This column of Strolling the Agora is from the August 2, 2010 issue of SHOPPING CENTER DIGEST
It’s an old, tired cliché, and yet true to a great extent--because that is what clichés are. The cliché? That figures don’t lie, but liars figure. Now take some of the latest numbers that have been circulating the last few days regarding the restaurant industry, one of the fastest-growing segments in the shopping center-retail chain industry today, at a time when few will classify this real estate niche as an aggressively expanding market.
So, some point to the number of US restaurants that closed within the past year, mostly independents. The tally of 5,204, according to the NPD Group, signals that “It’s been a difficult time for the restaurant industry, with customer traffic down over the last year” by about 3%.
I won’t dispute the numbers, but I question the analysis and conclusion. As one, no doubt biased and knowledgeable maven (Paul Fetscher of Great American Brokerage Co ) who specializes in this market keeps telling me, business is good because “people always gotta eat.” If you compare the number of closings with the totality—316,641 independents and 267,868 chain units—that’s not horrendous; in fact, it’s a very low percentage.
So compare the negative assessment with another, conflicting survey from People Report which states that employment expectations from restaurant operators are up, nearly at the same level before the economy tanked. It reported that 42% of operators that were surveyed expected to add hourly workers in the third quarter, while only 5% would cut staff, and that nearly half expected to hire more managers. This survey predicts modest growth in the restaurant industry increasing through the rest of the year.
No dispute that it’s easy to gorge on all those numbers and regurgitate only those that grab the most attention. None of us are immune from that disease. A question, however: Do they do it for the attention, or is it through lack of knowledge, ignorance?
I see that some of the largest most successful chains are reporting increases in same store sales, operators like Ruby Tuesday, The Cheesecake Factory, Panera Bread, Cracker Barrel. And that numerous others are taking advantage of the stubborn recession and lower rent demands by landlords to expand aggressively on the homefront, many through franchising. Especially ethnic restaurants focusing on the growing appetite for Mexican, Indian, Chinese, Philippine food, or the old, reliable standbys like Chick-fil-A, Pizza Hut, Domino’s, Papa John’s…hey, are these “Italian” restaurants no longer ethnic???, Subway, Quiznos, Taco Bell, KFC, Popeye’s.
Overseas Expansion
The behemoths, of course, McDonald’s, Burger King, Wendy’s, Starbucks, haven’t been doing so great domestically, and some of them are directing most of their expansion to foreign shores; we’ve discussed a number of these points in earlier columns and why they see greater growth opportunity across borders.
With today’s technology, with billions of bits of conflicting data swirling all around us, anyone can pick and choose which ones to pay attention to, and which ones to ignore. No question, the bigger the number—without clarification or explanation—the more likely it will draw attention.
Another example: Chain Store Guide has identified the 50 fastest-growing restaurant chains with more than 20 locations over the last five years; leading the pack is Which Wich Inc, which has grown 836.4% over the last five years. Impressive, huh? It has a total of 103 locations and total annual corporate revenue of $9 million; I’m not a great mathematician, but that’s only $88,000 that each unit conributess to the corporate coffers.
Some of the better operators in the restaurant industry would probably be closing individual units that did $88,000 in total sales for the year. Ruby Tuesday, for instance, is converting several of its underperforming restaurants to other brands in its family—Jim ‘N Nicks Bar-B-Q, Truffles Café, and Wok Hay—at a cost of $400,000 each. I’m willing to bet that each of the conversions are producing--as underperforming locations--more than $88,000 in annual sales to the corporate accounts.
Hey, it’s still a more impressive figure than that of No. 7 on the list, Froots Fresh Smoothies, whose 54 units produce a total of $1,900,000 in corporate revenue, or just over $35,000 each.
Discounting A Danger
The most common practice by retailers to drive customers into the stores is by deep discounting. Many are betting on increased sales for Back To School because of heavy discounting--which may not always lead to a profitable balance sheet. But it does increase traffic and protect market share, according to experienced retailers.
And then, there’s Cracker Barrel, with its 594 restaurants and its philosophy. It made $14.4 million the last quarter, up 20% from a year earlier. The reason for its success, according to CEO Michael Woodhouse, is because it didn’t slash prices as many of its competitors did.
“Once you devalue something, you’re digging a big hole and it’s (tough) to get out of that,” he said. Instead of getting “caught up in price warfare” the chain focused on providing value and “treating our guests right.”
The chain is ranked at the top of the list of 10 national full-service restaurants in customer satisfaction, according to Technomic Inc, based on its consumer survey of 4,000 respondents.
Understand What You’re Seeing
So now we get back to dealmaking and leasing and developing our shopping centers. All of the above must be taken with shovels full of salt.
I’ve heard some landlords still insist that they wouldn’t drop the rent because they have a great project—and have seen them with vacant stores until “they dropped the rent”—or lost the project.
And I’ve heard some restaurant chains become nervous about making a deal in a center, because the location they’re considering was vacated by another food operator. It may, however, have been a poor operator, or the wrong brand in a good location. The demographics for a corner may look the same for a Pizza Hut, KFC or a Dunkin’ Donuts, but for one it’s a home run and for the another a disaster: Is the heavy traffic in stopping for coffee, or a bucket of chicken for breakfast?
Look at the numbers. But above all, understand what you’re looking at.
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 .
Monday, August 2, 2010
Friday, July 16, 2010
"Summer Doldrums," With Expected Slowdown In Dealmaking, Still Raise Many Conflicting And Contradictory Questions
This column of Strolling the Agora appears in the July 19, 2010 issue of SHOPPING CENTER DIGEST
As we get deeper into the “summer doldrums,” when even the most aggressive and optimistic dealmakers find it hard to keep moving forward because of automatic vacation replies to emails and telephone messages, there are still interesting and contradictory highpoints in the industry. I find “interesting” such a great word because it covers a multitude of sins, doesn’t “say” anything, and leaves it open for the reader to interpret it anyway he/she wishes. Mebbe wishy-washy is a good description.
Yes, the vacancy rate rose to 10.9% in our neighborhood and community shopping centers, according to Reis, getting close to the record 11.1% recorded in ’91, with vacancies in large malls in the top 80 markets up now to 9%. Result: rents are continuing to come down across the board.
With June sales up only slightly from last year’s, “lackluster at best,” according to one analyst, because consumers are still showing marked caution to spending, why were department store sales up 5.8%--higher than expected—while discounters said growth was only 2.9%--lower than expected? And how do you equate this with research saying consumers are more frugal, focusing on bargain-shopping, using coupons, searching for “good buys”?
And with the shopping center rents dropping, and vacancies rising, why are so many retailers, including restaurant chains, now heading for urban/metro centers where rents are more expensive, operating costs are higher, and chances for success riskier?
Cross Border Traffic
So, why are so many domestic chains—including Wal-Mart-- heading overseas because they see greater opportunities for growth, and more foreign retailers are coming to the US and Canada for the same reason?
High-end department stores, luxury and fashion retailers have always pushed their exclusivity and traded on their posh surroundings and stressed that certain merchandise could be found only in their establishments-- and by paying top dollar. So, why are so many of them now involved in deep discounting and heading for outlet centers?
The most expensive designers—Marc Jacobs, Jimmy Choo, Hugo Boss, etc., etc--have avoided selling to the masses on the internet in the belief that it will erode their image. So, why are so many now preparing, perish the thought, to offer their product directly to the masses of consumer from their own websites?
Was it so many years ago that a highly regarded developer of quality malls told me that he didn’t want us to list any of his centers in our section, Centers With Lease Space Available, because he felt admitting to vacancies would detract from the prestigious image he wanted to project? Now even the most Triple-A project with a waiting list of eager tenants-to-be is not averse to having us mention the mall and leasing agent to call.
Interesting Contrasts
Hmmmmmmmmm, there’s that “interesting” again, as we look at two major urban cities and contradictory projects there.
In New York, Thor Equities just won the Takashimaya building on Fifth Avenue by bidding $142 million, and is expected to put another $40-$60 million into it to add some space and update the façade. Reportedly, the developer hopes to rent the first eight floors to a single, high-end retail tenant willing to pay up to $2,500 per sq. ft., possibly a European luxury company seeking top exposure, or a domestic merchant with a similar demand.
Then, in downtown Winnipeg, Canada’s top department store, The Bay, is undergoing renovation of its 75,000 sq. ft. building which has been operating there since 1926.
The retailer is moving its discount chain Zeller’s into the basement and looking to rent the upper floors possibly to office tenants. Said a spokesperson: “We are just condensing. Right now, we only occupy about 50 % of the space.” The owner of The Bay is now NRDC, a US-based company.
If you’re looking for a single, concise statement to bring together all these various anomalies so they make sense and are easily understandable, forget it. I can’t do it, unless you accept a token “expediency.”
And what does it all mean for the average dealmaker, just trying to put a living, breathing tenant into a 2,000 sq. ft. vacancy?
Well, one more curiosity: Some top professionals occasionally complain when they’re having large amounts of trouble leasing a center to a retail tenant that they “can’t even give the store away.”
In Cameron Village, the first planned community in Raleigh, NC, the shopping center is doing just that, offering space to nonprofits who are giving back to the community. It’s a chance to do something good for a local charity and it helps avoid one of the biggest eyesores in the shopping center industry: vacant space. “It’s not about always trying to collect the old buck,” said its property manager Lynne Worth.
Is there a message here?
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 .
As we get deeper into the “summer doldrums,” when even the most aggressive and optimistic dealmakers find it hard to keep moving forward because of automatic vacation replies to emails and telephone messages, there are still interesting and contradictory highpoints in the industry. I find “interesting” such a great word because it covers a multitude of sins, doesn’t “say” anything, and leaves it open for the reader to interpret it anyway he/she wishes. Mebbe wishy-washy is a good description.
Yes, the vacancy rate rose to 10.9% in our neighborhood and community shopping centers, according to Reis, getting close to the record 11.1% recorded in ’91, with vacancies in large malls in the top 80 markets up now to 9%. Result: rents are continuing to come down across the board.
With June sales up only slightly from last year’s, “lackluster at best,” according to one analyst, because consumers are still showing marked caution to spending, why were department store sales up 5.8%--higher than expected—while discounters said growth was only 2.9%--lower than expected? And how do you equate this with research saying consumers are more frugal, focusing on bargain-shopping, using coupons, searching for “good buys”?
And with the shopping center rents dropping, and vacancies rising, why are so many retailers, including restaurant chains, now heading for urban/metro centers where rents are more expensive, operating costs are higher, and chances for success riskier?
Cross Border Traffic
So, why are so many domestic chains—including Wal-Mart-- heading overseas because they see greater opportunities for growth, and more foreign retailers are coming to the US and Canada for the same reason?
High-end department stores, luxury and fashion retailers have always pushed their exclusivity and traded on their posh surroundings and stressed that certain merchandise could be found only in their establishments-- and by paying top dollar. So, why are so many of them now involved in deep discounting and heading for outlet centers?
The most expensive designers—Marc Jacobs, Jimmy Choo, Hugo Boss, etc., etc--have avoided selling to the masses on the internet in the belief that it will erode their image. So, why are so many now preparing, perish the thought, to offer their product directly to the masses of consumer from their own websites?
Was it so many years ago that a highly regarded developer of quality malls told me that he didn’t want us to list any of his centers in our section, Centers With Lease Space Available, because he felt admitting to vacancies would detract from the prestigious image he wanted to project? Now even the most Triple-A project with a waiting list of eager tenants-to-be is not averse to having us mention the mall and leasing agent to call.
Interesting Contrasts
Hmmmmmmmmm, there’s that “interesting” again, as we look at two major urban cities and contradictory projects there.
In New York, Thor Equities just won the Takashimaya building on Fifth Avenue by bidding $142 million, and is expected to put another $40-$60 million into it to add some space and update the façade. Reportedly, the developer hopes to rent the first eight floors to a single, high-end retail tenant willing to pay up to $2,500 per sq. ft., possibly a European luxury company seeking top exposure, or a domestic merchant with a similar demand.
Then, in downtown Winnipeg, Canada’s top department store, The Bay, is undergoing renovation of its 75,000 sq. ft. building which has been operating there since 1926.
The retailer is moving its discount chain Zeller’s into the basement and looking to rent the upper floors possibly to office tenants. Said a spokesperson: “We are just condensing. Right now, we only occupy about 50 % of the space.” The owner of The Bay is now NRDC, a US-based company.
If you’re looking for a single, concise statement to bring together all these various anomalies so they make sense and are easily understandable, forget it. I can’t do it, unless you accept a token “expediency.”
And what does it all mean for the average dealmaker, just trying to put a living, breathing tenant into a 2,000 sq. ft. vacancy?
Well, one more curiosity: Some top professionals occasionally complain when they’re having large amounts of trouble leasing a center to a retail tenant that they “can’t even give the store away.”
In Cameron Village, the first planned community in Raleigh, NC, the shopping center is doing just that, offering space to nonprofits who are giving back to the community. It’s a chance to do something good for a local charity and it helps avoid one of the biggest eyesores in the shopping center industry: vacant space. “It’s not about always trying to collect the old buck,” said its property manager Lynne Worth.
Is there a message here?
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 .
Monday, July 5, 2010
How--And Why--The "Chicago Deal" By Wal-Mart Will Impact On That City And The Shopping Center/Retail Chain Industry
This column of Strolling the Agora appears in the July 5, 2010 issue of SHOPPING CENTER DIGEST
“Of course it’s going to impact on the shopping center industry,” said a seasoned dealmaker. “Wal-Mart is so big that whatever it does is going to affect those specifically within this small real estate niche, and it will expand out to touch thousands of others not directly related.”
He was referring to the recent decision in Chicago where, after six years, the city council finally approved a zone change to permit the discount operator to build a store in a mixed-use project on the South Side, due to open in 2012. This, the chain said, would grow to dozens of stores within the next five years.
There’s no question that the stimulus behind the approval is the severe recession responsible for high unemployment in this city and across the nation, resulting in severe cutbacks of municipal services caused by reduced tax revenue and high deficits. Wal-Mart’s promise to hire 12,000 workers and to pay above minimum wage has softened the primary objections of the established unions; its estimate of paying some $500 million to the city in sales taxes, the expectation of its making available some space in its stores to small businesses, and to contribute $20 million to city charities also softened local opposition from community groups and independent retailers.
The discounter is talking of constructing units with union labor, stores as small as 8,000 sq. ft. in addition to its superstore concept, formats concentrating on groceries, and online services enabling customers to pick up merchandise at the stores. Also, some Chicago officials pointed out, a lot of local citizens are spending millions of their dollars and paying their sales taxes to benefit communities containing Wal-Marts that circle the city.
The Bentonville, AR, behemoth grew to be such a dominator force on the retail side by concentrating its growth in small towns and suburbs; essentially, it saturated this market.
Industry Reaction
According to Hank Mullany, who heads the Wal-Mart’s stores in the Midwest, Northeast, and mid-Atlantic regions, “We have very small market share in the large cities within the United States, so we see a big opportunity for us to grow in those urban markets.”
The reaction of many in the shopping center/retail chain industry is mostly strongly in favor of this new direction being taken.
Said Peter D. Morris, CEO at Greenstead Group: “Wal-Mart is simply watching the demographic and trend curves which indicate a new ‘urbanism’ as boomers move away from the burbs and back to the amenities of urban life. Smart developers should be watching this as many retailers have successfully clustered around [its] draw. The other side of the impact of urban Wal-Marts will be felt on unorganized business improvement districts and urban area merchants associations because these organizations typically lack [the] resources and management of a shopping center under a unified ownership.”
Brian Spray, owner/sr. project manager at Integrated Engineering, pointed out that large cities have become more accepting of big-box stores. “Most cities face budget short falls as they do not have enough tax revenue. Big boxes generate massive ratables for the city, provide affordable items to the residents, and create jobs for local residents who do have personal transportation.”
The Philadelphia Example
He pointed to an example of strong unions losing their hold on the city politic. “Here in
Philadelphia the Mayor had to beat the union into submission when MTV came to town a few years back to film a season of The Real World. The city needed the revenue generated from juniors who would now want to visit the city, go to school here and possibly work here. The unions drove MTV out of town as they were not the winning bidders on the project. The city had to work very hard to get MTV to come back.”
Relating to this city, Michael Fisher, who is a local developer at RealMarq and a faculty member at University of Phoenix, said Wal-Mart’s entry there had “little impact on the local retailers” and pointed to an opposite example in New York’s borough of The Bronx where strong union opposition helped kill development last May at the Kingsbridge Armory. There demands that tenants in the project pay $2.75 per hour above minimum wage forced developer Related Companies to drop plans for the shopping center.
Fisher pointed to other big box retailers—COSTCO, Home Depot, IKEA, Target, Lowes—who have successfully entered urban areas with the cooperation of local politicians and community groups. “Retailers need to look at these big boxes as a benefit; they bring a lot more people to that corner of the world. What can they do to benefit from those new entries to the market? Change is the only sure thing; Wal-Mart may seen to change the marketplace but in reality it adds to vibrancy of marketplace.”
Not One-Sided
The discounter, agreed Marsha Getto-Aikens, principal of Regoup Consulting, is “very much aware of the changing demographics, our aging population, the declining birth rate. Even more important, the movement of certain age/ethnic groups from suburbs to the cities, and vice versa…Cities have to decide if tghey want to foster and be differentiated by the smaller, uncommon, vibrant, retailer tht crerates a far more interesting shopping environment, combined with better residential, and a resugence of community-centgric components that increase the attractiveness of urban living, or NOT.”
It’s tough for a city to turn their back on the increased tax revenue Wal-Mart would generate, she continued, “however, you have to believe there are other ways to create revenue that does not involve the addition of more hardscape and less individuality.”
Susan Schulte, president of Schulte Real Estate Resources, doubted the Wal-Mart deal in Chicago would have much effect on the larger shopping centers and malls. It could however, “have a negative impact on the smaller, less occupied strip centers that may already be struggling. I think it will have a greater impact on grocery stores and some of the smaller independent businesses. Hopefully our economy will be stronger by the time these stores actually start to open for business. With the additional jobs there should be benefit to most retailers, even at lower wages.”
Some in the industry were uncomfortable about outside pressure being exerted to control wages paid by companies.
“Last time I checked,” said one dealmaker, “we were in a capitalistic free society. A merchant should be allowed to go to the market and hire at a rate a worker is willing to work for. Should no workers be available at those wages, they need to pay higher wages. That’s the nature of capitalism.
“The do-gooders have one fallacy in their reasoning. Paying a ‘living Wage’ doesn’t assure higher productivity. Therefore in order to attain desired ROI, the retailer is forced to raise prices—to the inner city consumer. That’s a lose/lose proposition.”
Another asks about where would be the cutoff point, where do you draw the line?
“A guy with 6 McDonalds? Patio.com? Once you get the biggest over a barrel, then the next smaller, then the next smaller, until everyone had to do it.? It unevens the playing field. I’m not in favor of leveling the field by punishing and penalizing the most efficient player!”
Question Of Dominance
Several also pointed to Wal-Mart’s history as a retail giant who trampled independent operators in small communities. Veteran dealmakers related historical anecdotes where the discounter cut prices below cost to force local merchants to close, and then raised their prices when they became overwhelmingly dominant in a small market.
“These problems experienced in small town USA,” warned one, “when Wal-Mart dominated those areas—will repeat itself in the urban retail landscape.”
The immediate impact of what has taken place—and will take place in Chicago-- said one local real estate maven, “will mean many more deals and commissions going to those able to put together these packages, for individual freestanding Wal-Marts and as anchors in small strip centers. There are a number of these with substantial vacancies caused by the demise of Circuit City, Linens-N-Things, and other well-known retailers.”
Another pointed out that due to these vacancies, rents being sought by cash-strapped landlords are about one-third less than that being asked three years ago.
It is understood by many in the industry, that Wal-Mart is expected to continue this direction in many other urban markets where it had been rejected in the past: Los Angeles, New York, the corridor between Boston and Washington, DC. And the chain’s strategy, said Mullany, “would be to get our stores as close as possible, so in urban markets we’ll be doing that with multiple formats.”
Other real estate veterans pointed out that the impact will have substantially positive effects on many in the workforce, in addition to those stocking the shelves and cash registers at Wal-Mart, or helping to build these stores.
“It will mean income for those involved in leasing, financing, administrating and designing the facilities, those in the service industries involved in the stores. And then look at the real estate values around these Wal-Marts. Don’t tell me,” he continued, “that those residential and commercial properties are not going to appreciate in value and also return substantial ratables to the city and their owners.”
More information on SHOPPING CENTER DIGEST, EXPANDING RETAILERS, the weekly SCD Eflash, the DIRECTORY OF MAJOR MALLS and our other products may be obtained from our website, www.shoppingcenters.com .
“Of course it’s going to impact on the shopping center industry,” said a seasoned dealmaker. “Wal-Mart is so big that whatever it does is going to affect those specifically within this small real estate niche, and it will expand out to touch thousands of others not directly related.”
He was referring to the recent decision in Chicago where, after six years, the city council finally approved a zone change to permit the discount operator to build a store in a mixed-use project on the South Side, due to open in 2012. This, the chain said, would grow to dozens of stores within the next five years.
There’s no question that the stimulus behind the approval is the severe recession responsible for high unemployment in this city and across the nation, resulting in severe cutbacks of municipal services caused by reduced tax revenue and high deficits. Wal-Mart’s promise to hire 12,000 workers and to pay above minimum wage has softened the primary objections of the established unions; its estimate of paying some $500 million to the city in sales taxes, the expectation of its making available some space in its stores to small businesses, and to contribute $20 million to city charities also softened local opposition from community groups and independent retailers.
The discounter is talking of constructing units with union labor, stores as small as 8,000 sq. ft. in addition to its superstore concept, formats concentrating on groceries, and online services enabling customers to pick up merchandise at the stores. Also, some Chicago officials pointed out, a lot of local citizens are spending millions of their dollars and paying their sales taxes to benefit communities containing Wal-Marts that circle the city.
The Bentonville, AR, behemoth grew to be such a dominator force on the retail side by concentrating its growth in small towns and suburbs; essentially, it saturated this market.
Industry Reaction
According to Hank Mullany, who heads the Wal-Mart’s stores in the Midwest, Northeast, and mid-Atlantic regions, “We have very small market share in the large cities within the United States, so we see a big opportunity for us to grow in those urban markets.”
The reaction of many in the shopping center/retail chain industry is mostly strongly in favor of this new direction being taken.
Said Peter D. Morris, CEO at Greenstead Group: “Wal-Mart is simply watching the demographic and trend curves which indicate a new ‘urbanism’ as boomers move away from the burbs and back to the amenities of urban life. Smart developers should be watching this as many retailers have successfully clustered around [its] draw. The other side of the impact of urban Wal-Marts will be felt on unorganized business improvement districts and urban area merchants associations because these organizations typically lack [the] resources and management of a shopping center under a unified ownership.”
Brian Spray, owner/sr. project manager at Integrated Engineering, pointed out that large cities have become more accepting of big-box stores. “Most cities face budget short falls as they do not have enough tax revenue. Big boxes generate massive ratables for the city, provide affordable items to the residents, and create jobs for local residents who do have personal transportation.”
The Philadelphia Example
He pointed to an example of strong unions losing their hold on the city politic. “Here in
Philadelphia the Mayor had to beat the union into submission when MTV came to town a few years back to film a season of The Real World. The city needed the revenue generated from juniors who would now want to visit the city, go to school here and possibly work here. The unions drove MTV out of town as they were not the winning bidders on the project. The city had to work very hard to get MTV to come back.”
Relating to this city, Michael Fisher, who is a local developer at RealMarq and a faculty member at University of Phoenix, said Wal-Mart’s entry there had “little impact on the local retailers” and pointed to an opposite example in New York’s borough of The Bronx where strong union opposition helped kill development last May at the Kingsbridge Armory. There demands that tenants in the project pay $2.75 per hour above minimum wage forced developer Related Companies to drop plans for the shopping center.
Fisher pointed to other big box retailers—COSTCO, Home Depot, IKEA, Target, Lowes—who have successfully entered urban areas with the cooperation of local politicians and community groups. “Retailers need to look at these big boxes as a benefit; they bring a lot more people to that corner of the world. What can they do to benefit from those new entries to the market? Change is the only sure thing; Wal-Mart may seen to change the marketplace but in reality it adds to vibrancy of marketplace.”
Not One-Sided
The discounter, agreed Marsha Getto-Aikens, principal of Regoup Consulting, is “very much aware of the changing demographics, our aging population, the declining birth rate. Even more important, the movement of certain age/ethnic groups from suburbs to the cities, and vice versa…Cities have to decide if tghey want to foster and be differentiated by the smaller, uncommon, vibrant, retailer tht crerates a far more interesting shopping environment, combined with better residential, and a resugence of community-centgric components that increase the attractiveness of urban living, or NOT.”
It’s tough for a city to turn their back on the increased tax revenue Wal-Mart would generate, she continued, “however, you have to believe there are other ways to create revenue that does not involve the addition of more hardscape and less individuality.”
Susan Schulte, president of Schulte Real Estate Resources, doubted the Wal-Mart deal in Chicago would have much effect on the larger shopping centers and malls. It could however, “have a negative impact on the smaller, less occupied strip centers that may already be struggling. I think it will have a greater impact on grocery stores and some of the smaller independent businesses. Hopefully our economy will be stronger by the time these stores actually start to open for business. With the additional jobs there should be benefit to most retailers, even at lower wages.”
Some in the industry were uncomfortable about outside pressure being exerted to control wages paid by companies.
“Last time I checked,” said one dealmaker, “we were in a capitalistic free society. A merchant should be allowed to go to the market and hire at a rate a worker is willing to work for. Should no workers be available at those wages, they need to pay higher wages. That’s the nature of capitalism.
“The do-gooders have one fallacy in their reasoning. Paying a ‘living Wage’ doesn’t assure higher productivity. Therefore in order to attain desired ROI, the retailer is forced to raise prices—to the inner city consumer. That’s a lose/lose proposition.”
Another asks about where would be the cutoff point, where do you draw the line?
“A guy with 6 McDonalds? Patio.com? Once you get the biggest over a barrel, then the next smaller, then the next smaller, until everyone had to do it.? It unevens the playing field. I’m not in favor of leveling the field by punishing and penalizing the most efficient player!”
Question Of Dominance
Several also pointed to Wal-Mart’s history as a retail giant who trampled independent operators in small communities. Veteran dealmakers related historical anecdotes where the discounter cut prices below cost to force local merchants to close, and then raised their prices when they became overwhelmingly dominant in a small market.
“These problems experienced in small town USA,” warned one, “when Wal-Mart dominated those areas—will repeat itself in the urban retail landscape.”
The immediate impact of what has taken place—and will take place in Chicago-- said one local real estate maven, “will mean many more deals and commissions going to those able to put together these packages, for individual freestanding Wal-Marts and as anchors in small strip centers. There are a number of these with substantial vacancies caused by the demise of Circuit City, Linens-N-Things, and other well-known retailers.”
Another pointed out that due to these vacancies, rents being sought by cash-strapped landlords are about one-third less than that being asked three years ago.
It is understood by many in the industry, that Wal-Mart is expected to continue this direction in many other urban markets where it had been rejected in the past: Los Angeles, New York, the corridor between Boston and Washington, DC. And the chain’s strategy, said Mullany, “would be to get our stores as close as possible, so in urban markets we’ll be doing that with multiple formats.”
Other real estate veterans pointed out that the impact will have substantially positive effects on many in the workforce, in addition to those stocking the shelves and cash registers at Wal-Mart, or helping to build these stores.
“It will mean income for those involved in leasing, financing, administrating and designing the facilities, those in the service industries involved in the stores. And then look at the real estate values around these Wal-Marts. Don’t tell me,” he continued, “that those residential and commercial properties are not going to appreciate in value and also return substantial ratables to the city and their owners.”
More information on SHOPPING CENTER DIGEST, EXPANDING RETAILERS, the weekly SCD Eflash, the DIRECTORY OF MAJOR MALLS and our other products may be obtained from our website, www.shoppingcenters.com .
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 .
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 .
“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
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