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 21, 2010
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 .
“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 .
Monday, May 17, 2010
FTC's Look At SPG And GGP May Be Moot Now, But Federal Involvement In The Shopping Center Industry Has A Long History
This column of Strolling the Agora is from the May 17, 2010 issue of the twice-monthly SHOPPING CENTER DIGEST
There has been a substantial buzz in the industry about the possibilities of the Federal Trade Commission looking into Simon Property Group and its efforts to acquire General Growth Properties, the number two owner-developer in the industry regarding the size of its portfolio in malls. This issue, of course, is moot, since the bankruptcy court last week approved GGP’s choice of an $8.5 billion reorganization plan offered by Brookfield Asset Management.
Here is not the forum to analyze which of the two proposals would be better for the bankrupt owner-developer and its shareholders; David Simon has said his company is bowing out, ending the acquisition/merger effort and will not continue the fight.
Regarding the FTC, he discounted that as an issue, stating SPG owns only 3.5% of the 7 billion square feet of shopping center space in the US and “anti-trust authorities have consistently recognized the retail real estate industry is highly competitive and fragmented and is one of the only industries exempted from Hart-Scott-Rodino filing requirements [which require companies to submit merger plans before announcing the deal]. Tenants, whether they are discount retailers, manufacturers or otherwise, can and do lease retail space in a variety of locations.”
Wellllllllllllllllllll, yes and no, if you want to discuss some of the “fragments” of that 7 billion sq. ft. of space. If you eliminate the overwhelming bulk of shopping centers, the neighborhood strips and concentrate on the number of remaining projects, SPG owns or has an interest in 387 properties totaling some 263 million sq. ft. of retail space; GGP has over 200 malls totaling some 200 million sq. ft.
Back To The ‘70s
The FTC has examined our industry and the possibilities of restraint of trade dating back to the early ‘70s, mainly focusing on the dealmaking leverage and conflicts that could involve special agreements between landlords and key tenants. These early examinations centered on Tysons Corner and its anchors, against Gimbel Brothers, the industry’s leasing practices-- including the suit filed by the operator of a gift shop franchise against some leading owner-developers-- and the like. And in 1978, a small Pennsylvania supermarket chain brought an antitrust suit against a larger food operator that operated in PA,WV, and OH for trying to keep it out of a specific strip shopping center; in 1956 the lease had been amended to add a clause prohibiting the leasing of any part of Bon Aire Shopping Center to a chain supermarket that would compete with Thorofare.
And then, in 1989, Sears, Roebuck & Co filed a request to modify a ’77 consent order prohibiting it from using radius clauses, use clauses and easement agreements, especially those involving Homart Development Co—which was the shopping center development arm of the retail giant.
All of the cases involve what could be considered—by today’s operation—outmoded or obsolete. Though in the past, some high-end malls would try to prevent discounters or big-box users from becoming a tenant, because they “conflicted” with the main concept or retail direction of the project, today that point is almost meaningless. There are numerous high-end and fashion-oriented malls that include these types of tenants, and even value-oriented retailers.
And the use of radius clauses, so a tenant would not compete or siphon off sales from one store to another two miles down the road, may be considered quaint; even if the clause is included in a lease, it is not vigorously enforced by landlord or tenant. I remember speaking to one sports retailer who ignored this restriction to open in a nearby, new project, now the top mall in the market: “I’d much rather take that new location and, perhaps impact my sales at the older center, than let the new store go to a competitor who would hurt me more.”
Developers, Anchors And 3.5%
It’s interesting, also, that the major restraint of trade investigation into this shopping center industry began when a retailer was turned down from becoming a tenant in a high-end fashion mall. His consultant, shortly after, was appointed to the FTC; and soon after that was when the federal authorities began a major investigation into arrangements between mall landlords and the relationships they had with their anchors, mostly department stores.
Now, getting back to SPG and its 3.5%, across the board, concentrating only on that ratio without any quantification, it appears almost laughable that one landlord could have such influence that its decisions could constitute a restraint of trade.
However, if there’s a trade area with three or four malls, and two or three are owned by one company, there’s a different perspective regarding negotiating a lease between equals.
If you have a niche within the industry, say off-price and factory outlets or value-oriented centers--which may total some 300 projects--and one landlord has an extremely high percentage of these projects, it may become another issue.
SPG is the largest landlord in this “fragment” with some 45 Chelsea Premium Outlets; it expects to close soon on its planned acquisition of Prime Retail, which will add 22 or so more centers totaling some 8.2 million sq. ft. to its portfolio. The next largest landlord is Tanger Outlet Centers with 33 centers in 22 states.
According to some in the industry, SPG would control 80% of the top 50 of these projects.
The pending acquisition, it concedes, is now being reviewed by the FTC.
Whatever decision is reached, I'm certain it will result in much introspection and discussion in this shopping center/retail chain industry.
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 website, www.shoppingcenters.com .
There has been a substantial buzz in the industry about the possibilities of the Federal Trade Commission looking into Simon Property Group and its efforts to acquire General Growth Properties, the number two owner-developer in the industry regarding the size of its portfolio in malls. This issue, of course, is moot, since the bankruptcy court last week approved GGP’s choice of an $8.5 billion reorganization plan offered by Brookfield Asset Management.
Here is not the forum to analyze which of the two proposals would be better for the bankrupt owner-developer and its shareholders; David Simon has said his company is bowing out, ending the acquisition/merger effort and will not continue the fight.
Regarding the FTC, he discounted that as an issue, stating SPG owns only 3.5% of the 7 billion square feet of shopping center space in the US and “anti-trust authorities have consistently recognized the retail real estate industry is highly competitive and fragmented and is one of the only industries exempted from Hart-Scott-Rodino filing requirements [which require companies to submit merger plans before announcing the deal]. Tenants, whether they are discount retailers, manufacturers or otherwise, can and do lease retail space in a variety of locations.”
Wellllllllllllllllllll, yes and no, if you want to discuss some of the “fragments” of that 7 billion sq. ft. of space. If you eliminate the overwhelming bulk of shopping centers, the neighborhood strips and concentrate on the number of remaining projects, SPG owns or has an interest in 387 properties totaling some 263 million sq. ft. of retail space; GGP has over 200 malls totaling some 200 million sq. ft.
Back To The ‘70s
The FTC has examined our industry and the possibilities of restraint of trade dating back to the early ‘70s, mainly focusing on the dealmaking leverage and conflicts that could involve special agreements between landlords and key tenants. These early examinations centered on Tysons Corner and its anchors, against Gimbel Brothers, the industry’s leasing practices-- including the suit filed by the operator of a gift shop franchise against some leading owner-developers-- and the like. And in 1978, a small Pennsylvania supermarket chain brought an antitrust suit against a larger food operator that operated in PA,WV, and OH for trying to keep it out of a specific strip shopping center; in 1956 the lease had been amended to add a clause prohibiting the leasing of any part of Bon Aire Shopping Center to a chain supermarket that would compete with Thorofare.
And then, in 1989, Sears, Roebuck & Co filed a request to modify a ’77 consent order prohibiting it from using radius clauses, use clauses and easement agreements, especially those involving Homart Development Co—which was the shopping center development arm of the retail giant.
All of the cases involve what could be considered—by today’s operation—outmoded or obsolete. Though in the past, some high-end malls would try to prevent discounters or big-box users from becoming a tenant, because they “conflicted” with the main concept or retail direction of the project, today that point is almost meaningless. There are numerous high-end and fashion-oriented malls that include these types of tenants, and even value-oriented retailers.
And the use of radius clauses, so a tenant would not compete or siphon off sales from one store to another two miles down the road, may be considered quaint; even if the clause is included in a lease, it is not vigorously enforced by landlord or tenant. I remember speaking to one sports retailer who ignored this restriction to open in a nearby, new project, now the top mall in the market: “I’d much rather take that new location and, perhaps impact my sales at the older center, than let the new store go to a competitor who would hurt me more.”
Developers, Anchors And 3.5%
It’s interesting, also, that the major restraint of trade investigation into this shopping center industry began when a retailer was turned down from becoming a tenant in a high-end fashion mall. His consultant, shortly after, was appointed to the FTC; and soon after that was when the federal authorities began a major investigation into arrangements between mall landlords and the relationships they had with their anchors, mostly department stores.
Now, getting back to SPG and its 3.5%, across the board, concentrating only on that ratio without any quantification, it appears almost laughable that one landlord could have such influence that its decisions could constitute a restraint of trade.
However, if there’s a trade area with three or four malls, and two or three are owned by one company, there’s a different perspective regarding negotiating a lease between equals.
If you have a niche within the industry, say off-price and factory outlets or value-oriented centers--which may total some 300 projects--and one landlord has an extremely high percentage of these projects, it may become another issue.
SPG is the largest landlord in this “fragment” with some 45 Chelsea Premium Outlets; it expects to close soon on its planned acquisition of Prime Retail, which will add 22 or so more centers totaling some 8.2 million sq. ft. to its portfolio. The next largest landlord is Tanger Outlet Centers with 33 centers in 22 states.
According to some in the industry, SPG would control 80% of the top 50 of these projects.
The pending acquisition, it concedes, is now being reviewed by the FTC.
Whatever decision is reached, I'm certain it will result in much introspection and discussion in this shopping center/retail chain industry.
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 website, www.shoppingcenters.com .
Monday, May 3, 2010
Money Is Now Available For Mergers And Acquisitions And In The Forefront Are The Behemoths Simon Property Group And Kimco Realty
This Strolling the Agora column appears in the May 3, 2010 issue of the twice-monthly newsletter, SHOPPING CENTER DIGEST
While much of the shopping center/retail chain industry has been focusing on opposing forces waving billions of dollars to acquire or joint venture with bankrupt General Growth Properties, the financial markets are also finally opening their purses wide to begin investing once more in retail properties. Traditional life insurance companies such as TIAA-CREF, Prudential Mortgage Capital and Pacific Life Insurance Co have stated their interest in large offerings primarily directed at top regional malls and grocery-anchored neighborhood shopping centers; the requirement for one is malls with annual sales over $400 per sq. ft..
And there are a number of real estate investment trusts that have already announced they would be launching IPOs (Initial Public Offerings) to raise capital to acquire new shopping center properties.
Since March 1, there have been more than 90 filings in the US for companies seeking to raise more than $50 billion, and more offerings are anticipated within the next few months. (Note. These are for REITs of all categories, residential, hospitality, medical, etc., not just retail).
In addition, the US, according to many, is the main locale for foreign interests seeking to invest in commercial real estate; leading the offshore pack are investors from Germany, Mexico and Israel, and, of course, the Far East.
But to personalize the quest for prime retail properties, one cannot discuss acquisitions and mergers of landlord portfolios without concentrating on the two leading behemoths in their respective niches: Simon Property Group, which owns some 387 or so properties totaling 263 million sq. ft., and Kimco Realty Corp, with about 1,478 shopping centers totaling 152 million sq. ft. This includes relatively minor interests each has around the globe, with the two giants focusing on distinctly different types of properties.
FTC Attention?
SPG emphasizes the larger retail centers, and is also, by far, the largest and most powerful landlord in the niche within a niche, outlet centers; in number of projects and total GLA, it easily outranks the number two landlord of regional and super-regional malls, GGP. The number three owner-developer is Westfield USA, which has less than 60 malls.
Because of its already looming presence that over-shadows all other owner-developers in the field, many in the industry have raised the question of whether its acquisition or jv with GGP would create a monopoly because of its control of such a large percentage of projects within this category, and could result in restraint of trade action by the Federal Trade Commission. This issue was raised by Brookfield Asset Management, which is competing with SPG over GGP.
David Simon of SPG said his proposal would limit its board representation to two people who do not work for his company.
Retailers, especially, are nervous about what would happen if SPG is successful in its quest. Their fear is that in key markets, Simon may be the only landlord in the trade area and they either deal with SPG and its rent demands or “multi-center deals” or be “locked out” of that market.
Some years back the FTC took a look at possible restraint of trade issues within the shopping center industry. Some token concessions were made; tradition has it, however, that many private arrangements were never written down, but that personal relationships between department store anchors and owner-developers existed and helped maintain retail orientation and control within malls.
Kimco And CPP
It is unlikely that the federal government would take a close look at any acquisitions made by Kimco, which recently announced a long-term partnership with the Canada Pension Plan to acquire shopping centers in the US (see the item in this issue’s column of didja hear…???); its first deal of $370 million was for five centers. Though it is, by far, the largest owner of neighborhood or strip shopping centers in the industry, it does not control the much-smaller trade areas served by these centers, where there could be four and five retail centers in single market, each owned by a different landlord. Once the supermarket and/or discount anchors are in place, landlords must compete among each other to line up the best merchants and rent-paying tenants, many of them Moms and Pops or small franchisees.
Though Kimco may control nationwide some 1,300-plus properties, that is a small percentage of the total number of neighborhood shopping centers in the US, estimated at close to 70,000. There are numerous other landlords who own a substantial number of grocery-anchored, neighborhood centers: Developers Diversified, Regency, Weingarten, Inland, Edens and Avant, Vornado, Sembler, etc., etc.
Certainly Kimco could package multiple leasing deals with retailers, but it does not have the same type of leverage as SPG would have with a mall-oriented tenant with many less locations meeting its criteria.
Some Could Be Sold Off
If SPG were to acquire GGP, some in the industry believe, some of the malls in the package could be sold off to other owner-developers; the only way this could happen, they believe, is if one property was a bad fit with the rest of the portfolio, for one reason or another, or Simon wanted to reduce its debt obligations. Among those landlords mentioned who might be interested in certain properties are other REITs: Westfield, Macerich, CBL.
Since Kimco would be acquiring much smaller portfolios or individual, it is unlikely that any of these shopping centers would then be put on the block to be sold off.
Of course, anyone can speculate. There are a number of very prominent landlords who might be interested in specific GGP malls, if any of these were to go to market, say a high-end operator such as Taubman, or a major player in secondary markets as Cafaro, or those who are mainly owners of strip and community centers, but who also have projects that range in size up to small malls. All, or any of these landlords, could be interested in acquiring a mall or two if they meet their criteria or make a good fit within their existing portfolios.
So, few expect any action regarding GGP to be completed any sooner than by late summer. With Kimco and the amount of funds waiting to be placed into solid US real estate, another announcement could be only weeks away.
More information on SHOPPING CENTER DIGEST, EXPANDING RETAILERS, the weekly SCD Eflash, DIRECTORY OF MAJOR MALLS, and our other products may be obtained from our website, www.shoppingcenters.com .
Strolling the Agora
While much of the shopping center/retail chain industry has been focusing on opposing forces waving billions of dollars to acquire or joint venture with bankrupt General Growth Properties, the financial markets are also finally opening their purses wide to begin investing once more in retail properties. Traditional life insurance companies such as TIAA-CREF, Prudential Mortgage Capital and Pacific Life Insurance Co have stated their interest in large offerings primarily directed at top regional malls and grocery-anchored neighborhood shopping centers; the requirement for one is malls with annual sales over $400 per sq. ft..
And there are a number of real estate investment trusts that have already announced they would be launching IPOs (Initial Public Offerings) to raise capital to acquire new shopping center properties.
Since March 1, there have been more than 90 filings in the US for companies seeking to raise more than $50 billion, and more offerings are anticipated within the next few months. (Note. These are for REITs of all categories, residential, hospitality, medical, etc., not just retail).
In addition, the US, according to many, is the main locale for foreign interests seeking to invest in commercial real estate; leading the offshore pack are investors from Germany, Mexico and Israel, and, of course, the Far East.
But to personalize the quest for prime retail properties, one cannot discuss acquisitions and mergers of landlord portfolios without concentrating on the two leading behemoths in their respective niches: Simon Property Group, which owns some 387 or so properties totaling 263 million sq. ft., and Kimco Realty Corp, with about 1,478 shopping centers totaling 152 million sq. ft. This includes relatively minor interests each has around the globe, with the two giants focusing on distinctly different types of properties.
FTC Attention?
SPG emphasizes the larger retail centers, and is also, by far, the largest and most powerful landlord in the niche within a niche, outlet centers; in number of projects and total GLA, it easily outranks the number two landlord of regional and super-regional malls, GGP. The number three owner-developer is Westfield USA, which has less than 60 malls.
Because of its already looming presence that over-shadows all other owner-developers in the field, many in the industry have raised the question of whether its acquisition or jv with GGP would create a monopoly because of its control of such a large percentage of projects within this category, and could result in restraint of trade action by the Federal Trade Commission. This issue was raised by Brookfield Asset Management, which is competing with SPG over GGP.
David Simon of SPG said his proposal would limit its board representation to two people who do not work for his company.
Retailers, especially, are nervous about what would happen if SPG is successful in its quest. Their fear is that in key markets, Simon may be the only landlord in the trade area and they either deal with SPG and its rent demands or “multi-center deals” or be “locked out” of that market.
Some years back the FTC took a look at possible restraint of trade issues within the shopping center industry. Some token concessions were made; tradition has it, however, that many private arrangements were never written down, but that personal relationships between department store anchors and owner-developers existed and helped maintain retail orientation and control within malls.
Kimco And CPP
It is unlikely that the federal government would take a close look at any acquisitions made by Kimco, which recently announced a long-term partnership with the Canada Pension Plan to acquire shopping centers in the US (see the item in this issue’s column of didja hear…???); its first deal of $370 million was for five centers. Though it is, by far, the largest owner of neighborhood or strip shopping centers in the industry, it does not control the much-smaller trade areas served by these centers, where there could be four and five retail centers in single market, each owned by a different landlord. Once the supermarket and/or discount anchors are in place, landlords must compete among each other to line up the best merchants and rent-paying tenants, many of them Moms and Pops or small franchisees.
Though Kimco may control nationwide some 1,300-plus properties, that is a small percentage of the total number of neighborhood shopping centers in the US, estimated at close to 70,000. There are numerous other landlords who own a substantial number of grocery-anchored, neighborhood centers: Developers Diversified, Regency, Weingarten, Inland, Edens and Avant, Vornado, Sembler, etc., etc.
Certainly Kimco could package multiple leasing deals with retailers, but it does not have the same type of leverage as SPG would have with a mall-oriented tenant with many less locations meeting its criteria.
Some Could Be Sold Off
If SPG were to acquire GGP, some in the industry believe, some of the malls in the package could be sold off to other owner-developers; the only way this could happen, they believe, is if one property was a bad fit with the rest of the portfolio, for one reason or another, or Simon wanted to reduce its debt obligations. Among those landlords mentioned who might be interested in certain properties are other REITs: Westfield, Macerich, CBL.
Since Kimco would be acquiring much smaller portfolios or individual, it is unlikely that any of these shopping centers would then be put on the block to be sold off.
Of course, anyone can speculate. There are a number of very prominent landlords who might be interested in specific GGP malls, if any of these were to go to market, say a high-end operator such as Taubman, or a major player in secondary markets as Cafaro, or those who are mainly owners of strip and community centers, but who also have projects that range in size up to small malls. All, or any of these landlords, could be interested in acquiring a mall or two if they meet their criteria or make a good fit within their existing portfolios.
So, few expect any action regarding GGP to be completed any sooner than by late summer. With Kimco and the amount of funds waiting to be placed into solid US real estate, another announcement could be only weeks away.
More information on SHOPPING CENTER DIGEST, EXPANDING RETAILERS, the weekly SCD Eflash, DIRECTORY OF MAJOR MALLS, and our other products may be obtained from our website, www.shoppingcenters.com .
Strolling the Agora
Monday, April 19, 2010
Are Overages From The Past A Way To Stimulate Dealmaking Now In The Shopping Center/Retail Chain Industry?
Tenants and landlords speak out in Strolling the Agora on the advantages and disadvantages of this leasing concept in the April 19, 2010 issue of the twice-monthly newsletter, SHOPPING CENTER DIGEST.
While discussing overages with a developer of a new regional mall in the New York Metro area some years ago, I remember clearly his attitude and comment: “If a tenant goes into overages,” he said, “it means the rent was too low.”
That company has been out of business for two decades, and the dealmaker quoted has also become only a memory in the shopping center/retail chain industry.
And in today’s market, that “take it or leave it” attitude has also disappeared from this industry.
To many, overages—where a lease is based on a low minimum rent tied to a retail sales figure, and the landlord shares in the upside of sales over that figure—had been a mainstay of this industry, primarily in malls; tenant and landlord, in essence, became “partners” and participated in the risk of opening stores in new and unproved shopping centers, or was used as an inducement to attract retailers to lagging projects.
Peter Morris, CEO of Greenstead Group, noted that this was a form of percentage rent which is “actually the cheapest form of rent.”…“Over the years, however, both sides of the table changed the concept to eliminate sales rent and build it into the base rent. That was great for the tenant in an expanding market as it fixed their costs. However, as sales have decreased tenants are seeking concessions in order to bring down their cost of occupancy.”
There are two main areas for sales rent to return on a wider basis, he continued. These are “tied to rent relief to accelerate the recapture of the deferred rent” and “as part of a creative rent structure to spur on leasing. Think of it as deferred rent at the onset of the lease.”
Good Source Of Profit
“Overage,” said Karen Scott, president at Centerworks Retail, “can be a good source of additional profit but the Landlord has to be very good at assisting tenants in making the break even points through effective marketing programs. Also, when marketing, don’t spend time on the underperformers which is what people tend to do; instead concentrate on the ones who look like they can make the break even and help push them over. So if you are going to do this (and basically partner with your tenants) hire an experienced marketing person….and require a minimum amount of participation in marketing programs-yes, for those of you [who] have been around awhile, this is beginning to sound familiar, right?”
Gail Nichols, vice chair and co-founder of The Now Mall, took off on the subject of marketing and pointed to national averages for mall sales tied to consumer purchases, and said that the impact of full multi-channel marketing using Rapid Online Order Fulfillment (ROOF) could “bring back lost sales and generate new traffic into the mall…not to mention happier customers.” She said the internet is “stealing away mall sales at the rate of 12% now, but growing rapidly to 35%-53% in 2014…”
A national retailer stressed that “just because sales have jumped in a specific store, does not mean that profits have matched that rise. More sales does not necessarily mean more profit. In the current economy, retailers have drastically discounted their merchandise to boost sales and move inventory. Though a reduced rent can be an inducement to make a deal, providing the landlord with a piece of this upside of store sales can eliminate much of the profit.”
Forensic Accountant
One leading consultant was not a strong advocate of this form of leasing. “A major concern for an owner-developer is to audit their tenant’s books to determine a true ‘overage.’ Most landlords would rather give away more concessions than play a forensic accountant.”
The whole issue, according to Jeff Davenport, principal of Davenport Consulting, gets into base points. “It depends on the level of overage rent a tenant will be paying. Are they paying 8% or 18% over a breakpoint? What is the breakpoint and how was it derived?…Yes, the low base rent/overage rent concept should help attract new tenants
because it shifts risk from the tenant to the landlord. Of course, this assumes reasonable overage rent and breakpoint terms are offered by the landlord.”
Another landlord stressed the importance of negotiating fair and reasonable terms.
Rohit Bakshi, CEO of CCPL Developers Pvt Ltd, “As a center head, in order to fill vacant space at non prime areas, even taking up brands on franchise mode is also lucrative. I strongly feel that any investor should look into the possibility of fixing a minimum guarantee amount and percentage share, this way the risk is being shared between the retailer and the investor.”
Spectacular Results
Chuck Devers, owner, SOM, LLC, said overage contracts “can be very useful tools in helping a prospective future tenant, or even an existing tenant to take responsible business risks to either up-grade, enlarge or otherwise improve the selling environment…”
He cited an example of one tenant who was at the crossroads, continue doing what he had been successful at, or “implement a new marketing concept that would require a total re-build [and] introduce a new product line in an enlarged store…We joined together as landlord and tenant and negotiated a new lease that controlled rent increase to a very modest level while increasing their selling space by 50%.”
The results, said Devers, were “spectacular for both of us…” Sales increased more than 50%, lease income increased over 50%, and the store’s profitability increased greatly in excess of 50%. “The concept worked so well, in fact, that the company determined to replicate the model on close to 800 of their existing retail clothing stores.”
Caution should be taken in the use of overage deals, cautioned Morris. The landlord’s come-on rent structure needs to be short term and carefully planned. The landlord “may get some more deals done… [but] as my father used to tell me it is false economy to make each sale at a loss but expect to make it up in volume.”
More information on SHOPPING CENTER DIGEST, Expanding Retailers, the weekly tipsheet, SCD Eflash, the Directory of Major Malls, and our other products may be obtained from our website, www.shoppingcenters.com .
While discussing overages with a developer of a new regional mall in the New York Metro area some years ago, I remember clearly his attitude and comment: “If a tenant goes into overages,” he said, “it means the rent was too low.”
That company has been out of business for two decades, and the dealmaker quoted has also become only a memory in the shopping center/retail chain industry.
And in today’s market, that “take it or leave it” attitude has also disappeared from this industry.
To many, overages—where a lease is based on a low minimum rent tied to a retail sales figure, and the landlord shares in the upside of sales over that figure—had been a mainstay of this industry, primarily in malls; tenant and landlord, in essence, became “partners” and participated in the risk of opening stores in new and unproved shopping centers, or was used as an inducement to attract retailers to lagging projects.
Peter Morris, CEO of Greenstead Group, noted that this was a form of percentage rent which is “actually the cheapest form of rent.”…“Over the years, however, both sides of the table changed the concept to eliminate sales rent and build it into the base rent. That was great for the tenant in an expanding market as it fixed their costs. However, as sales have decreased tenants are seeking concessions in order to bring down their cost of occupancy.”
There are two main areas for sales rent to return on a wider basis, he continued. These are “tied to rent relief to accelerate the recapture of the deferred rent” and “as part of a creative rent structure to spur on leasing. Think of it as deferred rent at the onset of the lease.”
Good Source Of Profit
“Overage,” said Karen Scott, president at Centerworks Retail, “can be a good source of additional profit but the Landlord has to be very good at assisting tenants in making the break even points through effective marketing programs. Also, when marketing, don’t spend time on the underperformers which is what people tend to do; instead concentrate on the ones who look like they can make the break even and help push them over. So if you are going to do this (and basically partner with your tenants) hire an experienced marketing person….and require a minimum amount of participation in marketing programs-yes, for those of you [who] have been around awhile, this is beginning to sound familiar, right?”
Gail Nichols, vice chair and co-founder of The Now Mall, took off on the subject of marketing and pointed to national averages for mall sales tied to consumer purchases, and said that the impact of full multi-channel marketing using Rapid Online Order Fulfillment (ROOF) could “bring back lost sales and generate new traffic into the mall…not to mention happier customers.” She said the internet is “stealing away mall sales at the rate of 12% now, but growing rapidly to 35%-53% in 2014…”
A national retailer stressed that “just because sales have jumped in a specific store, does not mean that profits have matched that rise. More sales does not necessarily mean more profit. In the current economy, retailers have drastically discounted their merchandise to boost sales and move inventory. Though a reduced rent can be an inducement to make a deal, providing the landlord with a piece of this upside of store sales can eliminate much of the profit.”
Forensic Accountant
One leading consultant was not a strong advocate of this form of leasing. “A major concern for an owner-developer is to audit their tenant’s books to determine a true ‘overage.’ Most landlords would rather give away more concessions than play a forensic accountant.”
The whole issue, according to Jeff Davenport, principal of Davenport Consulting, gets into base points. “It depends on the level of overage rent a tenant will be paying. Are they paying 8% or 18% over a breakpoint? What is the breakpoint and how was it derived?…Yes, the low base rent/overage rent concept should help attract new tenants
because it shifts risk from the tenant to the landlord. Of course, this assumes reasonable overage rent and breakpoint terms are offered by the landlord.”
Another landlord stressed the importance of negotiating fair and reasonable terms.
Rohit Bakshi, CEO of CCPL Developers Pvt Ltd, “As a center head, in order to fill vacant space at non prime areas, even taking up brands on franchise mode is also lucrative. I strongly feel that any investor should look into the possibility of fixing a minimum guarantee amount and percentage share, this way the risk is being shared between the retailer and the investor.”
Spectacular Results
Chuck Devers, owner, SOM, LLC, said overage contracts “can be very useful tools in helping a prospective future tenant, or even an existing tenant to take responsible business risks to either up-grade, enlarge or otherwise improve the selling environment…”
He cited an example of one tenant who was at the crossroads, continue doing what he had been successful at, or “implement a new marketing concept that would require a total re-build [and] introduce a new product line in an enlarged store…We joined together as landlord and tenant and negotiated a new lease that controlled rent increase to a very modest level while increasing their selling space by 50%.”
The results, said Devers, were “spectacular for both of us…” Sales increased more than 50%, lease income increased over 50%, and the store’s profitability increased greatly in excess of 50%. “The concept worked so well, in fact, that the company determined to replicate the model on close to 800 of their existing retail clothing stores.”
Caution should be taken in the use of overage deals, cautioned Morris. The landlord’s come-on rent structure needs to be short term and carefully planned. The landlord “may get some more deals done… [but] as my father used to tell me it is false economy to make each sale at a loss but expect to make it up in volume.”
More information on SHOPPING CENTER DIGEST, Expanding Retailers, the weekly tipsheet, SCD Eflash, the Directory of Major Malls, and our other products may be obtained from our website, www.shoppingcenters.com .
Sunday, April 4, 2010
What Are Some Suggestions Proposed To Stimulate Dealmaking?
This the subject of the Strolling the Agora column in the April 5, 2010 issue of Shopping Center Digest.
Though leasing and development is far from “frozen while landlords await a spring thaw,” it definitely has slowed over the last few years, with the more aggressive and hungry operators working overtime to find new ways to stimulate dealmaking in this very deep recession. Thus far, most landlords and tenants are using old and reliable techniques that have done well for them in the past; as we discussed in the last issue, retailers are taking advantage of conditions within the shopping center industry to negotiate short-term leases at agreeable rental rates for pop-up stores, and are using the latest technology to measure data testing numerous new concepts and demographics.
Going forward, the main obstacle to complete that deal today—after preliminary negotiations have been undertaken—is still the rent required by the owner-developer. After talk of short-term leases, numerous concessions on such standard “perks and allowances” covering CAM, fees, fixturing, and clauses related to kickouts, co-tenancies and the like, some landlords finally admit that “free” does not cause nausea or an allergic reaction.
One Florida-based strip operator conceded a while back—not for publication then-- that he was offering free rent in extreme instances, depending on the center and the Mom and Pop operator. Another Midwest landlord admitted that free rents are being offered now for “several months” just to get a tenant into a troubled property to avoid an even steeper slide in property values.
One Mom and Pop in San Diego noted he was not considering opening a second store because of the cost and risk. Then Westfield offered him “a deal he couldn’t refuse” and he took units in three local shopping malls in the area.
At times, a major source of leads could be existing tenants. “They have close relationships with other retailers and their recommendation can be a foot in the door to start negotiations,” said one broker.
Referral Program
As an example, Janine Landolina, a leasing agent at Treasure Coast Commercial Real Estate, said “I’ve recommended Landlords create a Tenant Referral Program for their existing tenants, giving them something (month free rent) for any referral tenant that signs a lease. This is something new we are about to implement with several different Landlords of different property types. By the end of August 2010, we will [be] able to determine if this program is generating results.”
Philip Stewart of Stewart Realty has placed a sign at one of his centers offering three months free rent to entice retailers and/or office tenants on the top floor of his project; he added that some are downsizing from 10,000 sq. ft. to 5-6,000 sq. ft. to cut operating costs and get rid of excess space, or re-locating from A space to B space and take advantage of lower occupancy costs.
Then there are the possibilities of introducing innovations in agreements, such as suggested by Deepak Vora of DVR Design. “How about exploring a lease with terms similar to a variable rate or a hybrid mortgage? The initial rent could be low and then adjusted upwards as the economy improves; it could be tied toGDP or some reliable sales data benchmarks. To keep investment manageable a master plan for tenant improvements can be prepared and the improvement done on an on-going basis as economy improves.”
And there’s Leighton Hunziker, president-asset & property management at Savills: “We’re doing deals here that effectively put the tenant on % of sales in the first year, and in the second year locks in a portion (85%) of that as the base rent with a Natural Break Point applied to the rent. Not ideal from a purely investment perspective but it’s a tenant with the lights on paying rent! It stimulates the Landlord to target marketing to grow sales, and the tenant is incentivised to work hard to generate sales.”
Peter D. Morris, CEO at Greenstead Group, noted that “tenants will continue to ‘trade up’. As the evolution continues those at the bottom will die out. To stimulate leasing, each property owner needs to refine [his] message…be a conduit for reaching a desirable market [and] a defined market. Therefore, it is important that each shopping center completely knows its market niche and builds a brand around that.
“Geography alone and filling a center with any warm body won’t cut it as we move well into a mature phase in the industry,” he said.
Understand What Retailers Need
“Retailers are looking for the best markets for their buck,” Morris pointed out. “Individual landlords can stimulate their leasing by understanding what each retailer really needs in a market and matching their efforts to the highest prospects.” He touched on multi-channel merchandising and “how the unique E-commerce landscape is going through the most radical shakeup of any retail strategy of all times…Government statistics are trending to 35% of all core retail sales to be online in 10 years.”
Gail Nichols of The Now Mall Corp said she’s negotiating with “several of the Top 100shopping center developers to implement our Rapid Online Order Fulfillment (ROOF) program to redirect lost online sales back to the stores and improve customer loyalty. In turn, this will retain and attract tenants, improve profits and market cap.”
Many retailers are closing lower-producing stores when leases expire, she continued, while they focus on growing online sales. Among these: “William-Sonoma@36.5%; Urban Outfitters@35.9%; Staples@31.7% ($7.7 billion)…As online sales continue to rise at the expense of in-store sales, their 20% to 30% return is also growing because consumers are not happy with the current 3 to 10 day shipping and the high shipping costs. And ship-to-store for pickup is no faster or less hassle.
“When shopping centers implement [ROOF with in-store shopping and delivery],” said Nichols, “these lost sales will return quickly. And they also gain new customers they never really had before…seniors; people with disabilities; busy families & offices.”
Then there are the possibilities of introducing innovations in agreements, such as suggested by Deepak Vora of DVR Design. “How about exploring a lease with terms similar to a variable rate or a hybrid mortgage? The initial rent could be low and then adjusted upwards as the economy imporives; it could be tied toGDP or some reliable sales data benchmarks. To keep investment manageable a master plan for tenant improvements can be repared and the improvement done on an on-going basis as economy improves.”
In the Houston market, the luxury-oriented Highland Village took excess space and used it to improve the overall shopping experience. It created a Farmers Market for local farmers and producers to market fresh fruits and vegetables, and also an Adoption Center for a non-profit organization to operate a weekend aimal adoption center which has placed over 1,650 dogs and cats in private homes over the last three years.
The center also runs complimentary valet service, 24-hour security, live holiday music and a trolley transportation service that takes shoppers around to the stores and to their homes in neary neighborhoods.
Generating New Life
And there’s also the push by leading retailers to go offshore. Some point to Canada as a primary target: “It’s in a nearby market,” said one consultant, “that is not as foreign as Europe or Asia or the Mid-East, with the potential much greater.” He pointed to 14 sq. ft. of shopping center space per capita there, as compared with about 23 in the US, and consumers in Canada are already aware of US brands; “some are producing 2.5 times the sales per sq. ft. as their US stores.”
This is where J. Crew is scouting its first non-US locations, and the focus directed there by others as Gap, Limited, and its various divisions: Bath & Body Works, Victoria’s Secret, and its acquisition in 2007 of lingerie retailer La Senza...”giving it something to build on.”
Established names still have great marketability, even for a failed enterprise. Recent examples, of course are such once-proud operators as CompuUSA and Circuit City.
These brands were acquired last year by Systemax Inc, parent company of TigerDirect.com, and re-born as online retailers. Traditional brick and mortar stores were first tested cautiously in the US and Canada, and now there are plans to increase this presence—there are now 34 CompuUSA units; among markets being considered for new and expanding units are Houston, Chicago and Florida, and Canada.
“Recession hurts, but it also creates opportunities that would not have existed otherwise,” said CEO Richard Leeds.
As above, some of the suggestions as ways to stimulate more dealmaking may tie-in directly to the focus of those servicing specific areas of the shopping center/retail chain industry. For example, Michael Morelli of Tampa Bay Signs: “This is where I think by establishing a relationship to be able to offer the potential tenant their exterior signage at a discounted rate by working with one company can benefit the agent, leasee, and sign company.”
Dealmakers have always prided themselves on finding ways to get the lease signed. “That’s the art of negotiating,” said one seasoned veteran. “If both parties come to the table and sincerely want to make it happen, it will. All that’s required is giving a little here, getting a little there; both may not be completely happy with the final agreement, but that’s one way to gauge that it’s fair in the current market.”
More information on Shopping Center Digest, Expanding Retailers, the weekly SCD Eflash, and the Directory of Major Malls may be obtained from our website at www.shoppingcenters.com .
Though leasing and development is far from “frozen while landlords await a spring thaw,” it definitely has slowed over the last few years, with the more aggressive and hungry operators working overtime to find new ways to stimulate dealmaking in this very deep recession. Thus far, most landlords and tenants are using old and reliable techniques that have done well for them in the past; as we discussed in the last issue, retailers are taking advantage of conditions within the shopping center industry to negotiate short-term leases at agreeable rental rates for pop-up stores, and are using the latest technology to measure data testing numerous new concepts and demographics.
Going forward, the main obstacle to complete that deal today—after preliminary negotiations have been undertaken—is still the rent required by the owner-developer. After talk of short-term leases, numerous concessions on such standard “perks and allowances” covering CAM, fees, fixturing, and clauses related to kickouts, co-tenancies and the like, some landlords finally admit that “free” does not cause nausea or an allergic reaction.
One Florida-based strip operator conceded a while back—not for publication then-- that he was offering free rent in extreme instances, depending on the center and the Mom and Pop operator. Another Midwest landlord admitted that free rents are being offered now for “several months” just to get a tenant into a troubled property to avoid an even steeper slide in property values.
One Mom and Pop in San Diego noted he was not considering opening a second store because of the cost and risk. Then Westfield offered him “a deal he couldn’t refuse” and he took units in three local shopping malls in the area.
At times, a major source of leads could be existing tenants. “They have close relationships with other retailers and their recommendation can be a foot in the door to start negotiations,” said one broker.
Referral Program
As an example, Janine Landolina, a leasing agent at Treasure Coast Commercial Real Estate, said “I’ve recommended Landlords create a Tenant Referral Program for their existing tenants, giving them something (month free rent) for any referral tenant that signs a lease. This is something new we are about to implement with several different Landlords of different property types. By the end of August 2010, we will [be] able to determine if this program is generating results.”
Philip Stewart of Stewart Realty has placed a sign at one of his centers offering three months free rent to entice retailers and/or office tenants on the top floor of his project; he added that some are downsizing from 10,000 sq. ft. to 5-6,000 sq. ft. to cut operating costs and get rid of excess space, or re-locating from A space to B space and take advantage of lower occupancy costs.
Then there are the possibilities of introducing innovations in agreements, such as suggested by Deepak Vora of DVR Design. “How about exploring a lease with terms similar to a variable rate or a hybrid mortgage? The initial rent could be low and then adjusted upwards as the economy improves; it could be tied toGDP or some reliable sales data benchmarks. To keep investment manageable a master plan for tenant improvements can be prepared and the improvement done on an on-going basis as economy improves.”
And there’s Leighton Hunziker, president-asset & property management at Savills: “We’re doing deals here that effectively put the tenant on % of sales in the first year, and in the second year locks in a portion (85%) of that as the base rent with a Natural Break Point applied to the rent. Not ideal from a purely investment perspective but it’s a tenant with the lights on paying rent! It stimulates the Landlord to target marketing to grow sales, and the tenant is incentivised to work hard to generate sales.”
Peter D. Morris, CEO at Greenstead Group, noted that “tenants will continue to ‘trade up’. As the evolution continues those at the bottom will die out. To stimulate leasing, each property owner needs to refine [his] message…be a conduit for reaching a desirable market [and] a defined market. Therefore, it is important that each shopping center completely knows its market niche and builds a brand around that.
“Geography alone and filling a center with any warm body won’t cut it as we move well into a mature phase in the industry,” he said.
Understand What Retailers Need
“Retailers are looking for the best markets for their buck,” Morris pointed out. “Individual landlords can stimulate their leasing by understanding what each retailer really needs in a market and matching their efforts to the highest prospects.” He touched on multi-channel merchandising and “how the unique E-commerce landscape is going through the most radical shakeup of any retail strategy of all times…Government statistics are trending to 35% of all core retail sales to be online in 10 years.”
Gail Nichols of The Now Mall Corp said she’s negotiating with “several of the Top 100shopping center developers to implement our Rapid Online Order Fulfillment (ROOF) program to redirect lost online sales back to the stores and improve customer loyalty. In turn, this will retain and attract tenants, improve profits and market cap.”
Many retailers are closing lower-producing stores when leases expire, she continued, while they focus on growing online sales. Among these: “William-Sonoma@36.5%; Urban Outfitters@35.9%; Staples@31.7% ($7.7 billion)…As online sales continue to rise at the expense of in-store sales, their 20% to 30% return is also growing because consumers are not happy with the current 3 to 10 day shipping and the high shipping costs. And ship-to-store for pickup is no faster or less hassle.
“When shopping centers implement [ROOF with in-store shopping and delivery],” said Nichols, “these lost sales will return quickly. And they also gain new customers they never really had before…seniors; people with disabilities; busy families & offices.”
Then there are the possibilities of introducing innovations in agreements, such as suggested by Deepak Vora of DVR Design. “How about exploring a lease with terms similar to a variable rate or a hybrid mortgage? The initial rent could be low and then adjusted upwards as the economy imporives; it could be tied toGDP or some reliable sales data benchmarks. To keep investment manageable a master plan for tenant improvements can be repared and the improvement done on an on-going basis as economy improves.”
In the Houston market, the luxury-oriented Highland Village took excess space and used it to improve the overall shopping experience. It created a Farmers Market for local farmers and producers to market fresh fruits and vegetables, and also an Adoption Center for a non-profit organization to operate a weekend aimal adoption center which has placed over 1,650 dogs and cats in private homes over the last three years.
The center also runs complimentary valet service, 24-hour security, live holiday music and a trolley transportation service that takes shoppers around to the stores and to their homes in neary neighborhoods.
Generating New Life
And there’s also the push by leading retailers to go offshore. Some point to Canada as a primary target: “It’s in a nearby market,” said one consultant, “that is not as foreign as Europe or Asia or the Mid-East, with the potential much greater.” He pointed to 14 sq. ft. of shopping center space per capita there, as compared with about 23 in the US, and consumers in Canada are already aware of US brands; “some are producing 2.5 times the sales per sq. ft. as their US stores.”
This is where J. Crew is scouting its first non-US locations, and the focus directed there by others as Gap, Limited, and its various divisions: Bath & Body Works, Victoria’s Secret, and its acquisition in 2007 of lingerie retailer La Senza...”giving it something to build on.”
Established names still have great marketability, even for a failed enterprise. Recent examples, of course are such once-proud operators as CompuUSA and Circuit City.
These brands were acquired last year by Systemax Inc, parent company of TigerDirect.com, and re-born as online retailers. Traditional brick and mortar stores were first tested cautiously in the US and Canada, and now there are plans to increase this presence—there are now 34 CompuUSA units; among markets being considered for new and expanding units are Houston, Chicago and Florida, and Canada.
“Recession hurts, but it also creates opportunities that would not have existed otherwise,” said CEO Richard Leeds.
As above, some of the suggestions as ways to stimulate more dealmaking may tie-in directly to the focus of those servicing specific areas of the shopping center/retail chain industry. For example, Michael Morelli of Tampa Bay Signs: “This is where I think by establishing a relationship to be able to offer the potential tenant their exterior signage at a discounted rate by working with one company can benefit the agent, leasee, and sign company.”
Dealmakers have always prided themselves on finding ways to get the lease signed. “That’s the art of negotiating,” said one seasoned veteran. “If both parties come to the table and sincerely want to make it happen, it will. All that’s required is giving a little here, getting a little there; both may not be completely happy with the final agreement, but that’s one way to gauge that it’s fair in the current market.”
More information on Shopping Center Digest, Expanding Retailers, the weekly SCD Eflash, and the Directory of Major Malls may be obtained from our website at www.shoppingcenters.com .
Tuesday, March 23, 2010
The Time Is Ripe For Many Retailers To Test New Concepts. What Impact Do These New Approaches Have For Leasing, Development And Expansion?
This Strolling the Agora column is from the March 22, 2010 Issue of Shopping Center Digest
Those retailers who have weathered the economic recession and are now “flush with bucks” are looking at ways to take advantage of changing demographics and conditions within the industry to find new ways to grow. And one pathway could be to spin off or creation of new concepts that exploit what they see as an under-served niche.
It has worked extremely well for some operators in the past; a prime example, of course, is Target, which was originally a spinoff by a leading mainstream department store, Dayton-Hudson.
Conditions now are ripe for testing. Due to high vacancy rates in shopping centers of all sizes and focus, landlords are more amenable to granting inexpensive, short-term leases to test these concepts--- and the ease of data capture and analyzingf results can be relatively inexpensive; result, many more “pop up” stores becoming a common fixture in these projects, and even in CBDs of major metropolitan markets, especially those involving home repair and furnishings. And you have established operations widening their focus, perhaps a pizza chain acquiring restaurants specializing in Mexican or Indian foods.
Whether there are a record number of new concepts being tested is hard to measure; I don’t know if this type of information was ever gathered before. However, anecdotal evidence shows that it is a more visible and common trend today than previously reported. The greater number of these concepts being developed are in associated areas related to the main focus of the parent company; you’re unlikely, for example, find a shoe chain “popping up” with a store selling hardware, for example.
Selecting Niches
So you have chains specializing in women’s wear trying on units to cater to men; you have teen-oriented retailers establishing brands focusing on pre-teens or—since they have an aging, loyal customer—testing completely separate concepts to serve the needs of those in their 20s and 30s. We are not speaking of a discount operator, for example, opening an in-store department providing optical service, or a grocery chain inserting a coffee shop within its supermarket, or wines and liquors.
This shopping center-retail chain industry has always been innovative—as we’ve cited numerous times in the past, some successful new directions, and some not-so-successful directions. Would you believe, at one time, anchors, such as a department store, thought it would better merchandising to not have another department store in the same center because “Who needed the extra competition in your own backyard?”
The boom in information and technology has made it a relatively simple matter to gather data of all sorts, massage these numbers, and pinpoint areas that are just waiting for someone to exploit. “Whereas,” said one senior dealmaker, “we’ve had the surge to big-box stores and category-killers, now we’re getting into a more refined area where we can zero-in on specific segments: seniors, hikers and campers and sportsmen, those who want to build their own one-of-a-kind toys. You can call this trend one of segmenting; select this niche and then direct it at a market where there are an overbundance of these people.”
The Impact On Dealmaking
So, what does this increasing number of specialized brands mean for the leasing, expansion and development of shopping centers? What, overall, will be the impact from these new concepts.
There is a wide range of opinion from seasoned dealmakers. They go from those who are far from excited:
“My opinion [is that the] net effect will be zero. I wonder if it isn’t being driven as much by three things: Landlords will to do ‘any’ retail chain deal in their shopping centers; rock bottom pricing in some ‘A’ location and whether or not retailers are simply carving out ‘high profit margin items’ for a quick hit to their bottom line/quarterly earning announcements?”
On the other hand, there are those who look at it as the best thing since sliced bread.
“It gives me as a landlord another tenant to add to my merchandise mix, one that a competing mall may not have, and, if successful can be quickly added to almost every center in my portfolio. If it really takes off, it gives me a strong selling point to attract other retailers, such as when Victoria’s Secret became a magnet, or Nordstrom, for other retailers.”
Another owner-developer said he would be less likely to test a concept in a top mall at favorable terms if it were being proposed by a ‘Mom and Pop.’ “If it’s a great idea and extremely successful, they wouldn’t have the required investment capital to do much with it, except open another store or two.”
To the retailer, a new concept can ride on the coattails or loyalty of established customers and transfer this loyalty to another brand, providing another income stream to the parent.
To the landlord, in an industry that has been contracting due to closings and bankruptcies, a new concept may mean another tenant available to fill continuing vacancies.
More information on Shopping Center Digest and our other products, such as Expanding Retailers, the weekly Eflash, the Directory of Major Malls, etc., may be obtained from our website, www.shoppingcenters.com .
Those retailers who have weathered the economic recession and are now “flush with bucks” are looking at ways to take advantage of changing demographics and conditions within the industry to find new ways to grow. And one pathway could be to spin off or creation of new concepts that exploit what they see as an under-served niche.
It has worked extremely well for some operators in the past; a prime example, of course, is Target, which was originally a spinoff by a leading mainstream department store, Dayton-Hudson.
Conditions now are ripe for testing. Due to high vacancy rates in shopping centers of all sizes and focus, landlords are more amenable to granting inexpensive, short-term leases to test these concepts--- and the ease of data capture and analyzingf results can be relatively inexpensive; result, many more “pop up” stores becoming a common fixture in these projects, and even in CBDs of major metropolitan markets, especially those involving home repair and furnishings. And you have established operations widening their focus, perhaps a pizza chain acquiring restaurants specializing in Mexican or Indian foods.
Whether there are a record number of new concepts being tested is hard to measure; I don’t know if this type of information was ever gathered before. However, anecdotal evidence shows that it is a more visible and common trend today than previously reported. The greater number of these concepts being developed are in associated areas related to the main focus of the parent company; you’re unlikely, for example, find a shoe chain “popping up” with a store selling hardware, for example.
Selecting Niches
So you have chains specializing in women’s wear trying on units to cater to men; you have teen-oriented retailers establishing brands focusing on pre-teens or—since they have an aging, loyal customer—testing completely separate concepts to serve the needs of those in their 20s and 30s. We are not speaking of a discount operator, for example, opening an in-store department providing optical service, or a grocery chain inserting a coffee shop within its supermarket, or wines and liquors.
This shopping center-retail chain industry has always been innovative—as we’ve cited numerous times in the past, some successful new directions, and some not-so-successful directions. Would you believe, at one time, anchors, such as a department store, thought it would better merchandising to not have another department store in the same center because “Who needed the extra competition in your own backyard?”
The boom in information and technology has made it a relatively simple matter to gather data of all sorts, massage these numbers, and pinpoint areas that are just waiting for someone to exploit. “Whereas,” said one senior dealmaker, “we’ve had the surge to big-box stores and category-killers, now we’re getting into a more refined area where we can zero-in on specific segments: seniors, hikers and campers and sportsmen, those who want to build their own one-of-a-kind toys. You can call this trend one of segmenting; select this niche and then direct it at a market where there are an overbundance of these people.”
The Impact On Dealmaking
So, what does this increasing number of specialized brands mean for the leasing, expansion and development of shopping centers? What, overall, will be the impact from these new concepts.
There is a wide range of opinion from seasoned dealmakers. They go from those who are far from excited:
“My opinion [is that the] net effect will be zero. I wonder if it isn’t being driven as much by three things: Landlords will to do ‘any’ retail chain deal in their shopping centers; rock bottom pricing in some ‘A’ location and whether or not retailers are simply carving out ‘high profit margin items’ for a quick hit to their bottom line/quarterly earning announcements?”
On the other hand, there are those who look at it as the best thing since sliced bread.
“It gives me as a landlord another tenant to add to my merchandise mix, one that a competing mall may not have, and, if successful can be quickly added to almost every center in my portfolio. If it really takes off, it gives me a strong selling point to attract other retailers, such as when Victoria’s Secret became a magnet, or Nordstrom, for other retailers.”
Another owner-developer said he would be less likely to test a concept in a top mall at favorable terms if it were being proposed by a ‘Mom and Pop.’ “If it’s a great idea and extremely successful, they wouldn’t have the required investment capital to do much with it, except open another store or two.”
To the retailer, a new concept can ride on the coattails or loyalty of established customers and transfer this loyalty to another brand, providing another income stream to the parent.
To the landlord, in an industry that has been contracting due to closings and bankruptcies, a new concept may mean another tenant available to fill continuing vacancies.
More information on Shopping Center Digest and our other products, such as Expanding Retailers, the weekly Eflash, the Directory of Major Malls, etc., may be obtained from our website, www.shoppingcenters.com .
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