Partners cites issues of co-tenancy, terminations, and the demand to "make it worth my while." And, "impact fees are raising the barrier as ...we are faced with $4.00 and to $5.00 of fees to obtain approvals from the municipalities."
One financial maven stressed that lenders are reluctant to lend without a strong cash flow and excellent sponsorship. “They are trying to make agreements more creative and more palatable, but they are becoming difficult for borrowers to accept. Some are putting points up front, or perhaps even trying to reduce the amount of the financing it is willing to provide.”
One national chain which has cut back on the number of new stores it plans to open this year attributes the decision to developers who have halted or delayed building plans. “We haven’t seen such a lack of new projects in 20 years,” he said.
“It’s hitting the smaller operators especially hard,” said another dealmaker, “especially those who have been using credit cards and have depended on long-standing credit lines to keep their business afloat. Some banks have arbitrarily cut back on these credit lines, especially over the last six or seven months.”
It’s much worse than in the early ‘90s when traditional financing “froze up completely,” said a senior dealmaker. “Then, to get the ball rolling, many turned to Wall Street and IPOs as owner-developers re-invented the REIT (real estate investment trust) industry, which had never established a foothold in the shopping center/retail chain industry, except for several owners of strip centers.
Some in the industry say REITs are expected to lead the rebound in commercial real estate, mainly because they have the ability raise money by selling securities; the IPOs are the example they cited when shopping centers became an important part of this niche. Such companies as Simon Property Group, Macerich and Kimco Real Estate have already re-financed much of their debt.
“Now,” he continued, “these landlords—and tenants—are directing their attention offshore where there are less hassles, easier deals, a more welcome environment, and the opportunity for joint ventures and partnerships.”
[We had discussed this in earlier columns, and the fact that some foreign investors—in development and in retailing--were beginning to fill the vacuum here by expanding into North America.]
Perhaps another deterrent to making a deal today can be the local laws, codes, zoning and the like, especially in those markets where retailing is considered to be saturated, and over-stored.
Said Jeffrey Evans of Intertech Design Services: “It seems as though tighter restrictions have been made on what is and what is not allowed in regards to signage and trade dress. Certainly I understand that there needs to be restrictions, but how far do companies need to go in diminishing their brand[?]”
It can be simplistic to base most of the gridlock on just one aspect, lack of funding. However, this is the main cause that many dealmakers point to.
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
Whether you want to build a shopping center or expand it, grow your retail empire by entering a new market or open another store or two, cash is king. Without it, forget it. Nothing new here. We’ve been hearing this refrain from many dealmakers around the country: “It’s the economy, stupid.”
It’s the main reason, for months now, dealmakers have been complaining about the lack of movement and deals are being frozen, even those that “were made” just recently at the Las Vegas RECon. And few of them are optimistic about the freeze lifting in the near future—though we are now in summer and there are many economists and mavens in and out of the administration who are pointing to positive signs.
“Even if there are some convincing signs,” said one investor, “these have not filtered down yet to commercial real estate such as shopping centers and retailing. First there has to be enough positive movement in other areas to be considered a trend, and that will have to take place primarily in a reduction in unemployment, and an uptick in residential values.”
The biggest obstacle to moving forward?
To Kenneth Roosth of Roosth Construction: “I am finding that Financing is the biggest hurdle right now.”
To Ira Meislik of Meislik & Meislik: “…the most common barrier is the inability to obtain financing. Principals are calculating ROIs based upon leverage, and it seems that the numbers don’t work without leverage.”
To Mary Farwell of Noteworthy Investments and Managemednt: “Financing, financing, financing. Working on now that is less than 50% LTV with perfect credit and clean environmental but they still have taken excessive time and, just today, hit my client with an extra point. Now is definitely the time to be creative in our financial side and specialize in exchanges, owner-finance, lease purchase, etc.”
In addition to financing problems, Alan Smith of Bourn Partners cites issues of co-tenancy, terminations, and the demand to "make it worth my while." And, "impact fees are raising the barrier as ...we are faced with $4.00 and to $5.00 of fees to obtain approvals from the municipalities."
One financial maven stressed that lenders are reluctant to lend without a strong cash flow and excellent sponsorship. “They are trying to make agreements more creative and more palatable, but they are becoming difficult for borrowers to accept. Some are putting points up front, or perhaps even trying to reduce the amount of the financing it is willing to provide.”
One national chain which has cut back on the number of new stores it plans to open this year attributes the decision to developers who have halted or delayed building plans. “We haven’t seen such a lack of new projects in 20 years,” he said.
“It’s hitting the smaller operators especially hard,” said another dealmaker, “especially those who have been using credit cards and have depended on long-standing credit lines to keep their business afloat. Some banks have arbitrarily cut back on these credit lines, especially over the last six or seven months.”
It’s much worse than in the early ‘90s when traditional financing “froze up completely,” said a senior dealmaker. “Then, to get the ball rolling, many turned to Wall Street and IPOs as owner-developers re-invented the REIT (real estate investment trust) industry, which had never established a foothold in the shopping center/retail chain industry, except for several owners of strip centers.
Some in the industry say REITs are expected to lead the rebound in commercial real estate, mainly because they have the ability raise money by selling securities; the IPOs are the example they cited when shopping centers became an important part of this niche. Such companies as Simon Property Group, Macerich and Kimco Real Estate have already re-financed much of their debt.
“Now,” he continued, “these landlords—and tenants—are directing their attention offshore where there are less hassles, easier deals, a more welcome environment, and the opportunity for joint ventures and partnerships.”
[We had discussed this in earlier columns, and the fact that some foreign investors—in development and in retailing--were beginning to fill the vacuum here by expanding into North America.]
Perhaps another deterrent to making a deal today can be the local laws, codes, zoning and the like, especially in those markets where retailing is considered to be saturated, and over-stored.
Said Jeffrey Evans of Intertech Design Services: “It seems as though tighter restrictions have been made on what is and what is not allowed in regards to signage and trade dress. Certainly I understand that there needs to be restrictions, but how far do companies need to go in diminishing their brand[?]”
It can be simplistic to base most of the gridlock on just one aspect, lack of funding. However, this is the main cause that many dealmakers point to.
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, June 18, 2009
The Reasons Why US And Canadian Developers And Retailers Are Expanding Into Foreign Markets
Strolling the Agora column for the June 22 issue of SHOPPING CENTER DIGEST.
For several years now, “civilians” ignorant of the industry or how it operates have been calling it dead in the US and Canada, and writing its obituary in newspapers, magazines, on television specials and on the internet. Especially that niche involving large malls. Meanwhile, we have continued to flourish and re-invent our projects with mixed-use developments, lifestyle centers, entertainment-oriented projects, hybrids, and the basic, ever-present strip center.
Now, with increasing vacancies reaching historic proportions here—resulting in liquidations and bankruptcies of major and minor retailers and developers—some solvent behemoths on both sides of the negotiating table are focusing on offshore, more fertile ground for new development and expansion.
China, India, Brazil, Dubai, South Korea, Russia, the Middle East, the Far East, Europe, in essence, any market or emerging/developing nation with a stable government, growing population and prosperity, whose welcoming arms offer joint ventures and attractive financing, are attracting North American landlords and tenants.
Why There Instead Of Here?
Why there instead of here? The easy responses are the clichés and platitudes that have become over-used in relation to the industry domestically: We’ve reached saturation. Over-building has resulted in duplication of goods and services. The internet has made it too easy to shop based on price, or made the shopping center redundant. Too much competition has destroyed opportunities for future growth. New developments face extensive public opposition, litigation, and excessive time and costs due to requirements for numerous layers of governmental approvals. Etc., etc. Sad to say, there’s more than a kernel of truth in much of this.
But the potential elsewhere? One report says more than 100 malls encompassing 30 million sq. ft. are to be built in India by the end of 2010. Though China has a population of 1.3 billion people with most of the per capita income at the poverty level, much of its growth is centered along the coastal regions where income and population are booming and a city of 1 million people is a small town. The stock index in the last three months has jumped 64% in India, 41% in Brazil, 37% in China, 80% in Russia. The largest department store in the world may very well be in South Korea, Shinsegae Centrum City, which covers some 3, 163,000 sq. ft..
Suzanne Gardent of PBW, Czech Republic, says “shopping malls are becoming a key feature in the retail panorama. Since the fall of communism over 250 shopping centers were built in the Czech Republic, with many of them now over 100 shops—this is huge for Central and Eastern Europe.”
Even though Czechs have a relatively low income, she says, “food and drinks are cheap…they still manage to spend a lot of it [income] on fashion clothes and girls especially are increasingly wearing the same garments as other Western girls…tax system in the Czech Republic is advantageous, and GDP per capita is growing…All that brings to interest to develop more shopping centers [here].”
International Profits Are Greater
Paul Fetscher of Great American Brokerage pointed out that chain restaurants are going international mostly as joint ventures or partnerships with established companies in those countries. “At TGIF, for example, its profits internationally are greater than that of all its domestic units combined.”
In China, said John Cirillo of Strategic Market Insites, “…the construction cranes over there are not for decorative purposes (as opposed to the ones I saw rusting in place in Las Vegas).
“A strong(er) economy, emerging middle/upper class households and a thirst for western brands are a few of the drivers for U.S. retailers to look east. Younger consumers in China are not as focused on saving like their parents; much like baby boomers outspent their depression era grandparents.”
Anil Suri with Inorbit Malls Cyberabad, said “there are around 400 Malls in India and the Number is likely to go up to 1000 soon.” In Mumbai malls work “because of the population and Mumbai is finance capital. Retailers & Developers are now targeting tier II and tier III cities because the potential is immense.”
Andrew King, who manages East Europe at Aston Worldwide, points to Poland’s rising economy and its stability “through European membership since 2004. [It has a] Transparent business environment with high level of international compliance,” citing “Government and EU incentives available to foreign companies for a range of business activities.”
Poland Is Highly Skilled, Educated
The population of 40 million, he says, is “highly skilled and educated, multi-lingual labour pool of over 2 million students [and] with low attrition rates.”
The reason for the push for foreign development “is simple,” according to Geok Ser Lee, International AssocAIA, RIBA, NZIA, LEED AP. “The emerging market there is as big if not larger than the US and Canada now and is growing exponentially as their purchasing grow[s] in tandem with high economic growth….the population of China’s middle class alone is the size of the US and is largely virgin territory with unsatisfied demands, high saving rate, well informed by global standard…They may represent a minute percentage of their total population but is a huge market in absolute term[s]…”
“The two main drivers for international expansion [from the retailer point of view],” said Thomas Naslund, strategic commercial advisor at Longship RE, are retaliation and brand upgrade. “…you need to fight your competitors on their own turf in order to make sure that your competitor can’t make excessive profits on their home market. Money that could be used against you on your own home market.” He cites “the Inditex (Zara)-H&M-fight in Spain and Sweden” as examples.
Also, Naslund states, “Most brands tend to go pricey when they cross borders. This brand upgrade would/could have a positive effect in your home market as well.” An example is the sticker many fashion retailers place on store fronts indicating stores in fashion cities “giving higher status to the shopper…”
"The companies are not so complicated," according to consultant Marco Federico Del Ponte. "If their domestic results in the last year don't register a growth, the only way to hope in better results is to invest and plan expansion in new markets. An example? Abercrombie! They are planning new european openings, but in US they are in stand-by.
"And it is the same for european companies/retailers,infact they are investing a lot in asian markets but not at home."
Hazards, Dangers On Horizon
The push to expand offshore, though, is replete with many dangers, experienced dealmakers stress.
Said Lee: “However, it is not a bed of roses and only those who are serious about helping [China] grow and plug into the global grid are rewarded handsomely.” Many have been successful, others have been harmed. “Simplistically speaking, half hearted attempts through sending in their second liners or pinching pennies when recruiting staff to lead their foray into these markets are the primary causes of their failures.”
“While demand is great [in China],” said Cirillo, “retailers need to be aware that Chinese consumers are sophisticated. U.S. firms that go over there resting on their brand awareness laurels will be in for disappointing sales.
“Many market sectors in first tier (Shanghai) and second tier (Hangzhou) cities are already over-stored…and some centers in working class trade areas have a much too upscale tenant mix.”
Joseph Wan, chief executive of London-based Harvey Nichols, is expanding through local partners in the Middle East, Russia and South America, but is avoiding Mainland China. He says 80% of the population is at the poverty level. “Leave the coastal regions and go inland and you’ll see very primitive conditions, with people struggling for access to electricity and hot water.” In the cities, rents are too high, though “mono-brands are doing well because they charge high margins and can absorb the high rents.”
This concern of areas being over-stored, was echoed by Suri regarding India, “especially in Mumbai there are too many malls and has reached a saturation point…Major real estate companies which were in residential and commercial development have stepped in mall business and a lot of local companies too…We will see a boom till 2012 and then consolidation will happen…”
Domestically, The Future Is Good
“Once the economy rebounds and the industry in the US and Canada recovers,” said one noted shopping center executive, “tenants and landlords have a bright future here. All the guidelines and economic signposts are positive.
“Leading foreign retailers are already seeking locations in our major cities and surrounding markets, especially now when rents are low and there is a push on to diversify the tenant lists in the higher-end markets,” he said.
“With an ever-growing domestic population in North America being forecasted by the census bureau and numerous think tanks—much of course do to second generation citizens reaching maturity and entering the workforce—a strong shopping center/retail industry must grow to meet their demand for goods and services.”
More information on Shopping Center Digest and our associate publications, Expanding Retailers and the Directory of Major Malls, may be obtained from our website, www.shoppingcenters.com .
For several years now, “civilians” ignorant of the industry or how it operates have been calling it dead in the US and Canada, and writing its obituary in newspapers, magazines, on television specials and on the internet. Especially that niche involving large malls. Meanwhile, we have continued to flourish and re-invent our projects with mixed-use developments, lifestyle centers, entertainment-oriented projects, hybrids, and the basic, ever-present strip center.
Now, with increasing vacancies reaching historic proportions here—resulting in liquidations and bankruptcies of major and minor retailers and developers—some solvent behemoths on both sides of the negotiating table are focusing on offshore, more fertile ground for new development and expansion.
China, India, Brazil, Dubai, South Korea, Russia, the Middle East, the Far East, Europe, in essence, any market or emerging/developing nation with a stable government, growing population and prosperity, whose welcoming arms offer joint ventures and attractive financing, are attracting North American landlords and tenants.
Why There Instead Of Here?
Why there instead of here? The easy responses are the clichés and platitudes that have become over-used in relation to the industry domestically: We’ve reached saturation. Over-building has resulted in duplication of goods and services. The internet has made it too easy to shop based on price, or made the shopping center redundant. Too much competition has destroyed opportunities for future growth. New developments face extensive public opposition, litigation, and excessive time and costs due to requirements for numerous layers of governmental approvals. Etc., etc. Sad to say, there’s more than a kernel of truth in much of this.
But the potential elsewhere? One report says more than 100 malls encompassing 30 million sq. ft. are to be built in India by the end of 2010. Though China has a population of 1.3 billion people with most of the per capita income at the poverty level, much of its growth is centered along the coastal regions where income and population are booming and a city of 1 million people is a small town. The stock index in the last three months has jumped 64% in India, 41% in Brazil, 37% in China, 80% in Russia. The largest department store in the world may very well be in South Korea, Shinsegae Centrum City, which covers some 3, 163,000 sq. ft..
Suzanne Gardent of PBW, Czech Republic, says “shopping malls are becoming a key feature in the retail panorama. Since the fall of communism over 250 shopping centers were built in the Czech Republic, with many of them now over 100 shops—this is huge for Central and Eastern Europe.”
Even though Czechs have a relatively low income, she says, “food and drinks are cheap…they still manage to spend a lot of it [income] on fashion clothes and girls especially are increasingly wearing the same garments as other Western girls…tax system in the Czech Republic is advantageous, and GDP per capita is growing…All that brings to interest to develop more shopping centers [here].”
International Profits Are Greater
Paul Fetscher of Great American Brokerage pointed out that chain restaurants are going international mostly as joint ventures or partnerships with established companies in those countries. “At TGIF, for example, its profits internationally are greater than that of all its domestic units combined.”
In China, said John Cirillo of Strategic Market Insites, “…the construction cranes over there are not for decorative purposes (as opposed to the ones I saw rusting in place in Las Vegas).
“A strong(er) economy, emerging middle/upper class households and a thirst for western brands are a few of the drivers for U.S. retailers to look east. Younger consumers in China are not as focused on saving like their parents; much like baby boomers outspent their depression era grandparents.”
Anil Suri with Inorbit Malls Cyberabad, said “there are around 400 Malls in India and the Number is likely to go up to 1000 soon.” In Mumbai malls work “because of the population and Mumbai is finance capital. Retailers & Developers are now targeting tier II and tier III cities because the potential is immense.”
Andrew King, who manages East Europe at Aston Worldwide, points to Poland’s rising economy and its stability “through European membership since 2004. [It has a] Transparent business environment with high level of international compliance,” citing “Government and EU incentives available to foreign companies for a range of business activities.”
Poland Is Highly Skilled, Educated
The population of 40 million, he says, is “highly skilled and educated, multi-lingual labour pool of over 2 million students [and] with low attrition rates.”
The reason for the push for foreign development “is simple,” according to Geok Ser Lee, International AssocAIA, RIBA, NZIA, LEED AP. “The emerging market there is as big if not larger than the US and Canada now and is growing exponentially as their purchasing grow[s] in tandem with high economic growth….the population of China’s middle class alone is the size of the US and is largely virgin territory with unsatisfied demands, high saving rate, well informed by global standard…They may represent a minute percentage of their total population but is a huge market in absolute term[s]…”
“The two main drivers for international expansion [from the retailer point of view],” said Thomas Naslund, strategic commercial advisor at Longship RE, are retaliation and brand upgrade. “…you need to fight your competitors on their own turf in order to make sure that your competitor can’t make excessive profits on their home market. Money that could be used against you on your own home market.” He cites “the Inditex (Zara)-H&M-fight in Spain and Sweden” as examples.
Also, Naslund states, “Most brands tend to go pricey when they cross borders. This brand upgrade would/could have a positive effect in your home market as well.” An example is the sticker many fashion retailers place on store fronts indicating stores in fashion cities “giving higher status to the shopper…”
"The companies are not so complicated," according to consultant Marco Federico Del Ponte. "If their domestic results in the last year don't register a growth, the only way to hope in better results is to invest and plan expansion in new markets. An example? Abercrombie! They are planning new european openings, but in US they are in stand-by.
"And it is the same for european companies/retailers,infact they are investing a lot in asian markets but not at home."
Hazards, Dangers On Horizon
The push to expand offshore, though, is replete with many dangers, experienced dealmakers stress.
Said Lee: “However, it is not a bed of roses and only those who are serious about helping [China] grow and plug into the global grid are rewarded handsomely.” Many have been successful, others have been harmed. “Simplistically speaking, half hearted attempts through sending in their second liners or pinching pennies when recruiting staff to lead their foray into these markets are the primary causes of their failures.”
“While demand is great [in China],” said Cirillo, “retailers need to be aware that Chinese consumers are sophisticated. U.S. firms that go over there resting on their brand awareness laurels will be in for disappointing sales.
“Many market sectors in first tier (Shanghai) and second tier (Hangzhou) cities are already over-stored…and some centers in working class trade areas have a much too upscale tenant mix.”
Joseph Wan, chief executive of London-based Harvey Nichols, is expanding through local partners in the Middle East, Russia and South America, but is avoiding Mainland China. He says 80% of the population is at the poverty level. “Leave the coastal regions and go inland and you’ll see very primitive conditions, with people struggling for access to electricity and hot water.” In the cities, rents are too high, though “mono-brands are doing well because they charge high margins and can absorb the high rents.”
This concern of areas being over-stored, was echoed by Suri regarding India, “especially in Mumbai there are too many malls and has reached a saturation point…Major real estate companies which were in residential and commercial development have stepped in mall business and a lot of local companies too…We will see a boom till 2012 and then consolidation will happen…”
Domestically, The Future Is Good
“Once the economy rebounds and the industry in the US and Canada recovers,” said one noted shopping center executive, “tenants and landlords have a bright future here. All the guidelines and economic signposts are positive.
“Leading foreign retailers are already seeking locations in our major cities and surrounding markets, especially now when rents are low and there is a push on to diversify the tenant lists in the higher-end markets,” he said.
“With an ever-growing domestic population in North America being forecasted by the census bureau and numerous think tanks—much of course do to second generation citizens reaching maturity and entering the workforce—a strong shopping center/retail industry must grow to meet their demand for goods and services.”
More information on Shopping Center Digest and our associate publications, Expanding Retailers and the Directory of Major Malls, may be obtained from our website, www.shoppingcenters.com .
Thursday, May 28, 2009
Money And Time Were The Driving Forces At ICSC's RECon In Las Vegas
This column of Strolling the Agora appears in the June 8 issue of Shopping Center Digest.
“The two driving forces at the ICSC RECon were money and time,” said Cuthbert as he brought to order the Dinosaur Chowder and Marching Society; the annual gathering of these seasoned veterans is held at the close of the Las Vegas event to gauge their reactions to the 4-day event. “Some of the heaviest hitters, domestic and offshore landlords and investors, have the dollars in hand to buy shopping centers and are patiently waiting until prices drop even more. Interest rates are low, but the banks are not lending.”
“In fact,” chimed in Banker Bob, “the lenders are playing a game called ‘Extend and Pretend.’ Let’s extend our current agreement and make believe we’re lending you money. And those wanting to sell their assets, still have an inflated idea as to what their properties are worth.”
“I concur,” said Dealer Dan. “I offered an owner $36 million straight cash for his mall, he wanted $40 mil, got another buyer for his price subject to financing, and the deal fell through when the buyer couldn’t get the money. The seller is calling me now.”
“Ditto here,” agreed Financing Fred. “I was negotiating on several centers, the owner is asking a cap rate of 8, I’m offering 10 ¼. The point is I’m in no rush. If he takes my offer, fine. If he doesn’t, also fine, I can afford to wait. And if the deal dies, I don’t especially care.”
“I’m representing a landlord,” said Consultant Carl, “who has all the approvals in place, and the main anchors lined up to start building the shopping center. He just bought the land for $15 million. And the bank will only lend him $1.5 million for construction. Ridiculous.”
Looking For C Malls
Leasing Larry said “I have a buyer with $50 mil who wants to buy C Malls. I met with a top exec at GGP (General Growth Properties) and they’re being very slow to sell some of their A projects. Look, I told him, you’re not going to get the price you want for those prime malls—especially since you’re trying to package them with some of the poorer properties. Why not take what you can for these projects that very few of the bigger players want? I’m waiting to hear back.”
“The point is,” said Cuthbert, “too many owners want to get out of their centers the money they have invested in brick, mortar, land and time. It doesn’t work that way. Value is based on ROI, and if they have substantial vacancies and tenants at below- market rents, it deteriorates the property. This industry has always operated on the Golden Rule: Them what has the gold makes the rules.”
After the initial flurry of experiences dealing with buying and selling, the consensus was that though the turnout may have been off by some 30 to even 50% from last year’s, it was still a very good dealmaking event for the large majority of those attending and those retailers still in the market to expand and open new stores and markets. Most of the retail deals were in the low-end of the spectrum, discount stores, dollar stores, fast food, supermarkets, and the like—very little high-end and for A malls.
“Ya know,” said Sassy Sue, “the crybabies stayed home and made it easier to maneuver around the Leasing Mall, in the hotel suites, and get things done. Because of the decreased time pressures, we were able to talk, build relationships, and go well beyond the ‘Here’s the deal, take it or leave it, and I got another appointment waiting outside.’ ”
A Growing Resentment
“I saw a growing resentment against Simon and Westfield,” said Cuthbert, “for moving out of the Leasing Mall into Caesar’s and Wynn’s, forcing dealmakers to waste precious time and money cabbing back and forth from the hotels to the Leasing Mall.”
“Oh, yeah,” said Angry Al. “I blew them off and refused to set up an appointment. Simon didn’t have any dealmakers at Caesar’s, only vice presidents. So I’m gonna sit down and talk while he takes notes to bring back to the guy I deal with, and gets the information garbled, and then I gotta waste time trying to straighten out the lack of communication? No way.”
“And the vacant areas created in all three halls by these developers backing out, by others who made booth commitments and then decided not to come, or the space that ICSC couldn’t lease,” said Cuthbert. “The empty spaces looked like a guy got hit in the mouth with a 2x4.”
“Also,” asked Querying Quentin, “what’s gonna happen next year if Simon and Westfield decide to come back into the Leasing Mall? Is ICSC gonna relocate Centro and CB Richard Ellis and the others who helped them out by taking over those prime locations? It wouldn’t be fair, and it wouldn’t be right. Or, suppose SPG and Westfield decide they don’t need RECon and the heavy costs and make their own arrangements? Remember when we had the convention in Toronto, the major developers didn’t like the facilities and moved their dealmaking activities to Inn on the Park and ICSC had to run shuttle buses to them? It took years to get them all back into the fold.”
“What could work,” said Reasonable Ruth, “is if they wanted to come back, they could be placed at the far end of the South Hall, just beyond the Trade Expo; that area was dying because of the lack of a heavy draw to attract dealmakers.”
“But,” said Tenant Tom, “the retailers on the second level were doing gangbusters, wall to wall people—even though some of it was caused by dealmakers lining up to get a free pretzel.”
“And many of the landlords in the North and Central Halls were complaining,” said Cuthbert, “because putting all those retailers only at the end of the South Hall drew traffic away from their leasing booths.”
Scheduled Appointments
“We’re missing the point,” said Senior Sam. “We’ve been operating for years now on scheduled appointments, whether it’s 15 minutes, 20 minutes, or a half-hour. There never has been much chance for drop-in traffic, so what difference does it make if there’s a crowd rushing down the corridor outside your booth? With this convention, so many left by Tuesday, that Wednesday was like a morgue, and there was very little chance to backtrack on missed appointments. Yeah, the dance cards were not completely filled and there was more time for meetings and real negotiating because of the smaller attendance. We all made deals, but if someone was willing to stand in line 10 minutes for a pretzel, he didn’t have much on his plate to begin with.”
“Perhaps,” said Halloween Harry, “but it felt damned good to now be besieged by landlords trying to make a deal. For years we were chasing developers trying to get locations for our retail stores, and couldn’t get a call back. We must have had over 700 business cards dropped off at our leasing booth the first two days. And we made our first deal for 2009 on October 12, 2008.”
Dealmakers reported a lot of activity by brokers trying to put a deal together, job hunters, and those entering into the new arena of consulting. “These last,” said Consulting Carl, “have to be patient. Most clients are taking longer and longer to pay those bills, instead of 30 days, sometimes 3 and 4 months. It’s best to insist on, at least, a token monthly retainer.”
And Then There’s China
“Hey, we can’t end this meeting without touching on the Far East,” said China Charlie, who has been based in Shanghai since July and heads up a division developing shopping centers on the mainland. “They made many mistakes in the past,” he said, “and my role is to help avoid future mistakes, bring US and Canadian retailers to China, and to incorporate Western and Eastern approaches into a successful operation.
“One thing US-trained dealmakers have to get used to is the difference in size,” he continued. “They have malls and mixed-use projects of 5 million sq. ft. A city with a population of 1 million people is considered a small town. I was offering a furniture retailer a store of 200,000 sq. ft. He said ‘I don’t think I can operate in that small a store. I have stores over 1 million sq. ft., and my smallest is 500,000 sq. ft.’”
“We can go on and on,” said Cuthbert, “telling stories and personal experiences. What we all agree on, though, is that this was one of the most interesting conventions we’ve had in a long time—not the busiest or the most successful by a wide margin. But the most interesting because of the contradictions, the diversity of opinions, and the wide range in conceptions and opinions. Not all of this is good—but it is memorable.
“Now, who’s buying the next round?”
More information on Shopping Center Digest and our associate publication, the Directory of Major Malls may be obtained from our website, www.shoppingcenters.com
“The two driving forces at the ICSC RECon were money and time,” said Cuthbert as he brought to order the Dinosaur Chowder and Marching Society; the annual gathering of these seasoned veterans is held at the close of the Las Vegas event to gauge their reactions to the 4-day event. “Some of the heaviest hitters, domestic and offshore landlords and investors, have the dollars in hand to buy shopping centers and are patiently waiting until prices drop even more. Interest rates are low, but the banks are not lending.”
“In fact,” chimed in Banker Bob, “the lenders are playing a game called ‘Extend and Pretend.’ Let’s extend our current agreement and make believe we’re lending you money. And those wanting to sell their assets, still have an inflated idea as to what their properties are worth.”
“I concur,” said Dealer Dan. “I offered an owner $36 million straight cash for his mall, he wanted $40 mil, got another buyer for his price subject to financing, and the deal fell through when the buyer couldn’t get the money. The seller is calling me now.”
“Ditto here,” agreed Financing Fred. “I was negotiating on several centers, the owner is asking a cap rate of 8, I’m offering 10 ¼. The point is I’m in no rush. If he takes my offer, fine. If he doesn’t, also fine, I can afford to wait. And if the deal dies, I don’t especially care.”
“I’m representing a landlord,” said Consultant Carl, “who has all the approvals in place, and the main anchors lined up to start building the shopping center. He just bought the land for $15 million. And the bank will only lend him $1.5 million for construction. Ridiculous.”
Looking For C Malls
Leasing Larry said “I have a buyer with $50 mil who wants to buy C Malls. I met with a top exec at GGP (General Growth Properties) and they’re being very slow to sell some of their A projects. Look, I told him, you’re not going to get the price you want for those prime malls—especially since you’re trying to package them with some of the poorer properties. Why not take what you can for these projects that very few of the bigger players want? I’m waiting to hear back.”
“The point is,” said Cuthbert, “too many owners want to get out of their centers the money they have invested in brick, mortar, land and time. It doesn’t work that way. Value is based on ROI, and if they have substantial vacancies and tenants at below- market rents, it deteriorates the property. This industry has always operated on the Golden Rule: Them what has the gold makes the rules.”
After the initial flurry of experiences dealing with buying and selling, the consensus was that though the turnout may have been off by some 30 to even 50% from last year’s, it was still a very good dealmaking event for the large majority of those attending and those retailers still in the market to expand and open new stores and markets. Most of the retail deals were in the low-end of the spectrum, discount stores, dollar stores, fast food, supermarkets, and the like—very little high-end and for A malls.
“Ya know,” said Sassy Sue, “the crybabies stayed home and made it easier to maneuver around the Leasing Mall, in the hotel suites, and get things done. Because of the decreased time pressures, we were able to talk, build relationships, and go well beyond the ‘Here’s the deal, take it or leave it, and I got another appointment waiting outside.’ ”
A Growing Resentment
“I saw a growing resentment against Simon and Westfield,” said Cuthbert, “for moving out of the Leasing Mall into Caesar’s and Wynn’s, forcing dealmakers to waste precious time and money cabbing back and forth from the hotels to the Leasing Mall.”
“Oh, yeah,” said Angry Al. “I blew them off and refused to set up an appointment. Simon didn’t have any dealmakers at Caesar’s, only vice presidents. So I’m gonna sit down and talk while he takes notes to bring back to the guy I deal with, and gets the information garbled, and then I gotta waste time trying to straighten out the lack of communication? No way.”
“And the vacant areas created in all three halls by these developers backing out, by others who made booth commitments and then decided not to come, or the space that ICSC couldn’t lease,” said Cuthbert. “The empty spaces looked like a guy got hit in the mouth with a 2x4.”
“Also,” asked Querying Quentin, “what’s gonna happen next year if Simon and Westfield decide to come back into the Leasing Mall? Is ICSC gonna relocate Centro and CB Richard Ellis and the others who helped them out by taking over those prime locations? It wouldn’t be fair, and it wouldn’t be right. Or, suppose SPG and Westfield decide they don’t need RECon and the heavy costs and make their own arrangements? Remember when we had the convention in Toronto, the major developers didn’t like the facilities and moved their dealmaking activities to Inn on the Park and ICSC had to run shuttle buses to them? It took years to get them all back into the fold.”
“What could work,” said Reasonable Ruth, “is if they wanted to come back, they could be placed at the far end of the South Hall, just beyond the Trade Expo; that area was dying because of the lack of a heavy draw to attract dealmakers.”
“But,” said Tenant Tom, “the retailers on the second level were doing gangbusters, wall to wall people—even though some of it was caused by dealmakers lining up to get a free pretzel.”
“And many of the landlords in the North and Central Halls were complaining,” said Cuthbert, “because putting all those retailers only at the end of the South Hall drew traffic away from their leasing booths.”
Scheduled Appointments
“We’re missing the point,” said Senior Sam. “We’ve been operating for years now on scheduled appointments, whether it’s 15 minutes, 20 minutes, or a half-hour. There never has been much chance for drop-in traffic, so what difference does it make if there’s a crowd rushing down the corridor outside your booth? With this convention, so many left by Tuesday, that Wednesday was like a morgue, and there was very little chance to backtrack on missed appointments. Yeah, the dance cards were not completely filled and there was more time for meetings and real negotiating because of the smaller attendance. We all made deals, but if someone was willing to stand in line 10 minutes for a pretzel, he didn’t have much on his plate to begin with.”
“Perhaps,” said Halloween Harry, “but it felt damned good to now be besieged by landlords trying to make a deal. For years we were chasing developers trying to get locations for our retail stores, and couldn’t get a call back. We must have had over 700 business cards dropped off at our leasing booth the first two days. And we made our first deal for 2009 on October 12, 2008.”
Dealmakers reported a lot of activity by brokers trying to put a deal together, job hunters, and those entering into the new arena of consulting. “These last,” said Consulting Carl, “have to be patient. Most clients are taking longer and longer to pay those bills, instead of 30 days, sometimes 3 and 4 months. It’s best to insist on, at least, a token monthly retainer.”
And Then There’s China
“Hey, we can’t end this meeting without touching on the Far East,” said China Charlie, who has been based in Shanghai since July and heads up a division developing shopping centers on the mainland. “They made many mistakes in the past,” he said, “and my role is to help avoid future mistakes, bring US and Canadian retailers to China, and to incorporate Western and Eastern approaches into a successful operation.
“One thing US-trained dealmakers have to get used to is the difference in size,” he continued. “They have malls and mixed-use projects of 5 million sq. ft. A city with a population of 1 million people is considered a small town. I was offering a furniture retailer a store of 200,000 sq. ft. He said ‘I don’t think I can operate in that small a store. I have stores over 1 million sq. ft., and my smallest is 500,000 sq. ft.’”
“We can go on and on,” said Cuthbert, “telling stories and personal experiences. What we all agree on, though, is that this was one of the most interesting conventions we’ve had in a long time—not the busiest or the most successful by a wide margin. But the most interesting because of the contradictions, the diversity of opinions, and the wide range in conceptions and opinions. Not all of this is good—but it is memorable.
“Now, who’s buying the next round?”
More information on Shopping Center Digest and our associate publication, the Directory of Major Malls may be obtained from our website, www.shoppingcenters.com
Tuesday, May 12, 2009
The Big Transformation Of The Industry Is Underway
Strolling the Agora column from the May 11, 2009 issue of Shopping Center Digest
The Big Transformation of this shopping center/retail industry has already begun as an initial reaction to the unheralded number of bankruptcies and liquidations of once-prominent tenants and landlords. However, the record-breaking contraction in the number of actual leading players, according to many veteran dealmakers, is only the beginning and will be the forerunner of a new landscape encompassing those able to react quickly as the economy improves.
“In a nutshell,” said Ira Meislik of Meislik & Meislik, “it will be right-sizing…the retail industry drifts to match its market. The actual behavior of individual consumers [will vary, but they are learning] that they can do with less and they can shop at unfamiliar, previously unconsidered stores [creating winners and losers as the industry adjusts] to the new consumer buying paradigm.”
Though Edward Spivey of Edward Spivey Associates does not expect a “bounce back” like previous downturns, “There will be great opportunities for investors, however, in picking up distressed retail assets and repositioning them or renegotiating lease terms, etc. Cash flow will once again be the main factor in determining asset values, and tenants will likely have more say in what leases rates they are willing to pay.”
Bogus Ploys Are Over
He stressed: “The era of asset values based on bogus financing schemes and refinancing ploys is over.”
Greg D. Icenhour of Shield Engineering says the volume of retail investment is down over 50% and “here in the Southeast almost 80%…As far as new construction, the only activity [in his market of Charlotte, NC] is primarily by end-users,” businesses with specialized space. “With the amount of retail space currently on the market, there should be ample opportunities for lease consultation and property management as these properties change hands.”
Aside from the overall economy, there is little question that the biggest shakeup to the industry has been the bankruptcy filing of General Growth Properties. The experienced dealmakers applaud the refinancing efforts of leaders like Simon Property Group, Kimco, Developers Diversified, Weingarten Realty and Regency Centers to control their debt. They’re skeptical about GGP’s statements that it will not sell off much of its portfolio to return to solvency, and point to a substantial number of owners and investors—including those above—waiting to cherry-pick the better properties at bargain prices.
Sam Zell of Equity Group Investments noted recently that today’s troubled real estate was due to those using too much debt to buy properties during boom times, and that a substantial number of those acquisitions were “under water.” [They] “have no incentive to sell as long as they owe more than their properties are worth” and investors will be picking up this real estate from foreclosure over the next few years.
Others point out that many larger landlords are now focusing future growth and development internationally, especially in emerging nations, China, Japan, India, South America, and the like.
Impact Of Ethnics
“If you’re talking of a changing landscape in the industry,” said one respected dealmaker, “you can’t ignore how changing demographics are affecting us. Yes, more price-conscious consumers are gravitating to the dollar stores, but there is also an increase in ethnic-oriented retailers, in malls and specific mini-markets, a reflection of what’s taking place all around the country and in Canada. Then, such franchise operators as Church’s Chicken are beginning to search out immigrant operators, those that might be able to obtain needed financing through foreign credit markets.”
Harsha V. Agadi, chief executive of the chain which has 1,650 restaurants, stressed that this was only one aspect of its plans to open 120 stores this year and continue an aggressive expansion program. He pointed to Korean, Chinese and Taiwanese banks primarily as financial sources for franchisees.
Another highly-regarded veteran expanded on this point.
“When I got into this industry over 40 years ago, it was composed of mainly white males. Over the years, women became an integral part of developing and leasing, first entering through marketing. Now the entire demographic is like a rainbow, reflecting what is taking place throughout North America. And, as US companies—retailers and owners—expand their interests globally, you see a major influx of this cross-border pollination domestically as more foreign-based tenants and landlords enter the market, which they see as containing fantastic, untapped potential.”
Many of the ethnic groups now an essential part of the industry—African Americans, Asians, Hispanics, etc.—he points out, are native-born or first- or second-generation.
[We’ve discussed this evolving demographic of tenants in this and past issues of Shopping Center Digest, pointing to such apparel chains as Shasa from Mexico and H&M from Sweden, the U.K.’s supermarket chains like Tesco and J. Sainsbury, and others that have been a growing in presence for years: Germany’s Aldi, Belgium’s Delhaize, Mexico’s Gigante, or the existing US retailers that have added more ethnic foods to cater to changing populations.This latter re-tooling of shopping centers to better serve demographic changes has been a vital part of the industry for years.]
Internet Shopping
Laurence Hsu, a developer/investor and contractor in China, Taiwan, sees the changing landscape impacting substantially on brick and mortar construction. “The first impact to retail business was caused by eBay which changed the consumer’s behavior…This crisis [will result in an accelerated] “space connect with net shopping.”
Consistent with this assessment, a survey by Forrester Research and Shop.org states that online retail sales in the US rose an average of 11% in the first three months of this year; at least 44% of all e-tailers said sales were up over 10%, and 14% said they increased up to 10%. Citi Investment Research projects US retail e-commerce sales will grow 4.4% to $141 billion in 2009, and then skyrocket 16.5% in 2010.
Many consumers still research their shopping online, and then hit the stores to buy the product, or pick it up at a local outlet. There are few successful retailers who do not now use multi-channel sources to reach their customers.
When we first began the research for this column it was basically a narrow focus, essentially that bigger companies would get bigger, that more smaller operators on the fringe will enter the mainstream. Much of it was due to the current economic crisis, but also on numerous research projections showing a marked increase in future population growth due to the “browning of America.”
Initially, the belief is that this industry is suffering, more than it ever has before. However, just as strong, is the belief that if you can hang in there, the future is bright.
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
The Big Transformation of this shopping center/retail industry has already begun as an initial reaction to the unheralded number of bankruptcies and liquidations of once-prominent tenants and landlords. However, the record-breaking contraction in the number of actual leading players, according to many veteran dealmakers, is only the beginning and will be the forerunner of a new landscape encompassing those able to react quickly as the economy improves.
“In a nutshell,” said Ira Meislik of Meislik & Meislik, “it will be right-sizing…the retail industry drifts to match its market. The actual behavior of individual consumers [will vary, but they are learning] that they can do with less and they can shop at unfamiliar, previously unconsidered stores [creating winners and losers as the industry adjusts] to the new consumer buying paradigm.”
Though Edward Spivey of Edward Spivey Associates does not expect a “bounce back” like previous downturns, “There will be great opportunities for investors, however, in picking up distressed retail assets and repositioning them or renegotiating lease terms, etc. Cash flow will once again be the main factor in determining asset values, and tenants will likely have more say in what leases rates they are willing to pay.”
Bogus Ploys Are Over
He stressed: “The era of asset values based on bogus financing schemes and refinancing ploys is over.”
Greg D. Icenhour of Shield Engineering says the volume of retail investment is down over 50% and “here in the Southeast almost 80%…As far as new construction, the only activity [in his market of Charlotte, NC] is primarily by end-users,” businesses with specialized space. “With the amount of retail space currently on the market, there should be ample opportunities for lease consultation and property management as these properties change hands.”
Aside from the overall economy, there is little question that the biggest shakeup to the industry has been the bankruptcy filing of General Growth Properties. The experienced dealmakers applaud the refinancing efforts of leaders like Simon Property Group, Kimco, Developers Diversified, Weingarten Realty and Regency Centers to control their debt. They’re skeptical about GGP’s statements that it will not sell off much of its portfolio to return to solvency, and point to a substantial number of owners and investors—including those above—waiting to cherry-pick the better properties at bargain prices.
Sam Zell of Equity Group Investments noted recently that today’s troubled real estate was due to those using too much debt to buy properties during boom times, and that a substantial number of those acquisitions were “under water.” [They] “have no incentive to sell as long as they owe more than their properties are worth” and investors will be picking up this real estate from foreclosure over the next few years.
Others point out that many larger landlords are now focusing future growth and development internationally, especially in emerging nations, China, Japan, India, South America, and the like.
Impact Of Ethnics
“If you’re talking of a changing landscape in the industry,” said one respected dealmaker, “you can’t ignore how changing demographics are affecting us. Yes, more price-conscious consumers are gravitating to the dollar stores, but there is also an increase in ethnic-oriented retailers, in malls and specific mini-markets, a reflection of what’s taking place all around the country and in Canada. Then, such franchise operators as Church’s Chicken are beginning to search out immigrant operators, those that might be able to obtain needed financing through foreign credit markets.”
Harsha V. Agadi, chief executive of the chain which has 1,650 restaurants, stressed that this was only one aspect of its plans to open 120 stores this year and continue an aggressive expansion program. He pointed to Korean, Chinese and Taiwanese banks primarily as financial sources for franchisees.
Another highly-regarded veteran expanded on this point.
“When I got into this industry over 40 years ago, it was composed of mainly white males. Over the years, women became an integral part of developing and leasing, first entering through marketing. Now the entire demographic is like a rainbow, reflecting what is taking place throughout North America. And, as US companies—retailers and owners—expand their interests globally, you see a major influx of this cross-border pollination domestically as more foreign-based tenants and landlords enter the market, which they see as containing fantastic, untapped potential.”
Many of the ethnic groups now an essential part of the industry—African Americans, Asians, Hispanics, etc.—he points out, are native-born or first- or second-generation.
[We’ve discussed this evolving demographic of tenants in this and past issues of Shopping Center Digest, pointing to such apparel chains as Shasa from Mexico and H&M from Sweden, the U.K.’s supermarket chains like Tesco and J. Sainsbury, and others that have been a growing in presence for years: Germany’s Aldi, Belgium’s Delhaize, Mexico’s Gigante, or the existing US retailers that have added more ethnic foods to cater to changing populations.This latter re-tooling of shopping centers to better serve demographic changes has been a vital part of the industry for years.]
Internet Shopping
Laurence Hsu, a developer/investor and contractor in China, Taiwan, sees the changing landscape impacting substantially on brick and mortar construction. “The first impact to retail business was caused by eBay which changed the consumer’s behavior…This crisis [will result in an accelerated] “space connect with net shopping.”
Consistent with this assessment, a survey by Forrester Research and Shop.org states that online retail sales in the US rose an average of 11% in the first three months of this year; at least 44% of all e-tailers said sales were up over 10%, and 14% said they increased up to 10%. Citi Investment Research projects US retail e-commerce sales will grow 4.4% to $141 billion in 2009, and then skyrocket 16.5% in 2010.
Many consumers still research their shopping online, and then hit the stores to buy the product, or pick it up at a local outlet. There are few successful retailers who do not now use multi-channel sources to reach their customers.
When we first began the research for this column it was basically a narrow focus, essentially that bigger companies would get bigger, that more smaller operators on the fringe will enter the mainstream. Much of it was due to the current economic crisis, but also on numerous research projections showing a marked increase in future population growth due to the “browning of America.”
Initially, the belief is that this industry is suffering, more than it ever has before. However, just as strong, is the belief that if you can hang in there, the future is bright.
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
Though The Industry Is Contracting, Those Able To React To Existing Conditons Are Expected To Lead Future Expansion
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 .
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 .
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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