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

Monday, June 21, 2010

Dealmakers Look At New Ways To Keep The Momentum Going

This column of Strolling the Agora appears in the June 21, 2010 issue of SHOPPING CENTER DIGEST, the twice-monthly newsletter that focuses on leasing/development in the shopping center/retail chain industry.

Whether due to improved consumer attitudes, a desire to break a logjam impeding forward movement, the positive sales results from many tenants, increased financing available, or a multitude of other reasons, there has been a recent increase in dealmaking activity, at and following the ICSC RECON in Las Vegas.

But it is still far from a rush to make a deal. And there is no clear pattern, and in numerous cases, we see examples going against recent trends.

Overall, the conventional wisdom points to discount and value-oriented retailers looking at the latest numbers, and then announcing they’re back looking for deals.

If that’s the case across-the-board, how do you explain Target? This No. 2 discount retailer boosted its quarterly dividend 47% from last year, saying its cash generation is far more than required “for optimal reinvestment in our core business.” After its retail sales surge resulted in a 29% increase in its quarterly profit, it cut back on new-store expansion to less than 10 this year, compared with 60 in 2009 and its more basic annual average of close to 100 new stores.

The retail toy business for years has been dragging, with the leaders in this category trailing behind the strong competition from Walmart and other mass merchandisers. So, how to explain the move by Kohlberg Kravis Roberts and Bain Capital to seek public funding by preparing to raise $800 million from an Initial Public Offering for Toys R Us?

Or that retail operations directed at the teen and pre-teen market were among those at the forefront of a growth market, but recent sales results conclude that some of these operators may be heading for further problems?

Eye On The Deal

“I don’t try to explain these anomalies,” said one veteran dealmaker, “since I have no control over what top management at a company may decide, whether it be a tenant or a landlord. I focus on my immediate projects and do what I have to do to get that lease signed.”

When looking at a specific project, and trying to be creative, many senior negotiators go back to the tried and true methods that have worked in the past. They look at the basic rent—and whether an owner-developer or a retail chain—the rate will go up or down based on the square footage of the store, or the immediate occupancy costs: taking a smaller unit so overhead including tenant improvements such as HVAC, fixturing, housekeeping and maintenance, personnel, operations and the like can also be reduced.

Or they may concentrate on the length of the lease, shorter or longer term, maybe throwing a few dollars in at the back end to make the front end a little more acceptable. Or adding or deleting or revising a clause dealing with co-tenancies, or kickouts, or exclusive, and on and on.

Nothing new here.

Emphasis On Franchising

With the high unemployment rate coupled with the increasing length of time experienced professionals are on the street, many of these workers are channeling their efforts into starting their own businesses; the category of retailing is attracting more than its share, and most of it is directed at established successful franchises.

To many operators, this is a great opportunity and they are being very aggressive in attracting businessmen with a good track record and substantial financial packages from their former employers. So the franchiser, in many instances, is providing some of the dollars through an in-house financing program to make the deal, cutting its fees, fine-tuning leasing and royalty costs, guaranteeing bank loans, and putting its greater financial standing behind the deal.

They are advising their prospects to work with their local banks where they have a relationship, use relatives and friends as investors, community development groups, consider used equipment from auctions and Craigslist to reduce immediate costs, work with landlords to pay a higher rent upfront to obtain a larger tenant improvements payment from the landlord, etc.

One experienced dealmaking went into the distant past. “I remember when we owner-developers helped put several retailers into business because we could get better financing from the banks and lending institutions than they could. We used our stature to make it happen, financing them and helping them fixture their stores. In a sense it could have been a reaction against one or two extremely important retailers who essentially controlled a vital part of the women’s apparel industry. I can see the connection between then and now with what’s going on in franchising, especially with the restaurant and fast-food industry.”

Sooooooooo not much new here either.

Get Someone’s Attention

To get some movement started, another stated, “you have to get someone on the other end to pick up the phone or answer an email—you have to grab their attention.

“It’s almost like wooing a new lover. You can send the candy, the flowers, the theater tickets—that’s become almost common, now. With one real estate VP, we found out she was very involved and committed to a charitable organization, so we made a substantial contribution in her name to that fund. We finally got a callback and made the deal.

“There’s no way,” he conceded, “we would have been successful if the location did not fit very well into their criteria. But you have to do something to make them acknowledge that this a good location that they may not be aware of—I won’t say overlooked.”

The possible hazard that many involved in leasing and development on both sides of the negotiating table recognize is if the little momentum that is now underway were to stall. There are signs that the normal slowdown that comes with the summer may also impact on dealmaking. Some retail sales results from May show declines from those anticipated; in other instances, sales may be up, but profits may not, because deep discounting was necessary to drive customers into the stores; and in some instances total sales may be up for the retailer, but an increasing proportion of those dollars may be coming from the internet, and not from brick and mortar.

To some retailers, this could be to raise the emphasis on internet sales and to direct their focus internationally where the market may be less competitive and ROI could be much faster. A number of larger landlords are turning their attention for new development offshore, to Asia, especially China and India, South America such as Brazil, Colombia, Mexico, under-served European countries such as Russia, Slovakia, Spain, Portugal.

So the challenge for the dealmaker domestically? Wave, make some noise, get someone out there to recognize that here is an opportunity that is new or deserves a second look.

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

Monday, June 7, 2010

Tenants, Landlords Begin Making Deals Again At ICSC RECON, Which Is “Better Than Expected”

This latest column of Strolling the Agora is from the June 7, 2010 issue of SHOPPING CENTER DIGEST

“It wasn’t great, but we’re all in agreement then,” said Cuthbert, “that improved retail sales and consumer confidence are behind the increased number of deals started and completed at the ICSC RECON, and that the convention was lot better than most of us expected.” He was chairing the Dinosaur Chowder and Marching Society’s wrapup following the Las Vegas convention.

“The attendance was down considerably from two years ago,” said Tom Baker of Property Resources Group, “but those attending were looking at opportunities for expansion and growth…one of the better shows for actual deals and prospects.”

Mike Mallon of Mallon and Associates agreed. “I felt the activity was encouraging and that a number of retailers especially the discounters were making deals. [They] are tough but at least there is activity vs. a year ago.”

Randee Stratton said “…[it] was uplifting and positive with more developers looking for deals and tenants interest in using the opportunity for expanding into markets that were previously unattainable for them with higher rents and low vacancies.”

Chris Marabella of Marabella Commercial Finance, said he “discussed construction and permanent financing with many developer/landlords who indicated they planed to develop several Walgreen and CVS stores in the next 12 months. I found the atmosphere to be positive and I definitely see an up tick in development if we can finance their projects.”

“Many [were] working harder for fewer deals,” said Dave Osterhus, “but most agreed that we need to all focus and work on what we can control and not be dragged down by what we can’t. Let’s all remember our friends who are out of work and looking to get back into our industry. Buy them a cup of coffee next week and encourage them!”


“Cautious optimism is a good description,” said Darlene Murray of RCC Associates. “We are a G.C. and the meetings with our clients were positive. Projects are being planned and built. So much better than last year.”

Karen Pollard of the City of Rochester pointed to “The interest in getting new projects into the pipeline was great. A definite improvement over last year, the energy was very good. From a public sector perspective we definitely achieved our goals for the show.”

Integration Good And Bad

There was also quite a bit of discussion regarding mingling exhibitors from companies serving the industry with the landlords and tenants from the Leasing Mall, with most of it being positive.

Lesley Woodring of Synergos Technologies: “I thought the integration of the exhibitors, leasing folks, and restaurant/retailers was great for everyone. There was a lot of energy and a lot less dead zones throughout the halls.”

“I was a little worried about the integration of the exhibitors,” admitted Thomas Erb of Electric Time Co, “but it worked well. The dead space last year was depressing.”

But then, there were others, like, Pablo Torres of Triangulo las Animas: “Great activity but I didn’t like the mix at the expo. It’s better to have zones in order to see what you want instead of missing some spots.”

Golden Rule

There was still some resentment from tenants that many of them were required to leave the Leasing Mall to visit the dealmaking suites of Simon Property Group and Westfield at Caesars Palace. “But,” said Reasonable Ralph, “it saved them substantial money not having to pay for exhibit space, and they’re big enough not to need the presence in the convention center. It’s the Golden Rule: Them what has the gold makes the rules.”

The types of deals being made were not equal in all categories. “Leading the charge,” said Cuthbert, “were restaurants, discounters, value-oriented merchants, with strong indications that though consumers were opening their purses, they were price-conscious and insisting on getting good value.”

“This is not to say,” Fashion Fay pointed out, “that some of the higher-end tenants were not making deals. They were, especially in their concepts that showed flexibility and were catering to this yearning by shoppers for quality and good bang for the buck.”

She noted that some of the luxury retailers in the industry were closing stores because they were unable to satisfy this need for even their most loyal customers.

Flexibility By Landlords

The landlords, also were showing flexibility, said Designing Dan, in their leases. “But also,” he stressed, “in willingness to be innovative, splitting big boxes into multiple tenancies, changing basic requirements to accommodate specific needs of smaller operators, willing to talk to retailers for A malls they would not have considered before.”

“Yeah, but if it’s for a top project with high occupancy,” said Hard-boiled Harry, “there’s no way I’m gonna drop the rent, even for a short-term lease. I’m willing to negotiate, and I am making deals for less rent than two years I would have said was ridiculous. But there’s a limit. Unless there’s some quid pro quo for another project or two that could use a little help, no way am I going to give away space just to get a lease signed.”

A number of experienced dealmakers cited numerous examples of money beginning to flow into the industry to finance projects that had been put on back burners and now may be gearing up for openings in 2011 and 2012. “Especially,” said Financing Fred, “in the areas of acquisitions and mergers—a lot of foreign money is coming into the US, with joint ventures from Canada, Latin America, the Far East, Europe. We may think we’ve been hardhit in our recession, but others still say we’re among the safest ports to park some substantial cash, especially for long-term investments.

“A good portion of these investments are being aimed at depressed portfolios, where cash-strapped owners are being pressured to paydown some of their mortgages that are coming to term, and for shopping centers that can be quickly renovated and expanded.”

Still Stressing Caution

This is all true to some extent, conceded Careful Carl. “However, though we may have numerous chains looking to expand into new markets, trying out new concepts, seeking to tap into a different demographic, we must still maintain a certain amount of caution. We’re not out of the woods yet; there’s still high unemployment, increasing national debt and a public that’s increasingly more pessimistic about the future. Yeah, here in our industry there’s a growing optimism, but it can turn around almost overnight.”

Part of the success of this convention, Cuthbert said, can also be attributed to a pentup demand to make deals, and a lack of new development. “Don’t forget, for almost two years, there were very few new projects being built—even though some now estimate we have over 100,000 shopping centers in the country.

“Much of what we’ve been chewing about for the last couple of hours,” he continued, “are points that have been made time and time again over the last couple of months. Tenants want to expand and grow, and landlords want to provide them with the space they need to accomplish these goals, and it can only come about if the economy continues to improve.

“And all the parties involved are willing to compromise in some ways. It’s no longer, here’s the deal, take it or leave it. Though I know some landlords who think we may return to that in another year or two.”

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