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.
Tuesday, September 29, 2009
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 .
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