Strolling the Agora column from the September 28, 2009 issue of Shopping Center Digest “The Locations Newsletter”
To many dealmakers on the Eastern Seaboard, the ICSC Philadelphia meeting serves as a landmark, the first official session after Labor Day and a formal statement that summer is over and with fall comes the full-court press to get some leases signed.
So it was that some 1,200 landlords, tenants and brokers involved in New Jersey, Pennsylvania, and Delaware—with quite a bit of leakage into Ohio, New York and Maryland-- converged on the City of Brotherly Love for two days of meeting, greeting, and the drive to fill vacant space.
Many tried to maintain a cheerful, optimistic outlook. But…….
“We’re working a lot harder for a lot less.”
“It’s what we do—keep plugging away with the anticipation that a few of the deals we’re working on will come through. I used to have pending deals up to here [signaling up to his brow] and now they’re only up to here [signaling knee high].”
“There are a lot of hungry people out there looking for jobs, but very few openings available.”
“We’re treading water and hope we don’t sink.”
And, “It’s getting nasty and a little more vicious, especially amongst brokers in the same office. Though it has always been a problem, there is a lot more poaching of clients, trying to steal deals, attempting to horn in and share commissions that are undeserved.”
Said one veteran dealmaker, “This is not unique for just this market. I’ve been hearing similar stories over the last few months from friends around the country.”
Higher Concentration Of Brokers
As far as the quality of those in attendance, a substantial majority of mostly local brokers—which is always the case for these ICSC events covering a localized region—representing landlords and tenants involved in small, strip centers. However, there was almost no representation from large mall operators or national tenants, even those who have a substantial presence in the market.
As for national chains, it was pointed out that many of them are farming out a lot of the drudge work to willing brokers in the immediate area.
Beyond just the areas involved in leasing, there was also a lot of speculation about the increasing number of new funds being created daily for potential acquisition of distressed shopping centers that may soon be going into default. However, there are few large portfolios or sales taking place. The sellers are holding on for a better price, and the potential buyers are in no hurry to buy at current values, which they expect to drop even more.
“The owner still has a price in mind that conflicts with reality,” said one veteran who acknowledged he has several large investors, a good number of them with financing coming in from Israel, China, and various European countries, and is waiting for a better deal.
“We’re eye to eye, waiting to see who blinks first, and there’s no pressure on us to blink at all.”
Growing Numbers Of Vacancies
One owner: “We have a good center and have been paying our monthly mortgage all along. But we lost a couple of key tenants and technically, therefore, we’re in default. We look at the situation, are leasing a lot of available to offices, and see we can pay it off in four years.
“Mortgage lender sees this, too, and tells us he’s going to foreclose. Luckily, we can come up with the cash and pay off the loan. Now, we’re looking for similar landlords who are being foreclosed on who cannot come up with the cash.”
The problems of growing vacancies has made many landlords eager to negotiate and strike deals to fill space they never would have considered before. We’ve remarked on this in numerous columns over the past year. And it’s the reason why medical and dental offices are becoming a greater presence in major malls. They always wanted the visibility and the access to the affluent customers, but could never meet the rental demands; now they can as rents have dropped many dollars below last year’s asking price.
It has even affected retailers whose customers are blue collar, low-income ethnics, and whose main locations are small strips and storefronts in the inner cores.
Said one leasing director for a major apparel chain, “We now have so much more to choose from. No way, are we going into malls; but because there are so many more opportunities coming to us out there, and the rents are so low, we’re able to expand at a much greater rate than we anticipated. We’re locking in those low rents now, and will be in a much better position in one or two years when the industry gets back to normal.”
Speed Dating
The main purpose of the two-day session was dealmaking, with several hundred booths set up mainly by landlords, brokers, and tenants for the Thursday session. The day before, though, there were a number of workshops and panels on various topics of interest to early arrivals. The best attended and popular was the called Speed Dating, where some 19 retailers held court at individual tables, explained who they were, the demographics of their markets, size of stores, and what they were looking for in new locations, handed out fact sheets and exchanged business cards. Among those were Chipotle, Great Clips, Ikea, Subway, Panda Express, and a number of local supermarkets.
After a few minutes, the presenters stayed in place and the landlords went on to another table and took some more notes.
It was something, said owner-developers and brokers who participated, and certainly “better than nothing. But it was still,” said one hungry landlord, “like having a nibble at a banquet. Still it gives us something to work with. And, we’re dealmakers, which means we have to always look on the positive.”
P.S.---One sad note, which brought back so many memories to us old farts in Philly: the passing of Mel Simon, one of the stalwarts in the industry, a hard-driving, fun guy, and with Herb and Fred built a great company. Here’s to ya!
More information on the twice-monthly SHOPPING CENTER DIGEST and our associate publications, EXPANDING RETAILERS and DIRECTORY OF MAJOR MALLS, may be obtained from our website, www.shoppingcenters.com.
Tuesday, September 29, 2009
Thursday, September 10, 2009
With Leverage Finally On The Side Of Tenants, How Are Landlords Reacting?
Strolling the Agora column from the September 14 special issue of SHOPPING CENTER DIGEST
As long as this shopping center/retail chain industry has been around—at least for the last 40-some years—the leverage at the negotiating table has been overwhelmingly with the owner-developers. That is until this massive recession hit, new development came almost to a standstill, and vacancies from the smallest strip to the biggest mall began to go through the roof (pun intended).
Tenants, and it’s not just the discount/dollar stores, the fast food and restaurant chains, the sporting goods operators or electronics retailers still in business, or the teen-oriented specialty chains that are taking advantage of this new-found power. It has spilled over to regional operators, Mom and Pops, temporary retailers, innovative merchants wanting to test new concepts and markets, and even those not normally interested in locating in a shopping center but lured by rock-bottom rents, central location, and numerous other reasons and concessions. Franchising is a big source of potential retailers as numerous operators eye entrepreneurs as likely partners due to their access to off-shore financial markets.
Oh sure, some may contend the landlords never had overwhelming muscle when it came to striking a deal, because they “really needed that anchor, or that dominant retailer, or that high-prestige fashion plate” to make the project happen. And there’s a lot to be said for the need by high-profile merchants to have some say in how the center or mall is marketed, or what other retailers would be permitted in, and what prime locations they would have.
Heavyweights Of The Past
This is behind the retail heavyweights of the past, such as Sears or May Stores or Dayton-Hudson for malls, or Giant Foods, Acme Stores, Safeway Stores or Gamble-Skogmo for grocery-anchored strips, establishing their own development divisions. Or why discounters like Wal-Mart or Kmart designated operators in key markets to be their prime developers.It was all done to protect their substantial financial investment and to be able to control their destiny within the shopping center.
These were the exceptions. In most instances, the landlord set the rules and Triple-A or national tenants got the best deals, the earlier they signed the better; they were necessary to hit that 70% of signed leases to obtain financing, but they still had little, real bargaining power. And the other retailers provided most of the profit for the project. With the surge to the formation of REITs and the creation of behemoth landlords, the balance was tipped even more to the side of the owner-developers.
Now, pointing to the depressed economy and declining retail sales and profits that have caused many competitors to close up, the remaining merchants still in business and looking for locations are relishing this change of fortune. A cliché: “In the country of the blind, the one-eyed man is king.” A viable tenant who used to open 50 stores annually and is now looking only for 20 when others aren’t ‘open to buy’ has a lot of muscle.
So rent reductions, and fixture allowances, and “finished stores” and dozens of other demands that a few years ago would cause a landlord to ask for a sanity hearing, are now part of the opening gambit in negotiations.
How The Landlords React
So, how is the landlord, more used to a “take it or leave it” approach reacting to this? How is he and his leasing representatives working to turn the tide and make those deals that will keep the tenant list filled and the shopping center viable?
Among the first steps is getting existing tenants to renew, which both sides are agreeable to, with rent reductions, tenant improvements, reducing operating hours, co-tenancy clauses, and numerous other concessions and details being hammered out.
With many empty big-box stores and prime locations going dark, landlords are eager to fill the gaps with almost any tenant offering a basic rent. This is why many of these locations are going to “pop up” stores, temporary and specialty tenants, salvage grocers, kiosk-oriented tenants, retailers looking to test new concepts and new markets, deals with permanent chains offering very short-term leases of two or three years, permitting “kickouts,” percentage rents, finished stores, etc., etc.
An interesting trend is that many discounters, home improvement chains, ethnic-oriented merchants, even dollar stores, are willing to take a risk on major downtown locations in large cities they usually ignored, cities like New York, Chicago, Miami, Los Angeles, Portland, Dallas.
In essence, on the table are any concessions a viable tenant is willing to ask for. And many times, to their surprise, they are being accepted by landlords.
They are eager add medical and dental offices, schools, libraries, municipal agencies, to try new concepts, such as water slides or indoor go kart tracks in place of empty “canyons,” nearly-new shops, pawn shops, and they may even look the other way when merchandise edges out into the common area—unless there’s a strong complaint from a retail neighbor.
Hoping For A Turnaround
Many in the shopping center/retail community are optimistic that there will be a turnaround next year, with the most cautious not expecting it until the second half of 2010. As reasons for their optimism, they point to more positive financial results from key retailers, polls showing a rise in consumer confidence, improvements in numbers from Wall Street, drops in the increases of jobs lost, rising home prices in some areas around the country, and the like.
Though back-to-school was not a great success for the majority of tenants, some were gratified with better-than-expected sales. However, all mavens are holding their breath awaiting sales figures for the most important selling season of all, November-December holiday sales.
No matter what their expectations and plans are now, all can change if those few weeks produce dismal results. However, if sales improve and are better than expected, the optimism may spill and result in more leasing and development deals from early 2010 and beyond.
It may take years though, many contend, before all the current empty stores are filled and a big push for new development and shopping center expansion swings leverage back to the side of the landlord.
More information on the twice-monthly SHOPPING CENTER DIGEST and our associate publications, EXPANDING RETAILERS and DIRECTORY OF MAJOR, may be obtained from our website, www.shoppingcenters.com .
As long as this shopping center/retail chain industry has been around—at least for the last 40-some years—the leverage at the negotiating table has been overwhelmingly with the owner-developers. That is until this massive recession hit, new development came almost to a standstill, and vacancies from the smallest strip to the biggest mall began to go through the roof (pun intended).
Tenants, and it’s not just the discount/dollar stores, the fast food and restaurant chains, the sporting goods operators or electronics retailers still in business, or the teen-oriented specialty chains that are taking advantage of this new-found power. It has spilled over to regional operators, Mom and Pops, temporary retailers, innovative merchants wanting to test new concepts and markets, and even those not normally interested in locating in a shopping center but lured by rock-bottom rents, central location, and numerous other reasons and concessions. Franchising is a big source of potential retailers as numerous operators eye entrepreneurs as likely partners due to their access to off-shore financial markets.
Oh sure, some may contend the landlords never had overwhelming muscle when it came to striking a deal, because they “really needed that anchor, or that dominant retailer, or that high-prestige fashion plate” to make the project happen. And there’s a lot to be said for the need by high-profile merchants to have some say in how the center or mall is marketed, or what other retailers would be permitted in, and what prime locations they would have.
Heavyweights Of The Past
This is behind the retail heavyweights of the past, such as Sears or May Stores or Dayton-Hudson for malls, or Giant Foods, Acme Stores, Safeway Stores or Gamble-Skogmo for grocery-anchored strips, establishing their own development divisions. Or why discounters like Wal-Mart or Kmart designated operators in key markets to be their prime developers.It was all done to protect their substantial financial investment and to be able to control their destiny within the shopping center.
These were the exceptions. In most instances, the landlord set the rules and Triple-A or national tenants got the best deals, the earlier they signed the better; they were necessary to hit that 70% of signed leases to obtain financing, but they still had little, real bargaining power. And the other retailers provided most of the profit for the project. With the surge to the formation of REITs and the creation of behemoth landlords, the balance was tipped even more to the side of the owner-developers.
Now, pointing to the depressed economy and declining retail sales and profits that have caused many competitors to close up, the remaining merchants still in business and looking for locations are relishing this change of fortune. A cliché: “In the country of the blind, the one-eyed man is king.” A viable tenant who used to open 50 stores annually and is now looking only for 20 when others aren’t ‘open to buy’ has a lot of muscle.
So rent reductions, and fixture allowances, and “finished stores” and dozens of other demands that a few years ago would cause a landlord to ask for a sanity hearing, are now part of the opening gambit in negotiations.
How The Landlords React
So, how is the landlord, more used to a “take it or leave it” approach reacting to this? How is he and his leasing representatives working to turn the tide and make those deals that will keep the tenant list filled and the shopping center viable?
Among the first steps is getting existing tenants to renew, which both sides are agreeable to, with rent reductions, tenant improvements, reducing operating hours, co-tenancy clauses, and numerous other concessions and details being hammered out.
With many empty big-box stores and prime locations going dark, landlords are eager to fill the gaps with almost any tenant offering a basic rent. This is why many of these locations are going to “pop up” stores, temporary and specialty tenants, salvage grocers, kiosk-oriented tenants, retailers looking to test new concepts and new markets, deals with permanent chains offering very short-term leases of two or three years, permitting “kickouts,” percentage rents, finished stores, etc., etc.
An interesting trend is that many discounters, home improvement chains, ethnic-oriented merchants, even dollar stores, are willing to take a risk on major downtown locations in large cities they usually ignored, cities like New York, Chicago, Miami, Los Angeles, Portland, Dallas.
In essence, on the table are any concessions a viable tenant is willing to ask for. And many times, to their surprise, they are being accepted by landlords.
They are eager add medical and dental offices, schools, libraries, municipal agencies, to try new concepts, such as water slides or indoor go kart tracks in place of empty “canyons,” nearly-new shops, pawn shops, and they may even look the other way when merchandise edges out into the common area—unless there’s a strong complaint from a retail neighbor.
Hoping For A Turnaround
Many in the shopping center/retail community are optimistic that there will be a turnaround next year, with the most cautious not expecting it until the second half of 2010. As reasons for their optimism, they point to more positive financial results from key retailers, polls showing a rise in consumer confidence, improvements in numbers from Wall Street, drops in the increases of jobs lost, rising home prices in some areas around the country, and the like.
Though back-to-school was not a great success for the majority of tenants, some were gratified with better-than-expected sales. However, all mavens are holding their breath awaiting sales figures for the most important selling season of all, November-December holiday sales.
No matter what their expectations and plans are now, all can change if those few weeks produce dismal results. However, if sales improve and are better than expected, the optimism may spill and result in more leasing and development deals from early 2010 and beyond.
It may take years though, many contend, before all the current empty stores are filled and a big push for new development and shopping center expansion swings leverage back to the side of the landlord.
More information on the twice-monthly SHOPPING CENTER DIGEST and our associate publications, EXPANDING RETAILERS and DIRECTORY OF MAJOR, may be obtained from our website, www.shoppingcenters.com .
Monday, August 24, 2009
The Fine Points Of Finance That Are Driving This Industry
Strolling the Agora column for August 17, 2009 issue of SHOPPING CENTER DIGEST
In broad strokes, I can understand only some of the financial workings that have been driving this industry for so long—certainly not the fine points--and I’m somewhat comfortable with that. Though there are times I wish I had the expertise and understanding of Milt Cooper, who led Kimco and the landlords of this industry into the REIT market in ’91, rescuing it from the lack of funding that was crippling development and growth.
There’s no doubt that we may be heading into a similar situation dealing with money now --though slightly different. According to First American CoreLogic, “almost $165 billion in U.S. commercial real estate loans will mature this year and need to be sold or refinanced as rents and occupancies fall…”
Also, according to the index developed by MIT’s Institute of Technology Center for Real Estate, there has been an increase in commercial sales, but also a record drop of 22% on the price sold by institutional investors.
We’ve been writing for months now about the larger landlords reducing their debt and positioning themselves to acquire new properties and mortgages from strapped owners forced to sell or liquidate their holdings. So far, few “large” acquisitions have been made. There have been numerous new companies or divisions formed by savvy investors and private equity companies to acquire distressed properties, but with few actual large deals being made, and there are many confusing signposts out there.
Extend Rather Than Sell
One financial maven said “we’re seeing lenders generally extending their loans when possible to avoid having to sell properties at current low prices and into a market where potential buyers are having difficulty arranging new financing.”
Sure, it was just announced that Cadillac Fairview Corp (owned by Ontario Teachers’ Pension Plan, is paying Macerich Co $150 million for 49% of its very successful Queens Center, and its $342 million mortgage; this is the first of three joint ventures by Macerich to cut its $7.9 billion debt by $1 or $2 billion within two or three years. And earlier this year Simon Property Group sold $1.7 billion in stock, and numerous others--Forest City, CBL, Kimco, etc., etc.—have put themselves into a more comfortable financial position by reducing their debt. Thus far, General Growth Properties is the only major developer that was forced into bankruptcy when it couldn’t re-finance and control its debt.
It’s interesting how GGP’s troubles have impacted on statistics for our industry. Delinquency rates for securitized mortgages on shopping malls fell in July to 4% from 5.9% a month earlier. Mainly, according to debt-rating firm Realpoint LLC, because the landlord resumed paying interest on several of its delinquent mortgages after filing for bankruptcy in April. In June, GGP accounted for 43% of delinquent mortgages in retail; in July, that shrank to 18%.
Not Looking To Wall Street
Now, if you listen to the pronouncements, some shopping center developers won’t be looking any longer to Wall Street for funding, at least for the time being. Kimco, said CFO Michael Pappagallo, will not “look to the equity market to bail us out. I don’t think our investors are going to keep buying into massively dilutive equity issuances solely to pay down debt.”
He continued: “Down the road, there will be circumstances where value-creating shopping center opportunities will be available. Issuing equity at that point would make sense if our price and” returns supported such a transaction.
Then there’s Equity One, stating that there weren’t too many bargain real estate deals out there, saying it’s shifting its focus from property purchases to manage existing properties and paying down debt. And Regency Centers also says it will avoid debt and will be cautious on acquisitions.
Financial advisor Ernst & Young released a recent survey finding that though 53% of its respondents had acquired non-performing properties or loans in the last 18 months, 45% of those who have not believe it’s too early to even attempt to purchase distressed properties or loans.
So, essentially, large acquisitions and mergers may not be happening for a while, at least regarding shopping centers and real estate. As for residential, PennyMac Mortgage Investment Trust—founded by former execs at infamous Countrywide Financial Corp—was able to raise only $335 million from the hoped-for $700 million IPO it announced in May.
Then, The Tenants
But then, on the other side of the negotiating table, are the tenants.
Among its annual list of Hot 100 Retailers, said STORES magazine, 7 of the top 10 earned that position through acquisition, rather than growing “organically” through opening new stores; to be eligible, the chains had to have at least $300 million in annual sales.
Those that had impressive boosts through opening stores and increasing its revenue from its units were American Apparel, ranked No. 2, with a sales jump of 57.6% through organic growth; Apple Stores, ranked No. 5, increased its sales by 46%; and the third retailer was jeweler Finlay Enterprises, No. 8 (Bailey Banks & Biddle, Carlyle, and Congress jewelry stores). [Interesting commentary on this last: Finley has just filed for Chapter 11 and plans an auction to sell its business and assets].
Leading this Hot list is DineEquity, formed by the merger of Applebee’s and IHOP. And the supermarket mergers, Susser Holdings (Town & Country and Village Market) No. 3, A&P (acquisition of Pathmark) No. 4; Wendy’s/Arby’s (No. 6).
Granted, there have been many instances over the last year of household names disappearing from the list of tenants in our shopping centers. Some of these brands may live again as internet retailers, or as a division of another mainstream retailer: Goody’s and Sharper Image, for example.
And then, there may be more acquisitions and mergers and investors on the horizon for successful retailers. Several financial mavens have said that Kohlberg Kravis Roberts, a leading private equity company, is considering an IPO to take Dollar General public. Also, Irving Place Capital Management, parent of, Vitamin Shoppe said it plans to raise $143.8 million from an IPO to double the number of its stores, now at 425.
And jvs are still being considered by owners of malls and other shopping centers. Macerich, for example, expects to announce one or two more agreements with institutional investors within a month or two, and says it will receive more than $500 million from investors for the year.
So even if many dealmakers say there’s isn’t that much leasing and developing taking place, never let it be said that there isn’t any activity going on in this industry.
More information on the twice-monthly SHOPPING CENTER DIGEST and our associate publications, EXPANDING RETAILERS and DIRECTORY OF Major Malls, may be obtained from our website, www.shoppingcenters.com.
In broad strokes, I can understand only some of the financial workings that have been driving this industry for so long—certainly not the fine points--and I’m somewhat comfortable with that. Though there are times I wish I had the expertise and understanding of Milt Cooper, who led Kimco and the landlords of this industry into the REIT market in ’91, rescuing it from the lack of funding that was crippling development and growth.
There’s no doubt that we may be heading into a similar situation dealing with money now --though slightly different. According to First American CoreLogic, “almost $165 billion in U.S. commercial real estate loans will mature this year and need to be sold or refinanced as rents and occupancies fall…”
Also, according to the index developed by MIT’s Institute of Technology Center for Real Estate, there has been an increase in commercial sales, but also a record drop of 22% on the price sold by institutional investors.
We’ve been writing for months now about the larger landlords reducing their debt and positioning themselves to acquire new properties and mortgages from strapped owners forced to sell or liquidate their holdings. So far, few “large” acquisitions have been made. There have been numerous new companies or divisions formed by savvy investors and private equity companies to acquire distressed properties, but with few actual large deals being made, and there are many confusing signposts out there.
Extend Rather Than Sell
One financial maven said “we’re seeing lenders generally extending their loans when possible to avoid having to sell properties at current low prices and into a market where potential buyers are having difficulty arranging new financing.”
Sure, it was just announced that Cadillac Fairview Corp (owned by Ontario Teachers’ Pension Plan, is paying Macerich Co $150 million for 49% of its very successful Queens Center, and its $342 million mortgage; this is the first of three joint ventures by Macerich to cut its $7.9 billion debt by $1 or $2 billion within two or three years. And earlier this year Simon Property Group sold $1.7 billion in stock, and numerous others--Forest City, CBL, Kimco, etc., etc.—have put themselves into a more comfortable financial position by reducing their debt. Thus far, General Growth Properties is the only major developer that was forced into bankruptcy when it couldn’t re-finance and control its debt.
It’s interesting how GGP’s troubles have impacted on statistics for our industry. Delinquency rates for securitized mortgages on shopping malls fell in July to 4% from 5.9% a month earlier. Mainly, according to debt-rating firm Realpoint LLC, because the landlord resumed paying interest on several of its delinquent mortgages after filing for bankruptcy in April. In June, GGP accounted for 43% of delinquent mortgages in retail; in July, that shrank to 18%.
Not Looking To Wall Street
Now, if you listen to the pronouncements, some shopping center developers won’t be looking any longer to Wall Street for funding, at least for the time being. Kimco, said CFO Michael Pappagallo, will not “look to the equity market to bail us out. I don’t think our investors are going to keep buying into massively dilutive equity issuances solely to pay down debt.”
He continued: “Down the road, there will be circumstances where value-creating shopping center opportunities will be available. Issuing equity at that point would make sense if our price and” returns supported such a transaction.
Then there’s Equity One, stating that there weren’t too many bargain real estate deals out there, saying it’s shifting its focus from property purchases to manage existing properties and paying down debt. And Regency Centers also says it will avoid debt and will be cautious on acquisitions.
Financial advisor Ernst & Young released a recent survey finding that though 53% of its respondents had acquired non-performing properties or loans in the last 18 months, 45% of those who have not believe it’s too early to even attempt to purchase distressed properties or loans.
So, essentially, large acquisitions and mergers may not be happening for a while, at least regarding shopping centers and real estate. As for residential, PennyMac Mortgage Investment Trust—founded by former execs at infamous Countrywide Financial Corp—was able to raise only $335 million from the hoped-for $700 million IPO it announced in May.
Then, The Tenants
But then, on the other side of the negotiating table, are the tenants.
Among its annual list of Hot 100 Retailers, said STORES magazine, 7 of the top 10 earned that position through acquisition, rather than growing “organically” through opening new stores; to be eligible, the chains had to have at least $300 million in annual sales.
Those that had impressive boosts through opening stores and increasing its revenue from its units were American Apparel, ranked No. 2, with a sales jump of 57.6% through organic growth; Apple Stores, ranked No. 5, increased its sales by 46%; and the third retailer was jeweler Finlay Enterprises, No. 8 (Bailey Banks & Biddle, Carlyle, and Congress jewelry stores). [Interesting commentary on this last: Finley has just filed for Chapter 11 and plans an auction to sell its business and assets].
Leading this Hot list is DineEquity, formed by the merger of Applebee’s and IHOP. And the supermarket mergers, Susser Holdings (Town & Country and Village Market) No. 3, A&P (acquisition of Pathmark) No. 4; Wendy’s/Arby’s (No. 6).
Granted, there have been many instances over the last year of household names disappearing from the list of tenants in our shopping centers. Some of these brands may live again as internet retailers, or as a division of another mainstream retailer: Goody’s and Sharper Image, for example.
And then, there may be more acquisitions and mergers and investors on the horizon for successful retailers. Several financial mavens have said that Kohlberg Kravis Roberts, a leading private equity company, is considering an IPO to take Dollar General public. Also, Irving Place Capital Management, parent of, Vitamin Shoppe said it plans to raise $143.8 million from an IPO to double the number of its stores, now at 425.
And jvs are still being considered by owners of malls and other shopping centers. Macerich, for example, expects to announce one or two more agreements with institutional investors within a month or two, and says it will receive more than $500 million from investors for the year.
So even if many dealmakers say there’s isn’t that much leasing and developing taking place, never let it be said that there isn’t any activity going on in this industry.
More information on the twice-monthly SHOPPING CENTER DIGEST and our associate publications, EXPANDING RETAILERS and DIRECTORY OF Major Malls, may be obtained from our website, www.shoppingcenters.com.
Monday, August 3, 2009
"Running Like Crazy And Trying To Stay In The Same Place," Is How Some Dealmakers Describe Their Efforts To Fill Ever-Growing Vacancies In Centers
Strolling the Agora column for the August 3, 2009 Issue of SHOPPING CENTER DIGEST
“You know,” a top real estate executive with a major owner-developer of shopping centers told me, “it’s as if I were a tiny hamster racing around one of those wheels in a cage. I’m going like crazy and at the end of all that rushing and running I’m still in the same place—if I’m lucky.”
What he was referring to was that most of his efforts and energy are being spent re-negotiating existing deals--trying to find new ways to retain tenants, preventing them from closing stores and contributing to the ever-growing increase of vacancies in his shopping centers—than prospecting for new tenants. “And trying to locate new retailers to fill the holes… we’re trying, but it’s very difficult to tell our story to them, or their reps, if we don’t already have a relationship with them. There aren’t enough hours in the day for that.”
This struck very close to home last week when I was discussing the reasons why a high-end, specialty retailer had not renewed her subscription to Shopping Center Digest. “We’ve been told by the home office to cut all expenses,” she said, “and why do I need a publication about new shopping centers or expansions when so little is happening now. And I’m besieged with offers of great locations and great, new deals by my current landlords and people I’ve never done business with?
“However,” she added, “when developers start building and expanding malls, and I need that information before my competitors, we’ll be back.”
Nick Lillo of SLF Associates, who specializes in restaurant leasing in malls and life-style centers, admitted that “…but for a very precious few, our business remains in limbo…requests for rent relief, closings, cautious lease renewals with operating ‘safe bailout contingencies’, are the talk of the day.”
Landlords Being Realistic
Paul Fetscher of Great American Brokerage, another dealmaker specializing in the restaurant niche, is making some new deals. “Fortunately,” he said, “I am spending plenty of time with active franchisees…and landlords willing to be realistic and those who realize that yesterday’s rents weren’t the real rents—are coming to the table and willing to cut reasonable deals.”
A veteran leasing professional with a national apparel chain explained that with the slowdown in his company’s growth plans, “we’re focusing primarily on leases coming up for renewal in the next three years. This enables us to offer an early renewal to the landlord in return for reductions. It helps with making the process a bit less contentious.”
With so many big box stores going dark because of the disappearance of Circuit City, Linen ‘n Things, Comp USA, numerous department store anchors, category killers, etc., etc., many landlords fear that excessive percentage of vacancies could trigger other tenants from using their co-tenancy clauses as a reason to close their stores. This is part of the reason why, as we mentioned at the end of last year, some key retailers were being allowed to remain in their locations by paying only percentage rent, or in some cases, without paying any rent.
But many of these vacant stores, a leading broker stressed, “are ideal locations for value-oriented, expansion-minded retailers like T.J.Maxx, Kohl’s, Target, Home Depot, Lowe’s, Babies R Us, numerous supermarket chains, and the like.”
Opportunities Not Available Before
Which is an important reason, said Lillo, “for new space being negotiated on an entirely different, much lower ‘sales pro-forma’ base than even one year ago…reduced hours of operation, fixed pricing, ‘smaller plates’…all now a big part of our new playing field to lure customers back. Burgers, Wings, the QSR are now being given opportunities in locations, shopping centers that would have been impossible only a year ago.”
Among the brands he expects to “lead the charge back into the light…[are such moderate-priced, family friendly operators as “Darden, Cheesecake, CPK, Changs, Bravo, Brinker, B.J’s…”
One VP with an apparel chain echoed the comments about landlords becoming more reasonable in their demands: “In the past year or so, I haven’t lost a deal to a competitor who was willing to pay more—and it’s not because we’re stretching our maximums. We’ve also been able to lower our rent as a percentage of sales, down to single digits in a few instances.”
Another national tenant said part of the reason for his company’s slowdown of new development is due to the lack of financing which have delayed or killed some projects, or landlords are reluctant or not able to provide “sizable tenant allowances we have become accustomed to…”
Despite all the doom and gloom we’re hearing today, it is far from all negative, with numerous dealmakers seeing future opportunities on the horizon.
The retailers with vision, said a national consultant, are the ones taking advantage of the current economy and willing to make great deals now. “Spaces aren’t going to ‘The Greater Fool’…They are going to those who are willing to step forward in this market. I haven’t spoken to anyone who doesn’t believe that in the next decade, we will have numerous years of prosperity. So let’s lock in a good deal today and lock in those rents!”
More information on SHOPPING CENTER DIGEST, and our associate publications, EXPANDING RETAILERS and the DIRECTORY OF MAJOR MALLS may be obtained from our website, www.shoppingcenters.com.
“You know,” a top real estate executive with a major owner-developer of shopping centers told me, “it’s as if I were a tiny hamster racing around one of those wheels in a cage. I’m going like crazy and at the end of all that rushing and running I’m still in the same place—if I’m lucky.”
What he was referring to was that most of his efforts and energy are being spent re-negotiating existing deals--trying to find new ways to retain tenants, preventing them from closing stores and contributing to the ever-growing increase of vacancies in his shopping centers—than prospecting for new tenants. “And trying to locate new retailers to fill the holes… we’re trying, but it’s very difficult to tell our story to them, or their reps, if we don’t already have a relationship with them. There aren’t enough hours in the day for that.”
This struck very close to home last week when I was discussing the reasons why a high-end, specialty retailer had not renewed her subscription to Shopping Center Digest. “We’ve been told by the home office to cut all expenses,” she said, “and why do I need a publication about new shopping centers or expansions when so little is happening now. And I’m besieged with offers of great locations and great, new deals by my current landlords and people I’ve never done business with?
“However,” she added, “when developers start building and expanding malls, and I need that information before my competitors, we’ll be back.”
Nick Lillo of SLF Associates, who specializes in restaurant leasing in malls and life-style centers, admitted that “…but for a very precious few, our business remains in limbo…requests for rent relief, closings, cautious lease renewals with operating ‘safe bailout contingencies’, are the talk of the day.”
Landlords Being Realistic
Paul Fetscher of Great American Brokerage, another dealmaker specializing in the restaurant niche, is making some new deals. “Fortunately,” he said, “I am spending plenty of time with active franchisees…and landlords willing to be realistic and those who realize that yesterday’s rents weren’t the real rents—are coming to the table and willing to cut reasonable deals.”
A veteran leasing professional with a national apparel chain explained that with the slowdown in his company’s growth plans, “we’re focusing primarily on leases coming up for renewal in the next three years. This enables us to offer an early renewal to the landlord in return for reductions. It helps with making the process a bit less contentious.”
With so many big box stores going dark because of the disappearance of Circuit City, Linen ‘n Things, Comp USA, numerous department store anchors, category killers, etc., etc., many landlords fear that excessive percentage of vacancies could trigger other tenants from using their co-tenancy clauses as a reason to close their stores. This is part of the reason why, as we mentioned at the end of last year, some key retailers were being allowed to remain in their locations by paying only percentage rent, or in some cases, without paying any rent.
But many of these vacant stores, a leading broker stressed, “are ideal locations for value-oriented, expansion-minded retailers like T.J.Maxx, Kohl’s, Target, Home Depot, Lowe’s, Babies R Us, numerous supermarket chains, and the like.”
Opportunities Not Available Before
Which is an important reason, said Lillo, “for new space being negotiated on an entirely different, much lower ‘sales pro-forma’ base than even one year ago…reduced hours of operation, fixed pricing, ‘smaller plates’…all now a big part of our new playing field to lure customers back. Burgers, Wings, the QSR are now being given opportunities in locations, shopping centers that would have been impossible only a year ago.”
Among the brands he expects to “lead the charge back into the light…[are such moderate-priced, family friendly operators as “Darden, Cheesecake, CPK, Changs, Bravo, Brinker, B.J’s…”
One VP with an apparel chain echoed the comments about landlords becoming more reasonable in their demands: “In the past year or so, I haven’t lost a deal to a competitor who was willing to pay more—and it’s not because we’re stretching our maximums. We’ve also been able to lower our rent as a percentage of sales, down to single digits in a few instances.”
Another national tenant said part of the reason for his company’s slowdown of new development is due to the lack of financing which have delayed or killed some projects, or landlords are reluctant or not able to provide “sizable tenant allowances we have become accustomed to…”
Despite all the doom and gloom we’re hearing today, it is far from all negative, with numerous dealmakers seeing future opportunities on the horizon.
The retailers with vision, said a national consultant, are the ones taking advantage of the current economy and willing to make great deals now. “Spaces aren’t going to ‘The Greater Fool’…They are going to those who are willing to step forward in this market. I haven’t spoken to anyone who doesn’t believe that in the next decade, we will have numerous years of prosperity. So let’s lock in a good deal today and lock in those rents!”
More information on SHOPPING CENTER DIGEST, and our associate publications, EXPANDING RETAILERS and the DIRECTORY OF MAJOR MALLS may be obtained from our website, www.shoppingcenters.com.
Wednesday, July 22, 2009
Though Many Are Directing Their Expansion Offshore, They And Many Others Are Preparing For Major Growth in the U.S. and Canada
Strolling the Agora column for the July 20 edition of SHOPPING CENTER DIGEST
For months now, we and a multitude of very experienced people in the real estate industry have been directing our attentions to high-profile activity offshore—especially those larger landlords and tenants with the financial capabilities to grow and expand their brands. No question, it was a lot sexier to talk of building in China, Brazil, Russia, and the like--when we could all see that no new development or retail expansion of any note was taking place here--and that numerous projects announced just months ago have now been placed on the back burner.
Right now, the opportunities domestically have been limited due to the economic crisis, said these senior sages, consultants, investors and developers.
However, that does not mean that many of them are not now positioning themselves to take advantage of these falling values when “all the ducks line up.”
In fact, one investor, Tom Shapiro of Golden Tree InSite Partners, classifies the US as the new emerging market. Moody’s/REAL National All Property Type Aggregate Index states that the value of real estate domestically has dropped to levels not seen since September 2004. And others are predicting that these prices could be 50% off the values established just before the economy tanked.
The latest of the heavy-hitters entering this now crowded field is Vornado Realty, which expects to raise $1 billion to fund distressed real estate acquisitions in New York and Washington, DC.
Based on their record-breaking, positive performance over the second quarter, the larger, established REITS are expected to lead the way in aggressive acquisitions [Simon, Macerich, Developers Diversified, CBL]. Granted these funds with their returns of well over 100% have achieved these levels because they were among the hardest hit when stocks plummeted; but by refinancing and reducing their debt, they are now in a good position to buy for cash and avoid the trap of chasing properties using highly leveraged instruments.
And numerous others have formed new companies or divisions for this purpose. According to one marker, some $13 billion has already been raised in the stock market since March just for this purpose.
Financing new projects, said Simon Ziff of Ackman-Ziff Real Estate Group, is still a major challenge. Two years ago, he continued, the average loan his company made was $75 million; today it is $15 million, “and you have to go to 100 lenders to get a deal done.”
To this mix, now, add the foreign investors who are beginning to consider shopping centers ripe for investing and acquisitions, with most of their attention being directed at strips, mainly those that are anchored by financially sound, chain supermarkets, and with high occupancy rates.
The biggest obstacle right now, though, is that despite all the talk of substantial vacancies, foreclosures, distressed properties and the like, there really isn’t that much in the shopping center/retail industry that is available right now for these buyers-in-waiting. Lenders have been easing payment requirements to numerous strapped landlords, many through short-term extensions; but with increasing vacancies in these properties, and the rent decreases being demanded by retailers, landlords may still not be able to service these loans.
Many anticipate, therefore, that even these loans that have been re-negotiated may be in trouble unless the economy begins to pick up. The more conservative are estimating that it could take three years; most, however, are hopeful that activity will begin to improve later in the year or by early spring.
What most, however, are in agreement on is something we noted earlier (See Agora, May 11, 2009, P. J385): The landscape is changing and as it contracts more shopping centers will be controlled by fewer and larger owner-operators.
So, those with the cash are facing off against those who need it, and the question is who’s going to blink first? There’s little question that the more financially sound companies can afford to wait and have no reason to open their wallets until they think the price is right.
More information on Shopping Center Digest “The Locations Newsletter” and our associate publications, Expanding Retailers and the Directory of Major Malls, may be obtained from our website, www.shoppingcenters.com.
For months now, we and a multitude of very experienced people in the real estate industry have been directing our attentions to high-profile activity offshore—especially those larger landlords and tenants with the financial capabilities to grow and expand their brands. No question, it was a lot sexier to talk of building in China, Brazil, Russia, and the like--when we could all see that no new development or retail expansion of any note was taking place here--and that numerous projects announced just months ago have now been placed on the back burner.
Right now, the opportunities domestically have been limited due to the economic crisis, said these senior sages, consultants, investors and developers.
However, that does not mean that many of them are not now positioning themselves to take advantage of these falling values when “all the ducks line up.”
In fact, one investor, Tom Shapiro of Golden Tree InSite Partners, classifies the US as the new emerging market. Moody’s/REAL National All Property Type Aggregate Index states that the value of real estate domestically has dropped to levels not seen since September 2004. And others are predicting that these prices could be 50% off the values established just before the economy tanked.
The latest of the heavy-hitters entering this now crowded field is Vornado Realty, which expects to raise $1 billion to fund distressed real estate acquisitions in New York and Washington, DC.
Based on their record-breaking, positive performance over the second quarter, the larger, established REITS are expected to lead the way in aggressive acquisitions [Simon, Macerich, Developers Diversified, CBL]. Granted these funds with their returns of well over 100% have achieved these levels because they were among the hardest hit when stocks plummeted; but by refinancing and reducing their debt, they are now in a good position to buy for cash and avoid the trap of chasing properties using highly leveraged instruments.
And numerous others have formed new companies or divisions for this purpose. According to one marker, some $13 billion has already been raised in the stock market since March just for this purpose.
Financing new projects, said Simon Ziff of Ackman-Ziff Real Estate Group, is still a major challenge. Two years ago, he continued, the average loan his company made was $75 million; today it is $15 million, “and you have to go to 100 lenders to get a deal done.”
To this mix, now, add the foreign investors who are beginning to consider shopping centers ripe for investing and acquisitions, with most of their attention being directed at strips, mainly those that are anchored by financially sound, chain supermarkets, and with high occupancy rates.
The biggest obstacle right now, though, is that despite all the talk of substantial vacancies, foreclosures, distressed properties and the like, there really isn’t that much in the shopping center/retail industry that is available right now for these buyers-in-waiting. Lenders have been easing payment requirements to numerous strapped landlords, many through short-term extensions; but with increasing vacancies in these properties, and the rent decreases being demanded by retailers, landlords may still not be able to service these loans.
Many anticipate, therefore, that even these loans that have been re-negotiated may be in trouble unless the economy begins to pick up. The more conservative are estimating that it could take three years; most, however, are hopeful that activity will begin to improve later in the year or by early spring.
What most, however, are in agreement on is something we noted earlier (See Agora, May 11, 2009, P. J385): The landscape is changing and as it contracts more shopping centers will be controlled by fewer and larger owner-operators.
So, those with the cash are facing off against those who need it, and the question is who’s going to blink first? There’s little question that the more financially sound companies can afford to wait and have no reason to open their wallets until they think the price is right.
More information on Shopping Center Digest “The Locations Newsletter” and our associate publications, Expanding Retailers and the Directory of Major Malls, may be obtained from our website, www.shoppingcenters.com.
Monday, July 6, 2009
Cash Is King, As Dealmakers Say The Biggest Obstacle To Making A Deal Is The Lack Of Financing
This column of Strolling the Agora appears in the July 6 issue of Shopping Center Digest
Whether you want to build a shopping center or expand it, grow your retail empire by entering a new market or open another store or two, cash is king. Without it, forget it. Nothing new here. We’ve been hearing this refrain from many dealmakers around the country: “It’s the economy, stupid.”
It’s the main reason, for months now, dealmakers have been complaining about the lack of movement and deals are being frozen, even those that “were made” just recently at the Las Vegas RECon. And few of them are optimistic about the freeze lifting in the near future—though we are now in summer and there are many economists and mavens in and out of the administration who are pointing to positive signs.
“Even if there are some convincing signs,” said one investor, “these have not filtered down yet to commercial real estate such as shopping centers and retailing. First there has to be enough positive movement in other areas to be considered a trend, and that will have to take place primarily in a reduction in unemployment, and an uptick in residential values.”
The biggest obstacle to moving forward?
To Kenneth Roosth of Roosth Construction: “I am finding that Financing is the biggest hurdle right now.”
To Ira Meislik of Meislik & Meislik: “…the most common barrier is the inability to obtain financing. Principals are calculating ROIs based upon leverage, and it seems that the numbers don’t work without leverage.”
To Mary Farwell of Noteworthy Investments and Managemednt: “Financing, financing, financing. Working on now that is less than 50% LTV with perfect credit and clean environmental but they still have taken excessive time and, just today, hit my client with an extra point. Now is definitely the time to be creative in our financial side and specialize in exchanges, owner-finance, lease purchase, etc.”
In addition to financing problems, Alan Smith of Bourn Partners cites issues of co-tenancy, terminations, and the demand to "make it worth my while." And, "impact fees are raising the barrier as ...we are faced with $4.00 and to $5.00 of fees to obtain approvals from the municipalities."
One financial maven stressed that lenders are reluctant to lend without a strong cash flow and excellent sponsorship. “They are trying to make agreements more creative and more palatable, but they are becoming difficult for borrowers to accept. Some are putting points up front, or perhaps even trying to reduce the amount of the financing it is willing to provide.”
One national chain which has cut back on the number of new stores it plans to open this year attributes the decision to developers who have halted or delayed building plans. “We haven’t seen such a lack of new projects in 20 years,” he said.
“It’s hitting the smaller operators especially hard,” said another dealmaker, “especially those who have been using credit cards and have depended on long-standing credit lines to keep their business afloat. Some banks have arbitrarily cut back on these credit lines, especially over the last six or seven months.”
It’s much worse than in the early ‘90s when traditional financing “froze up completely,” said a senior dealmaker. “Then, to get the ball rolling, many turned to Wall Street and IPOs as owner-developers re-invented the REIT (real estate investment trust) industry, which had never established a foothold in the shopping center/retail chain industry, except for several owners of strip centers.
Some in the industry say REITs are expected to lead the rebound in commercial real estate, mainly because they have the ability raise money by selling securities; the IPOs are the example they cited when shopping centers became an important part of this niche. Such companies as Simon Property Group, Macerich and Kimco Real Estate have already re-financed much of their debt.
“Now,” he continued, “these landlords—and tenants—are directing their attention offshore where there are less hassles, easier deals, a more welcome environment, and the opportunity for joint ventures and partnerships.”
[We had discussed this in earlier columns, and the fact that some foreign investors—in development and in retailing--were beginning to fill the vacuum here by expanding into North America.]
Perhaps another deterrent to making a deal today can be the local laws, codes, zoning and the like, especially in those markets where retailing is considered to be saturated, and over-stored.
Said Jeffrey Evans of Intertech Design Services: “It seems as though tighter restrictions have been made on what is and what is not allowed in regards to signage and trade dress. Certainly I understand that there needs to be restrictions, but how far do companies need to go in diminishing their brand[?]”
It can be simplistic to base most of the gridlock on just one aspect, lack of funding. However, this is the main cause that many dealmakers point to.
More information on Shopping Center Digest and our associate publications, Expanding Retailers and Directory of Major Malls may be obtained from our website, www.shoppingcenters.com
Whether you want to build a shopping center or expand it, grow your retail empire by entering a new market or open another store or two, cash is king. Without it, forget it. Nothing new here. We’ve been hearing this refrain from many dealmakers around the country: “It’s the economy, stupid.”
It’s the main reason, for months now, dealmakers have been complaining about the lack of movement and deals are being frozen, even those that “were made” just recently at the Las Vegas RECon. And few of them are optimistic about the freeze lifting in the near future—though we are now in summer and there are many economists and mavens in and out of the administration who are pointing to positive signs.
“Even if there are some convincing signs,” said one investor, “these have not filtered down yet to commercial real estate such as shopping centers and retailing. First there has to be enough positive movement in other areas to be considered a trend, and that will have to take place primarily in a reduction in unemployment, and an uptick in residential values.”
The biggest obstacle to moving forward?
To Kenneth Roosth of Roosth Construction: “I am finding that Financing is the biggest hurdle right now.”
To Ira Meislik of Meislik & Meislik: “…the most common barrier is the inability to obtain financing. Principals are calculating ROIs based upon leverage, and it seems that the numbers don’t work without leverage.”
To Mary Farwell of Noteworthy Investments and Managemednt: “Financing, financing, financing. Working on now that is less than 50% LTV with perfect credit and clean environmental but they still have taken excessive time and, just today, hit my client with an extra point. Now is definitely the time to be creative in our financial side and specialize in exchanges, owner-finance, lease purchase, etc.”
In addition to financing problems, Alan Smith of Bourn Partners cites issues of co-tenancy, terminations, and the demand to "make it worth my while." And, "impact fees are raising the barrier as ...we are faced with $4.00 and to $5.00 of fees to obtain approvals from the municipalities."
One financial maven stressed that lenders are reluctant to lend without a strong cash flow and excellent sponsorship. “They are trying to make agreements more creative and more palatable, but they are becoming difficult for borrowers to accept. Some are putting points up front, or perhaps even trying to reduce the amount of the financing it is willing to provide.”
One national chain which has cut back on the number of new stores it plans to open this year attributes the decision to developers who have halted or delayed building plans. “We haven’t seen such a lack of new projects in 20 years,” he said.
“It’s hitting the smaller operators especially hard,” said another dealmaker, “especially those who have been using credit cards and have depended on long-standing credit lines to keep their business afloat. Some banks have arbitrarily cut back on these credit lines, especially over the last six or seven months.”
It’s much worse than in the early ‘90s when traditional financing “froze up completely,” said a senior dealmaker. “Then, to get the ball rolling, many turned to Wall Street and IPOs as owner-developers re-invented the REIT (real estate investment trust) industry, which had never established a foothold in the shopping center/retail chain industry, except for several owners of strip centers.
Some in the industry say REITs are expected to lead the rebound in commercial real estate, mainly because they have the ability raise money by selling securities; the IPOs are the example they cited when shopping centers became an important part of this niche. Such companies as Simon Property Group, Macerich and Kimco Real Estate have already re-financed much of their debt.
“Now,” he continued, “these landlords—and tenants—are directing their attention offshore where there are less hassles, easier deals, a more welcome environment, and the opportunity for joint ventures and partnerships.”
[We had discussed this in earlier columns, and the fact that some foreign investors—in development and in retailing--were beginning to fill the vacuum here by expanding into North America.]
Perhaps another deterrent to making a deal today can be the local laws, codes, zoning and the like, especially in those markets where retailing is considered to be saturated, and over-stored.
Said Jeffrey Evans of Intertech Design Services: “It seems as though tighter restrictions have been made on what is and what is not allowed in regards to signage and trade dress. Certainly I understand that there needs to be restrictions, but how far do companies need to go in diminishing their brand[?]”
It can be simplistic to base most of the gridlock on just one aspect, lack of funding. However, this is the main cause that many dealmakers point to.
More information on Shopping Center Digest and our associate publications, Expanding Retailers and Directory of Major Malls may be obtained from our website, www.shoppingcenters.com
Thursday, June 18, 2009
The Reasons Why US And Canadian Developers And Retailers Are Expanding Into Foreign Markets
Strolling the Agora column for the June 22 issue of SHOPPING CENTER DIGEST.
For several years now, “civilians” ignorant of the industry or how it operates have been calling it dead in the US and Canada, and writing its obituary in newspapers, magazines, on television specials and on the internet. Especially that niche involving large malls. Meanwhile, we have continued to flourish and re-invent our projects with mixed-use developments, lifestyle centers, entertainment-oriented projects, hybrids, and the basic, ever-present strip center.
Now, with increasing vacancies reaching historic proportions here—resulting in liquidations and bankruptcies of major and minor retailers and developers—some solvent behemoths on both sides of the negotiating table are focusing on offshore, more fertile ground for new development and expansion.
China, India, Brazil, Dubai, South Korea, Russia, the Middle East, the Far East, Europe, in essence, any market or emerging/developing nation with a stable government, growing population and prosperity, whose welcoming arms offer joint ventures and attractive financing, are attracting North American landlords and tenants.
Why There Instead Of Here?
Why there instead of here? The easy responses are the clichés and platitudes that have become over-used in relation to the industry domestically: We’ve reached saturation. Over-building has resulted in duplication of goods and services. The internet has made it too easy to shop based on price, or made the shopping center redundant. Too much competition has destroyed opportunities for future growth. New developments face extensive public opposition, litigation, and excessive time and costs due to requirements for numerous layers of governmental approvals. Etc., etc. Sad to say, there’s more than a kernel of truth in much of this.
But the potential elsewhere? One report says more than 100 malls encompassing 30 million sq. ft. are to be built in India by the end of 2010. Though China has a population of 1.3 billion people with most of the per capita income at the poverty level, much of its growth is centered along the coastal regions where income and population are booming and a city of 1 million people is a small town. The stock index in the last three months has jumped 64% in India, 41% in Brazil, 37% in China, 80% in Russia. The largest department store in the world may very well be in South Korea, Shinsegae Centrum City, which covers some 3, 163,000 sq. ft..
Suzanne Gardent of PBW, Czech Republic, says “shopping malls are becoming a key feature in the retail panorama. Since the fall of communism over 250 shopping centers were built in the Czech Republic, with many of them now over 100 shops—this is huge for Central and Eastern Europe.”
Even though Czechs have a relatively low income, she says, “food and drinks are cheap…they still manage to spend a lot of it [income] on fashion clothes and girls especially are increasingly wearing the same garments as other Western girls…tax system in the Czech Republic is advantageous, and GDP per capita is growing…All that brings to interest to develop more shopping centers [here].”
International Profits Are Greater
Paul Fetscher of Great American Brokerage pointed out that chain restaurants are going international mostly as joint ventures or partnerships with established companies in those countries. “At TGIF, for example, its profits internationally are greater than that of all its domestic units combined.”
In China, said John Cirillo of Strategic Market Insites, “…the construction cranes over there are not for decorative purposes (as opposed to the ones I saw rusting in place in Las Vegas).
“A strong(er) economy, emerging middle/upper class households and a thirst for western brands are a few of the drivers for U.S. retailers to look east. Younger consumers in China are not as focused on saving like their parents; much like baby boomers outspent their depression era grandparents.”
Anil Suri with Inorbit Malls Cyberabad, said “there are around 400 Malls in India and the Number is likely to go up to 1000 soon.” In Mumbai malls work “because of the population and Mumbai is finance capital. Retailers & Developers are now targeting tier II and tier III cities because the potential is immense.”
Andrew King, who manages East Europe at Aston Worldwide, points to Poland’s rising economy and its stability “through European membership since 2004. [It has a] Transparent business environment with high level of international compliance,” citing “Government and EU incentives available to foreign companies for a range of business activities.”
Poland Is Highly Skilled, Educated
The population of 40 million, he says, is “highly skilled and educated, multi-lingual labour pool of over 2 million students [and] with low attrition rates.”
The reason for the push for foreign development “is simple,” according to Geok Ser Lee, International AssocAIA, RIBA, NZIA, LEED AP. “The emerging market there is as big if not larger than the US and Canada now and is growing exponentially as their purchasing grow[s] in tandem with high economic growth….the population of China’s middle class alone is the size of the US and is largely virgin territory with unsatisfied demands, high saving rate, well informed by global standard…They may represent a minute percentage of their total population but is a huge market in absolute term[s]…”
“The two main drivers for international expansion [from the retailer point of view],” said Thomas Naslund, strategic commercial advisor at Longship RE, are retaliation and brand upgrade. “…you need to fight your competitors on their own turf in order to make sure that your competitor can’t make excessive profits on their home market. Money that could be used against you on your own home market.” He cites “the Inditex (Zara)-H&M-fight in Spain and Sweden” as examples.
Also, Naslund states, “Most brands tend to go pricey when they cross borders. This brand upgrade would/could have a positive effect in your home market as well.” An example is the sticker many fashion retailers place on store fronts indicating stores in fashion cities “giving higher status to the shopper…”
"The companies are not so complicated," according to consultant Marco Federico Del Ponte. "If their domestic results in the last year don't register a growth, the only way to hope in better results is to invest and plan expansion in new markets. An example? Abercrombie! They are planning new european openings, but in US they are in stand-by.
"And it is the same for european companies/retailers,infact they are investing a lot in asian markets but not at home."
Hazards, Dangers On Horizon
The push to expand offshore, though, is replete with many dangers, experienced dealmakers stress.
Said Lee: “However, it is not a bed of roses and only those who are serious about helping [China] grow and plug into the global grid are rewarded handsomely.” Many have been successful, others have been harmed. “Simplistically speaking, half hearted attempts through sending in their second liners or pinching pennies when recruiting staff to lead their foray into these markets are the primary causes of their failures.”
“While demand is great [in China],” said Cirillo, “retailers need to be aware that Chinese consumers are sophisticated. U.S. firms that go over there resting on their brand awareness laurels will be in for disappointing sales.
“Many market sectors in first tier (Shanghai) and second tier (Hangzhou) cities are already over-stored…and some centers in working class trade areas have a much too upscale tenant mix.”
Joseph Wan, chief executive of London-based Harvey Nichols, is expanding through local partners in the Middle East, Russia and South America, but is avoiding Mainland China. He says 80% of the population is at the poverty level. “Leave the coastal regions and go inland and you’ll see very primitive conditions, with people struggling for access to electricity and hot water.” In the cities, rents are too high, though “mono-brands are doing well because they charge high margins and can absorb the high rents.”
This concern of areas being over-stored, was echoed by Suri regarding India, “especially in Mumbai there are too many malls and has reached a saturation point…Major real estate companies which were in residential and commercial development have stepped in mall business and a lot of local companies too…We will see a boom till 2012 and then consolidation will happen…”
Domestically, The Future Is Good
“Once the economy rebounds and the industry in the US and Canada recovers,” said one noted shopping center executive, “tenants and landlords have a bright future here. All the guidelines and economic signposts are positive.
“Leading foreign retailers are already seeking locations in our major cities and surrounding markets, especially now when rents are low and there is a push on to diversify the tenant lists in the higher-end markets,” he said.
“With an ever-growing domestic population in North America being forecasted by the census bureau and numerous think tanks—much of course do to second generation citizens reaching maturity and entering the workforce—a strong shopping center/retail industry must grow to meet their demand for goods and services.”
More information on Shopping Center Digest and our associate publications, Expanding Retailers and the Directory of Major Malls, may be obtained from our website, www.shoppingcenters.com .
For several years now, “civilians” ignorant of the industry or how it operates have been calling it dead in the US and Canada, and writing its obituary in newspapers, magazines, on television specials and on the internet. Especially that niche involving large malls. Meanwhile, we have continued to flourish and re-invent our projects with mixed-use developments, lifestyle centers, entertainment-oriented projects, hybrids, and the basic, ever-present strip center.
Now, with increasing vacancies reaching historic proportions here—resulting in liquidations and bankruptcies of major and minor retailers and developers—some solvent behemoths on both sides of the negotiating table are focusing on offshore, more fertile ground for new development and expansion.
China, India, Brazil, Dubai, South Korea, Russia, the Middle East, the Far East, Europe, in essence, any market or emerging/developing nation with a stable government, growing population and prosperity, whose welcoming arms offer joint ventures and attractive financing, are attracting North American landlords and tenants.
Why There Instead Of Here?
Why there instead of here? The easy responses are the clichés and platitudes that have become over-used in relation to the industry domestically: We’ve reached saturation. Over-building has resulted in duplication of goods and services. The internet has made it too easy to shop based on price, or made the shopping center redundant. Too much competition has destroyed opportunities for future growth. New developments face extensive public opposition, litigation, and excessive time and costs due to requirements for numerous layers of governmental approvals. Etc., etc. Sad to say, there’s more than a kernel of truth in much of this.
But the potential elsewhere? One report says more than 100 malls encompassing 30 million sq. ft. are to be built in India by the end of 2010. Though China has a population of 1.3 billion people with most of the per capita income at the poverty level, much of its growth is centered along the coastal regions where income and population are booming and a city of 1 million people is a small town. The stock index in the last three months has jumped 64% in India, 41% in Brazil, 37% in China, 80% in Russia. The largest department store in the world may very well be in South Korea, Shinsegae Centrum City, which covers some 3, 163,000 sq. ft..
Suzanne Gardent of PBW, Czech Republic, says “shopping malls are becoming a key feature in the retail panorama. Since the fall of communism over 250 shopping centers were built in the Czech Republic, with many of them now over 100 shops—this is huge for Central and Eastern Europe.”
Even though Czechs have a relatively low income, she says, “food and drinks are cheap…they still manage to spend a lot of it [income] on fashion clothes and girls especially are increasingly wearing the same garments as other Western girls…tax system in the Czech Republic is advantageous, and GDP per capita is growing…All that brings to interest to develop more shopping centers [here].”
International Profits Are Greater
Paul Fetscher of Great American Brokerage pointed out that chain restaurants are going international mostly as joint ventures or partnerships with established companies in those countries. “At TGIF, for example, its profits internationally are greater than that of all its domestic units combined.”
In China, said John Cirillo of Strategic Market Insites, “…the construction cranes over there are not for decorative purposes (as opposed to the ones I saw rusting in place in Las Vegas).
“A strong(er) economy, emerging middle/upper class households and a thirst for western brands are a few of the drivers for U.S. retailers to look east. Younger consumers in China are not as focused on saving like their parents; much like baby boomers outspent their depression era grandparents.”
Anil Suri with Inorbit Malls Cyberabad, said “there are around 400 Malls in India and the Number is likely to go up to 1000 soon.” In Mumbai malls work “because of the population and Mumbai is finance capital. Retailers & Developers are now targeting tier II and tier III cities because the potential is immense.”
Andrew King, who manages East Europe at Aston Worldwide, points to Poland’s rising economy and its stability “through European membership since 2004. [It has a] Transparent business environment with high level of international compliance,” citing “Government and EU incentives available to foreign companies for a range of business activities.”
Poland Is Highly Skilled, Educated
The population of 40 million, he says, is “highly skilled and educated, multi-lingual labour pool of over 2 million students [and] with low attrition rates.”
The reason for the push for foreign development “is simple,” according to Geok Ser Lee, International AssocAIA, RIBA, NZIA, LEED AP. “The emerging market there is as big if not larger than the US and Canada now and is growing exponentially as their purchasing grow[s] in tandem with high economic growth….the population of China’s middle class alone is the size of the US and is largely virgin territory with unsatisfied demands, high saving rate, well informed by global standard…They may represent a minute percentage of their total population but is a huge market in absolute term[s]…”
“The two main drivers for international expansion [from the retailer point of view],” said Thomas Naslund, strategic commercial advisor at Longship RE, are retaliation and brand upgrade. “…you need to fight your competitors on their own turf in order to make sure that your competitor can’t make excessive profits on their home market. Money that could be used against you on your own home market.” He cites “the Inditex (Zara)-H&M-fight in Spain and Sweden” as examples.
Also, Naslund states, “Most brands tend to go pricey when they cross borders. This brand upgrade would/could have a positive effect in your home market as well.” An example is the sticker many fashion retailers place on store fronts indicating stores in fashion cities “giving higher status to the shopper…”
"The companies are not so complicated," according to consultant Marco Federico Del Ponte. "If their domestic results in the last year don't register a growth, the only way to hope in better results is to invest and plan expansion in new markets. An example? Abercrombie! They are planning new european openings, but in US they are in stand-by.
"And it is the same for european companies/retailers,infact they are investing a lot in asian markets but not at home."
Hazards, Dangers On Horizon
The push to expand offshore, though, is replete with many dangers, experienced dealmakers stress.
Said Lee: “However, it is not a bed of roses and only those who are serious about helping [China] grow and plug into the global grid are rewarded handsomely.” Many have been successful, others have been harmed. “Simplistically speaking, half hearted attempts through sending in their second liners or pinching pennies when recruiting staff to lead their foray into these markets are the primary causes of their failures.”
“While demand is great [in China],” said Cirillo, “retailers need to be aware that Chinese consumers are sophisticated. U.S. firms that go over there resting on their brand awareness laurels will be in for disappointing sales.
“Many market sectors in first tier (Shanghai) and second tier (Hangzhou) cities are already over-stored…and some centers in working class trade areas have a much too upscale tenant mix.”
Joseph Wan, chief executive of London-based Harvey Nichols, is expanding through local partners in the Middle East, Russia and South America, but is avoiding Mainland China. He says 80% of the population is at the poverty level. “Leave the coastal regions and go inland and you’ll see very primitive conditions, with people struggling for access to electricity and hot water.” In the cities, rents are too high, though “mono-brands are doing well because they charge high margins and can absorb the high rents.”
This concern of areas being over-stored, was echoed by Suri regarding India, “especially in Mumbai there are too many malls and has reached a saturation point…Major real estate companies which were in residential and commercial development have stepped in mall business and a lot of local companies too…We will see a boom till 2012 and then consolidation will happen…”
Domestically, The Future Is Good
“Once the economy rebounds and the industry in the US and Canada recovers,” said one noted shopping center executive, “tenants and landlords have a bright future here. All the guidelines and economic signposts are positive.
“Leading foreign retailers are already seeking locations in our major cities and surrounding markets, especially now when rents are low and there is a push on to diversify the tenant lists in the higher-end markets,” he said.
“With an ever-growing domestic population in North America being forecasted by the census bureau and numerous think tanks—much of course do to second generation citizens reaching maturity and entering the workforce—a strong shopping center/retail industry must grow to meet their demand for goods and services.”
More information on Shopping Center Digest and our associate publications, Expanding Retailers and the Directory of Major Malls, may be obtained from our website, www.shoppingcenters.com .
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