Ann, Joe, Laurie, Rich, Alyson and myself attended the Philly Dealmaking last month and, as has been the norm for most shows recently, attendance was up 10% to 2100/2200 dealmakers who wined, dined and did deals for two days. Philly is never a great show, it's a workhorse, living in the shadow of DC and NYC but still a relevant event. The "negative" of this show over the 80 or so shows I've been to in the last four years is that this is the first conference where I heard a number of people complain or express concern that either business is not good or is slowing down.
It's been a long time since I've heard these complaints. In fairness, this is happening right after two hurricanes and gas going to $3 per gallon, so of course everyone is depressed. Anyway, all in attendance were happy with business and their income for the last year, with brokers continuing to make a decent buck for another year as their commissions get paid for "commissions earned but not due." It's their future income that people expressed concern over, with the largest group of paranoids being brokers. Over dinner several developers complained that they've been receiving calls from retailers who opened within the last year asking for concessions because their sales volume can't justify the rent. Numerous brokers complained this is the first show in years that they had no new product to promote. Not good signs for the future.
Ann and I also attended the Palm Springs dealmaking and, again, attendance was up about 10% to 4200/4300 dealmakers; this is always an excellent show, with my major complaint being I can't take the heat of Palm Springs after 10 in the morning. It's HOT. How people live there year round I find amazing. My concerns grew again with this show as I again heard discontent about present and future business.
That's two shows in a row with "concerns," and Californians are usually oblivious/optimistic about any part of the world except their own market. (In fairness, California is equivalent to the size of Maine to Virginia; no wonder it's always a great turnout and they look at the world from colored glasses). Anyway, we're on our way to the Atlanta and Chicago shows and if there's anxiety there, we as an industry have problems. The good news is that I'm willing to bet dollars to donuts that Atlanta, Chicago and New York will all have record attendance. Let's hope there's no bad news to report. My personal suggestion is if you're planning on selling a center, SELL NOW, since I believe it's all downhill from here.
The same is true for leasing. Don't fight for the last quarter, close now before the retailer experiences Christmas. Getting back to the show's attendance, the cocktail parties both for Philly and Palm Springs were good with the Palm Spring's event being jammed. No one could complain about attendance or networking opportunities.
What makes California different than any other market (besides great weather and earthquakes) is that the retail real estate industry is controlled almost completely by brokers. In fact, the Palm Springs show has a higher percentage of brokers in attendance compared to retailers than any other show I attend. On the other hand, the Philly show seemed to have a higher percentage of "real" retailers than most shows. Anyway, back to brokers. Over the last decade, brokers have become an important aspect of retail dealmaking nationwide but no other area has embraced brokers as much as Californians do. In most cases that's not a problem, but numerous retailers complained not only about the high rents (blame that on a state that takes forever to approve a site) but that when they are offered a site and presented with a rent and if they make a counter offer, the offering broker contends that they are insulted by such a "low" counteroffer number no matter what it is.
That I don't understand. I may not accept a retailer's counteroffer, but I'm never insulted when someone offers to pay me rent. I have problems with the "guy" who won't make an offer and I deal with lots of them. Another "unusual" aspect of the California show was the number of "newbie" developers I encountered. I must have talked to a dozen "first time" developers who had absolutely no idea what was required to develop a shopping center, but have millions of dollars used to either acquire or tie up property for long periods of time. One group I bumped into is developing 1.2 million sq.ft. of retail and 300,000 sq.ft. of mixed use and they never developed before in their life. I recommended they JV with an established developer and they said they tried; they met with Simon, General Growth, etc. but after they explained the type of JV they were offered, I recommended they keep on trying to find a "better" partner, because the JV proposals they were offered screws them and that's being polite.
I also talked to several brokers who specialize in 1031 exchanges and they "claim" that some of their Walgreen deals are selling at a 4 1/2-4 3/4% CAP; you can say whatever you want about the quality of the tenant or location but that's plain insane. The end is near. To clarify this, I have to say that these CAPS were for property in California, which uses different math than the rest of the country.
Over dinner I had some interesting debates over which retailers were going bankrupt next. The two most popular names were Blockbuster and Levitz. Other names came up but those two were far ahead of the crowd. Two other names came up a lot but in a more favorable light; they were Kimco and Inland, two companies trying their best to buy all the shopping centers in America. At the same dinner, three developers complained about the securitized loans they made. All three claim they'll never do these types of loans again. While they provide a higher "payout" to the borrower, after the loan is made it takes forever to get necessary approvals and no matter what they need from the lender, they have to pay a fee. They all complained they were being nickeled and dimed to death.
An "interesting" story I heard was that Rite-Aid, in order to keep their employees safe and productive during the hurricane in New Orleans set up temporary housing, provided food, services and gas for all their effected employees. Got to give them credit for that.
Also, both in Palm Springs and Philly, I encountered more retailers than usual looking for temporary space for 30 to 120 days. They sell everything from apparel, videos to electronics. I guess it's a trend in retailing that continues to do well even with a softening economy.
Hope to see you soon in Atlanta, Chicago or New York,
P.S. Don't forget to plan on attending the Barry Davis Memorial Next Generation Scholarship Dinner on December 4th, 2005 at the Pershing Square restaurant right before the start of the NY Dealmaking show. You should attend even if you didn't know Barry (which is a great loss) because this is not only an excellent cause to support but a great networking event. For complete details, call the ICSC at 646-728-3800.
----------------------------------------------------
I attended the Atlanta dealmaking show and Rich (our editor) and I went to Chicago for its event (Ann was busy working on the New York show) and, in both cases, attendance was up but not quite as much as most shows have experienced in the last few years. In fairness, the slowdown in growth may be due to some people not being able to get to either show because of the hurricane in Florida and that the two shows were back to back, making some of us old farts say it was too much and only attended one of the two. I think, but I’m not positive, that Atlanta was slightly larger than Chicago, but both were worth attending. The reason, I'm told, for the shows overlapping were because of the Jewish holidays and the desire/need not to have an event on any of the holidays. Next year, Chicago will be in September and Atlanta in October, making ‘em a non-competitive event and, IMHO, that’s good. Ann and I are leaving today for the Texas show, then New York in December before it all ends for the year. Happy New Year!
The only two widespread complaints were minor. The cocktail party in Atlanta, which was well attended, had long lines at the bar and food tables (not enough set ups) and in Chicago, if you tried to get your badge between 8:45 and 10:30 am, you had up to a 45-minute wait. According to Phyllis Peterson, who runs all the major shows, this was caused by an extremely high amount of people showing up at the same time, a problem promised to be corrected next year. The ICSC is learning; they know New York will be a nightmare on 42nd Street and is mailing out badges to advance registrants to avoid delays (smart decision).
Both shows were busy the day before the actual dealmaking, with suites set up throughout the hotels, “dealmakers” at every vacant table and busy restaurants the night before. I wasn’t able to attend the Harold Eisenberg dinner the night before the Chicago show started because I arrived there at 10 p.m. from Atlanta but was told it was a sellout with over 550 in attendance. But I still have to thank Jim Shutter for the invitation (Oh, don’t forget to come to the Barry Davis Memorial Dinner on Sunday, Dec 6th. in NYC. Not only are you supporting a great cause but it’s a really outstanding networking event. It’s the East Coast’s Harold Eisenberg Dinner, you don’t want to miss it. Call the ICSC at 646-728-3800).
Chicago seemed to appeal to companies from a wider region than Atlanta, in that I got into conversations with people from California, New York and all places in between. Atlanta drew more from a 200-mile radius. The New York show will be a national event. And, with some luck, another record will be set (actually no luck is needed. Short of a blizzard, another record is coming).
Both Atlanta and Chicago also seem to attract “small” developers who cater to middle markets, a difference from the Philly, Palm Springs and the Florida events. At both shows and in other trade publications, all you hear about is mixed-use, lifestyle centers. Based on all the press they receive, you’d think that the only type of center being built in America today is a 400,000 sq.ft., $75 million project which few of the “little guys” can afford (my definition of little guy means they have a personal net worth of $5 to $25 million but their average project usually costs under $10 million and there are LOTS of centers still being built that fit this definition). There were numerous conversations about mixed-use and lifestyle centers with several retailers talking about “failed” lifestyle centers they were in (so much going wrong so soon after they've become so "hot"). One retailer compared the hype over mixed-use and lifestyle centers as being similar to all the talk about outlet and off-price centers being the cure for all problem properties, which they weren’t. Several retailers contended that the only common ground that many lifestyle centers have was that they had a bookstore either announced or proposed after that they could contain a Pizza Hut and Kmart, but the developer contended it was a lifestyle. The one common comment I heard was that the lifestyle/mixed-use center did best when located across from a regional mall (makes sense). Some said they were being offered centers located in blue collar areas that are “close” to the upscale markets (which doesn’t work).
While 80% to 85% of the attendees at both shows were upbeat, 15% to 20% were apprehensive of the industry’s immediate future. Several developers were complaining about the number of bankruptcies and store closings they were encountering and were not optimistic about Christmas. They also saw more resistance from retailers on doing deals. Several retailers I spoke to said they were slowing down openings and holding off on determining the number of openings for 2006 until after Christmas. If we have a poor Christmas, business will suck next year. What was interesting was I spoke to several retailers who are operating in Chapter 11 and they were all upbeat about their future. Of course what choice do they have?
What was “scary” was I had conversations with some “bottom fishers” (I say this in the most complimentary way) and they contend both shows were excellent for them, a bad sign for the industry. On the other hand, I spoke to numerous “opportunist buyers” who “claimed they got great deals,” such as buying a center for $5 psf. The good news is there are still deals like that available, the bad news is you usually get what you pay for. I was offered the opportunity to manage/lease two of these projects and, in both cases, I felt they were beyond our ability to “cure.” IMHO, they are beyond recovery and are on a death watch. Neither buyer was that sophisticated or experienced and made their decision purely based on price, which is trouble looking for a place to happen.
Oh, good news on retailers for a change. Bon-Ton just announced they are acquiring SAKS northern division of 142 stores, combined with their past acquisition of Elder-Beerman makes them a major Midwest player. Why do I mention this since it’s just an acquisition? Well, it isn’t like Federated is acquiring some great local names and making ‘em into a Macy’s and taking away a local identity. Here, Bon-Ton, a former candidate for bankruptcy, is now alive and well and becoming a major player themselves. The demise of SAKS was a given, so this acquisition makes a local player more competitive and aids our industry in competition. I think Federated’s acquisitions will, and does, hurt the mall industry.
Macy's is an excellent department store, BUT variety is the spice of life. Malls are becoming boring when it comes to tenant mix. Yes, mall developers (the few that there are) are spending billions upgrading the centers, adding entertainment, condo, five-star restaurants and more, BUT the major reason you go to a mall is the retailers and retailing today is become so “me-too” that you often can’t tell the store you’re in until you’re at checkout and they tell you who to make the check payable to.
Oh well, on with my parting thoughts: Most retailers that either file for chapter 11 or close huge amounts of stores are either stupid or have top executives that are stupid and “forced” the real estate department to open more stores than they properly could and still keep costs down. I recently received an email from DJM Asset Management promoting the excess space of OshKosh B’Gosh, which is closing 15 locations. Their locations run the gamut of CA, CO, GA, MO, OH, OR, TN, TX, VA, VT and WI. Their square footage runs from 3,000 sq.ft. to 9,900 sq.ft. The locations, square footage and rents provide a decent overview of their operations and philosophy and insight into what they are. After reviewing their "excess locations," I understand why they’re having problems; they pay too much rent, which runs from $23 to $38.50 per foot. A lot of their real estate is excellent, sharing space with the likes of Ann Taylor, Bath & Body Works and Gap, but I think in most cases they were more concerned about image than mundane things such as profitability. They could do the same volume for less rent if they "worked" on finding locations. In the mail I also received a flyer from DJM marketing 58 locations of the Good Guys. An analysis of these locations proved the same insight. Too high of a rent payer.
The advantage of the Internet age and the proliferation of companies marketing the excess space of retailers is we can get a glimpse into the type of deals retailers did and I’m sure every retailer and tenant rep gets a dozen or more submissions a month of the surplus locations of one retailer or another. Hopefully, they can learn from the retailer's mistakes and not do their own. Yes, buying a lease of a tenant in bankruptcy makes sense if its an older lease at low rent, but newer deals rarely make sense. Oh, I think too many people are watching the TV program “Flip This House" and are trying to do it with shopping centers. In the last few weeks I’ve had four people call wanting to know if any of our clients would be interested in purchasing their contract for centers, which they signed a week ago. The ink isn't dry and they want to flip.
----------------------------------------------------
Ann and I came back a few weeks ago from the San Antonio show and it’s two weeks to go until New York (the end of the year is near). If 2005 ends as it’s been running for the past eleven months, New York will be great, as the Texas show was, but on a substantially larger scale. New York is no longer a regional event (not that it ever was); it’s our mid year national convention. The 2004 New York dealmaking had 6,100 attendees and 7,000 are expected this year. If you're not coming, you're missing a lot and making a mistake. While the Texas dealmaking was small compared to other shows (a little under 2,000 attended), its growth over the last few years has been substantially larger than the rest. The Texas dealmaking is also “purer,” in that less “outsiders” attend. It’s really Texas only-oriented; other shows attract from a larger region not just a state, but then Texas is "big." Approximately 90% of those in attendance appeared to be happy with current business, even the ones that feel there’s a slowdown/recession on the way looked at it as an opportunity to buy properties at a price that might make sense. Like Atlanta, the majority of developers were “MA&PAs” who owned 10 to 20 centers and, if need be, could finance a 150,000 sq.ft. center out of their own cash flow. Why they would do it is alien to them but they could. They were all bragging about new developments they had going with few mixed-use or lifestyle centers discussed (Texans are bread and potato people), but hundreds of millions of dollars are being spent on new projects and redevelopment in the state, not sexy projects, but excellent workhorses. Percentage-wise, there were fewer “real” retailers than were in Atlanta or Chicago, but there were vast numbers of brokers available to do deals.
About the only negative I had was the layout of their Retailers Runway, which used a seating arrangement around a table instead of the standard walk-up, which I prefer. Ann and I couldn't make the cocktail party but were told it was "so-so." On Wednesday there were several interesting seminars and people spent the day dealmaking or learning. Then, on Thursday the actual deal doing event began, which was active all day. While attendance was up, as was the enthusiasm of the attendees, you could tell there’s concern on many of the more mature attendees (old farts), who have seen slowdowns start in manners similar to what we’re encountering now (one of the few advantages of age is, if you’re lucky, you also gain experience/insight).
Changing back to the New York show, if it wasn’t as good as it’s been and I know it will be, I could never justify the current hotel rates that we’re being gouged with (but in fairness they're not picking on the ICSC, the hotels are ripping everyone off). I assume the hotel business is good, so they want to make hay while they can. The type of year 2006 will be is still a mystery, the economic indications are still too confusing. The stock market is up Monday, Wednesday and Friday and on Tuesday, Thursday and Sunday it’s down. REITs are up, down, hot and cold. And that’s just on Tuesday. They say there’s a real estate bubble, then they come back saying there will just be a slowdown but not a recession. Some say Christmas will be good, some say no. I’m not smart enough to know the answer. I do know, however, that if Christmas is good 2006 should be decent. If it isn’t, our “turnaround” division will be busy in the new year. Either way, I don't expect 2006 to be as good as 2005.
On a different note, people are either lazy, stupid or at minimum don’t want to go the extra mile to make a deal. An owner offered me a site that I reviewed but turned down for a retailer. When I explained it was too close to an existing store and didn’t have enough draw to the area, he disagreed with me and explained I was wrong. When I replied “how am I wrong?” I was told “because you are,” not a valid reason to change my mind. I suggested he do a trade map of the area, with different demographics, traffic counts and show all the competing centers in the immediate area, plus demographics on the population half way between their location and our store, something I often ask for when the landlord doesn’t like my opinion. Well, this one, as does six out of 10, said “If you want it, you do it.” I tried to explain that I didn’t want it, that I didn’t think the site was for us BUT that I’m willing to review my decision IF they supply the info. He couldn’t understand why I didn’t want to invest six to 12 hours on a site I don’t like to begin with. Needless to say, the deal was not done. The good news is that four out of 10 will provide the requested package even if it isn’t part of their standard leasing brochure. Sure, if you have great real estate you don’t have to work as hard to lease it, but most properties are in the “C” category and therefore harder work is required. Unfortunately, only 40% are willing to.
Changing topics...because of an operation, I recently spent a week working out of the house. On numerous occasions I needed someone’s phone number, and instead of constantly bothering my office, I “googled” for the information. When the company was public, I had no problems getting a phone, fax or e-mail address. But in the majority of the cases, if they were a smaller retailer/developer/broker, I couldn’t find ‘em or it was extremely difficult. Makes no sense. Even IF you have a web site, that doesn’t mean you’re indexed by the search engines (that means it's easier for people to find you) and even if you’re “brick & mortar-oriented,” people should be able to reach you on the net without knowing your URL. The Net and having a search engine strategy should be playing a major role in your leasing/development marketing strategy. If it isn't, you're making a mistake.
If you’re a developer, there should be a web site describing not only your main business but every center you have over 100,000 sq.ft., providing information both for the shopping public and potential tenants (If the consumer can find your tenant on the net, the retailer does higher volume, meaning you'll get higher rent). The name of all the top executives and leasing people should be prominently listed. If you’re a broker, provide information not only on your services but individual web sites for every center you’re leasing. Plus a link to every clients' home page and, if you’re a retailer have a “tag line” telling what and where your stores are about both for the consumer and interested landlords. I’m not going to bore you with terms like optimized web site, SRO, PPC, etc…but I do recommend you check into better indexing your homepage, you’ll lease more space and that's the name of the game.
Parting thoughts...on a nonpolitical but social note that relates to retail real estate. I was talking to a friend (a retailer that caters to the middle class) and he pointed out that there are monumental negative changes occurring in our nation right now and it’s not just the fight between the red and blue states but the rich and poor. The rich are getting richer and the poor are destitute (which is a problem for the retail real estate industry). When Big Lots has to close 170 stores, dollar stores are having a hard time and most importantly, Wal*Mart calling for a higher federal minimum wage, you have to know we’re in trouble. A substantial portion of consumers have no money. I don’t have the answers to the problem, only the questions (in theory our politicians do, but in reality they just waste time and money). Besides poverty being morally wrong it affects consumer spending and that hurts our industry drastically. Besides the ethical problem of 13% of the population living below poverty (the blue collar worker is desperate and the middle class is broke), having no medical insurance or upward mobility, the poor can't shop at the centers we're building. Sure, Nordstrom is doing great right now, as are most upscale retailers, but only 10 percent of the nation's population makes over $100,000 and there aren't enough of them to support our industry if we only build for the upscale consumer. We need the middle class and blue collar worker if "we" are to grow. It's to our benefit to help the lower income groups. I'm not saying give 'em money. I'm saying help them get a decent job and an education and then they'll be giving us back profits.
Anyway, have a healthy New Year's and a great holiday.
P.S. First, there’s still time to attend the Barry Davis Dinner on December 4, call the ICSC at 646-728-3800 for details It’s a great networking event and don’t forget to stop by our booth at Rhinelander 151 in New York to say Hi.
--------------------------------
I think half the brokers involved in commercial real estate are either peddling or acquiring 1031 exchanges (which is a polite way of saying “the property is overpriced.” But it’s better to overpay for the property than give it to the government. Saying your client is looking for a 1031 is code for “I’m willing to overpay”). This type of product has become super hot in the last few years and, based on the "Kraus theory of commercial real estate," if everyone is buying, then SELL. The difficulty is finding that optimum moment to take the money and run, which requires either skill or luck (I’d rather be lucky than skilled). The 1031 industry has had a great run for the last few years, and if you’re thinking of selling why not take the profits NOW and don't be greedy. I personally don’t think prices will be higher next year, but it’s your money so take the risk if you want.
For whatever it’s worth, the three best markets (in my opinion) to make a “deal” in (if there are any left) are: Pennsylvania, Texas and Florida. The problems in Florida and Texas are that both markets are overbuilt, especially when it comes to small shop spaces, so leasing can be more difficult than many of the other states. These markets have higher vacancies and more defaults than most larger regions. Florida and Texas’ specialty stores also have more Ma&Pa-oriented stores than in California or New Jersey. Oh, I was just offered a “tax payer” in midtown Manhattan at a 3.5% CAP and a drug store in Los Angeles for 4.25% and both brokers had a straight face when making the quotes.
While I’m giving opinions, let me ask if you've seen the new Sears Essential stores converted from Kmarts yet? They don’t work, at least that’s what I’m hearing. I must have spoken to at least six or eight former Kmart landlords who were initially excited about the switch and, in fact, were able to lease up space at higher rents just on the promise that Sears was coming. The problems began once they opened. In many cases, their traffic is lower as a Sears than it was as a Kmart and no one was happy with the Kmart’s volumes. Hopefully they get their act together soon since it would be a shame to see another bankruptcy.
I also forgot to mention in the last MyWay that I had lunch with four “developers” who, combined, own 65 centers in the northeast. We were all throwing the bull about the state of the industry and having a good old time until the topic of rent reductions came up and than EVERYONE became serious and intent (rent reduction is a very serious subject to owners). All present at the lunch had, during the last six months, recently-opened tenants calling asking for rent relief on stores opened less than a year. All the stores involved, except one, were under 4,000 sq.ft. What was really interesting was in 90% of the requests the tenant was a franchisee, which is where a LOT of specialty stores come from.
The best “educated” guess we came up with on why the newbie tenants were failing was these tenants were overly optimistic on what their volume would be, agreed to a ridiculous rent and then got into trouble. Unfortunately, the franchisor was more interested in selling a franchise than protecting the tenant and agreed that their franchisee could afford the rent which they couldn’t. All the franchisors had a provision in the lease that they had the right to take over the lease if the franchisee defaults, and none did.
Landlords might think it’s great that these tenants paid above market rents, but when you get more rent than the tenant can afford, they're first late in making payments, then just plain stop. And nine times out of 10, they get so far behind they just do a “midnight move,” owing you three to six months rent; you then have to sue (and get nowhere) and then pay another brokerage commission after the space has been vacant for six months. So your true “net” rent from the deceased tenant is probably what they could have afforded in the first place, and then they wouldn’t have left you.
On the other hand, I got a call the other day from a "Ma&Pa" tenant who wanted to lease space we had in a center's "armpit;" that is it had no visibility and limited frontage. Perfect for a service-oriented tenant, but not a conventional retailer. I asked what type of store they wanted to open and was told it was a deli. When I explained it was a poor location for a deli, they got mad at me and yelled "it's not your right to make a decision on where I could open" and hung up. So sometimes you can't win for losing.
On a more nostalgic topic, in my old age I’ve been doing lots of reflection on where I’ve been and where I’m going. The retail real estate industry plays a major role in my life and I’ve been thinking back to my 33 years of experience. Besides enjoying the travel and opportunity to do deals, one of my favorite aspects of going to the regional dealmaking shows is I get to play Alan Alda in “Same Time Next Year.” This industry has provided me an opportunity to make a decent income, have more fun than frustrations and get to meet some really great people (some a*holes also, but that’s for another issue). Some have become personal friends and many great business buddies. Because I’ve been traveling the country for 33 years, I’ve met people in every area. And the regional dealmaking shows provide an opportunity for us to see each other, if not often, at least on a regular basis. Now I’m beginning to realize that in many cases, we’ve grown old together. Yes, we only meet once or twice a year for 15 minutes to two hours but we condense a year of living into that time frame. I heard about, but never met, children a week after they were born, kept abreast of my colleague’s child’s college life, marriage and birth of grandchildren. Unfortunately, we’ve also shared illness and deaths together, but that’s part of sharing our lives. We’ve bonded over these 30 some odd years and for that I’m grateful. This isn’t a swan song or anything like one, it’s just that in the last three shows I’ve been to retirement has become one of the most popular topics I’ve heard (all from old farts like me). Everyone wants to become a “consultant” when they retire, both to supplement their income and keep active. Hate to be killjoy, but there’s few real consulting jobs “out there.” That’s where you get paid for your opinion no matter what the results. What will be available is brokerage, exactly what our industry needs; more brokers. Five years from now, this industry will have a totally different “personality” as the young replace all those leaving. These times are a changing.
Next, I just read two disturbing articles. One was in the Wall Street Journal saying the era of cheap interest rates are over. Then I read Ann’s “HerWay,” which is also in this issue discussing store closings and concerns about Christmas. And, combined with higher interest rates (notice I said higher, not high. I remember interest rates of 18-20%, so 7% or 8% is baby’s play), there’s no doubt at this moment that the Fed will continue to raise rates and, combined with high gas prices, mounting casualties in Iraq, Asian bird flu (now that’s one to be REALLY scared of) and terrorists knocking at our door has the American consumer depressed. Making matters worse, they don’t have a big financial cushion to fall back on when things go wrong, which appears to be the norm for the moment; so retail sales are, and will be, affected. We’re not saying the sky is falling, but this is a time for intelligent caution.
Oh, I was talking to a fellow broker the other day about some litigation he’s involved in. He’s a tenant rep and signed a commission agreement saying he would be paid a “market” commission if a lease was executed between the owner and his client. The good news is that the deal was signed. The problem began with a debate over what “market” commission is. He contended it was 5% and the landlord said 3%. He expected me to be sympathetic since we’re both brokers, but I explained to him he was stupid. First, I have no idea what “market” is. I’ve done deals at 1% and some at 6%. The more money involved, the lower my commission. I don’t care if $100,000 represents 1% or 5%, it’s $100,000 and that’s a lot of money to me. Yes, I try like crazy to get paid the most I can but I’m really only concerned about the cash, not the percentage. Also, while I’m no lawyer, nor do I play one on TV, requiring a “market” commission may be illegal under the FTC’s restraint of trade. But even more important, why make the agreement vague? Resolve the number up front and then there’s no dispute. Yes, it will cause more friction from the start, but sooner or later if a deal is done it has to be resolved and landlords are more generous before they know they have to pay a commission.
----------------------------
We all saw the images of Hurricane Katrina’s destruction and the resulting humanitarian crisis it brought. One million people were displaced from Louisiana and Mississippi to Alabama.
As the shock wears off, the business of business starts to take the lead of just some of the problems the region is beginning to address. In the next few months and coming years, how Katrina impacts retail real estate and the law will be a billion dollar debate and I’m willing to bet that some of the laws as we understand ‘em will be changed. Questions such as what amount of damage/destruction frees a tenant from paying rent? What if the center survived, but the customers left, is the tenant still responsible to pay rent? If there’s a net leased building in the disaster area, is the tenant obligated to pay rent even if the building has been destroyed? Who’s responsible for toxic waste now on the property?
What happens to commission agreements that were earned but not payable yet? Is there anyway an owner can avoid paying their mortgage? These are just some of the questions that face the industry and region for the next few years and I doubt if there will be easy solutions. However, if I had money, I believe investing in New Orleans for the long term makes sense and there should be great opportunities caused by this disaster. It’s the famous silver lining in the cloud.
Unfortunately, the impact of high gas prices that started before the disaster is now worse and is just beginning to have an impact on our economy and I believe its long-term impact will be a substantially slower economy even as the cost of gas decreases. Retail sales only grew 1% last month and that number might drop in the coming months. I have a Ford 150 pickup and it now costs me $75 to fill it up, that’s $150 a week I’m now spending on gas. If I’m having trouble adjusting to this insanity, what’s the average “guy” who’s earning $48,000 going to do? And that’s before we take into account higher heating costs this winter. Also, I don’t care what our beloved government says, inflation is higher than being reported and that’s having a negative impact on retail spending. We live in "interesting" times.
Before changing subjects, I have to commend Wal*Mart on their contribution to the survivors of the hurricane. Unlike our government, they knew the hurricane season was coming and prepared for it. They're getting and deserve great press for their assistance and I have to admit I’m not a Wal*Mart fan, they can be EXTREMELY difficult to deal with, but I think they get a lot of bad press and raps just because of their size not because of their management philosophy. They don't pay their people less than Target, Kohl’s, McDonald's or Kmart nor do they give fewer benefits. However, they are being constantly being blamed for the problems of the world. Down deep, I’m a Libertarian and believe in capitalism; no one is forced to work at Wal*Mart. If “you” believe you deserve more pay, either “fight” with your manager for a raise or get another job.
Talking about legal issues, ICSC’s Shopping Centers Today ran an article on “Lease Land Mines” which dealt with two main issues. First is that sloppy lease languages can kill deals or create major headaches. That’s a major issue in our industry that appears to be getting worse. Often the problem being the company writing the lease wants to “save” money, so they hire an in-house attorney who works for a lot less than outside counsel. That's the good news. The problem is the major reason for the cost difference between the in-house lawyer and outside counsel; the in-house lawyer is less experienced and in many instances doesn’t know what they are talking/writing about. The other major reason is the in-house counsel is overworked and because they are not billing a client or wanting to be a partner and won’t work until 10 p.m. every night to keep their head above water. Instead, they will just write quick and further complicating matters, either the leasing department doesn’t want to or isn’t allowed to review documents. Over the years, I’ve provided feedback to clients on leases being prepared and many times was told to mind my own business and in most cases not too politely; yet years later these provisions became problems for the owner. It appears no one reviews documents except for the lawyers and in most cases and that's the problem. The VP or president just scans the document and then signs, thereby prolonging the headaches.
The majority of the remainder of the article addressed exclusives, stating that exclusives can create problem later on or prevent certain uses from opening in the center. Duh!!! Yes, the article is 100% correct and in a perfect world “we” should never provide exclusives or restrictions but unfortunately we don’t live in a perfect world.
Unless you have a grade “A” site with six anchors wanting in, Kohl’s isn’t going to allow restaurants, billiard parlors or schools near its store. Bed Bath & Beyond will not allow Linens 'n Things into the same center it’s in and Giant Supermarkets won’t allow the sale of off-site food consumption or beauty /health supplies. I want to meet the developer who says no to these tenants and walks away from the deal. Let me restate that. I want to meet the SUCCESSFUL developer who lets them walk because of these restrictions.
Changing topics, last week I met with a potential client to lease and manage a 500,000 sq.ft. center that he was in the process of acquiring. One of the three anchors, a 100,000 sq.ft. "big box" owns their store and is vacating the premises in three months for a bigger unit a mile away. The vacating tenant is located "dead center" and has the most prominent spot in the project. I recommended he call the anchor before finalizing the acquisition and buy their store, so he controls his own destiny, not the retailer. He complained it made no sense to lay out $4 to $5 million and wait up to two years to start getting an income; there was no return in it for him. I tried desperately to explain a vacant store representing 20% of the center will hurt leasing and the flow of customers to the existing tenants, which ends up hurting him. The "big box" retailer by its very nature will be slow to lease/sell the space and under their REO can lease to any use they want. It's a disaster waiting to happen. He's prepared to buy the property for $35 million, and in reality isn't in control of the center's future. Needless to say, he didn't like my attitude nor did he feel that I was the right company to handle the management.
On a different note, I’m doing a 1031 exchange search for one of our clients and I’ve been “eyeing” hundreds or possibly thousands of properties available for exchange at a CAP rate of 5% to 9%, with such tenants as Walgreens, Wal*Mart, CVS, FedEx, etc. In addition to these credit worthy tenants there were dozens of tenants available at 7% to 9% CAP rates that IMHO, are an hour to an hour and a half away from bankruptcy. How can someone pay such an outrageous price for a weak tenant? I’d rather put my money in a totally safe CD at 4 ½% than get 7 1/4% for a tenant that probably will be out of business in a year. Pricing in our industry is totally insane, whether it’s for a center or 1031, the numbers don’t work for the long run and most of us are in it for the long run, so we have problems coming down the road SOON.
Last complaint of the day. Banks are DUMB. I was talking to a friend who borrows $50 to $75 million a year to acquire centers. He was bragging that he never puts more than 5% into any deal, the bank puts up 95% of non-recourse of the money. “How?” I asked and was told, “It’s simple. I LIE.” Add fictitious numbers, i.e. commission paid, TI, etc. and show, on paper at least, that “you’re” putting 20% into the property. The banks never check, they just provide the cash. You know when the next recession comes, and it is, that property will be going back to the bank. Dumb, de, dumb, de, dumb.
------------------------------
Ann, Laurie, Alyson and I attended the ICSC Orlando show and, as has become tradition, it was a homerun, with attendance up 15% (if this trend continues, the New York show will be a zoo, with the possibility that there will be over 7,000 dealmakers in attendance, making it a MUST, MUST event no matter how much you hate crowds or New York City). The night before the actual dealmaking event was “party” night and our industry excelled at eating, drinking and being merry. Tons of dealmakers got back to the hotel between 10 p.m. and 2 a.m. and had a 6 a.m. wake-up call. You know they weren't very productive that morning, but somehow I'm sure most made deals.
I didn’t attend, but was told the Women in Real Estate event was extremely well attended and active, as was the Next Generation party. HOWEVER, numerous people complained about the attendance at the actual cocktail party (it was low) and the quality/quantity of food available (don't go to these shows to eat).
The halls of the show were filled with the sound of dealmakers everywhere, laptops open and site plans on display from the exhibit hall to the corridors. Anywhere there was seating available there were deals being done or at least trying to be done. The highlight of the show is always the Retail Networking Session event, which was jammed from the opening bell ‘til 5 p.m. I’ve said it before and I’ll say it again, this type of retail event should be held at all the dealmaking shows; it’s extremely popular and, in a way, even more needed than the actual dealmaking. It's like going to a bar and having 50 gorgeous women wanting someone to buy 'em a drink.
I heard a number of retailers complain that rents and CAM costs were skyrocketing and that was particularly true for mall-oriented tenants. The “in” thing for mall tenants is fixed price CAM costs, and at least a dozen tenants complained they were being gouged. They also complained that the major mall owners (and there are few of ‘em left) are "forcing" them to renew leases in their less desirable centers by refusing to renew in the "good" center. This isn't a "new" tactic, but it appears it's becoming more common. There are only two types of malls in today's world; good ones and the rest, which is why so many mall-oriented tenants are trying lifestyle centers. It’s often a similar tenant mix, except there are no traditional anchors, at lower costs and no enclosed mall fees to pay.
I bumped into Jeff Doppelt at the show and IMHO Jeff is the best broker I’ve ever dealt with. He sold his company to Trammel Crow several years ago and tried retiring, but almost went crazy with all his free time, so he’s now semi-retired and his main involvement in retail real estate is the development of 10,000 sq.ft. to 20,000 sq.ft. centers east of Chicago. A nice retirement program, which more and more "retirees" seem to be doing.
I had an interesting discussion with a “retailer,” or actually a company that buys retail chains requiring a turnaround. The company buys the chain and then usually closes 25% of its stores in their drive to increase cash flow from under-producing units. His biggest problem at the moment was that he’s responsible for sub-leasing over 400 stores, mostly mall-oriented. His other “problem” is that the economy is too good, so they’re having trouble acquiring chains at a 12-14% CAP. So like the companies wanting to acquire centers, they’re quietly hoping for a recession, thereby bringing "reasonable deals" to the table. Anyway, if you look at the excess properties of many retailers, probably 15%-to-20% of their potential bottom line money is tied up in closed stores. (Wal*Mart probably spends more on paying rent, CAM and taxes on closed stores than most retailers gross). It's a major problem that's getting worse and no one has the real answer.
On a totally different topic, I just read a disturbing article that reports the number of home foreclosures increased 4.7% for July, the most new foreclosures reported in any month, year-to-date. New foreclosures have jumped more than 12% in the last two months, pushing the nation’s foreclosure rate to one foreclosure for every 1,465 households. Yes, it’s not commercial, which is still relatively low, but it’s a bad indication of what’s coming. When the consumer hurts, either from high gas costs or foreclosures, we’re in trouble and the consumer is hurting.
Oh, I forgot, I also got into a discussion with someone from a hedge fund and another with an insurance company while in Florida. Both are looking for developers with a track record and have numerous projects anticipated for the near term. They want to do JV’s where they put up all the money and they split 50-50 after they get 5%-to-6.5 % return on their cash. Not a bad deal for the developer. America is truly a wonderful country. Long live capitalism.
I also read three interesting articles last week; two were in ICSC’s Shopping Centers Today and the other was in The Wall Street Journal. One of the ICSC articles was about developers (both mall and strip) doing “everything” in their power to attract “upscale” retailers (Gucci, Gocci, Gicci) so they can differentiate themselves from other centers and produce higher sales per square foot. The Wall Street Journal article was about Sav-A-Lot opening stores in cities and poorer markets, offering prices below Wal*Mart. Two different ends of the spectrum.
There's nothing wrong with trying to attract higher end retailers; they serve a need and a market but higher end to me represents “MAYBE” 15%-to-20% of the population, which means 80% are not going to shop/buy at these retailers. Sav-A-Lot probably caters to the bottom 15%-to-20% of the population and the two shall never meet. BUT (that infamous but) high-end retailers as a rule do not attract the masses, so when a mid-priced tenant goes out and are replaced by a higher end merchant, traffic usually drops. The outlet industry, years ago, in order to have higher sales per square foot, replaced many of their popular priced retailers with high-end retailers. The good news was they accomplished their goal and sales per foot increased. The problem, since foot traffic dropped, is that the other tenants in the center saw a decrease in their walk-in traffic and therefore sales dropped for many of their tenants. And, in case you haven't heard, outlet centers are in trouble. The same will happen in traditional strips or malls if developers "push" too hard for upscale tenants. If less people shop in Gucci than Dollar Tree, then less people will eat in the pizza parlor or shop at Payless Shoes and the "pizza man" can contribute more to the owner's bottom line than Gucci. Sometimes we don't want what we wish for.
The third article was also in ICSC's "Today" and it dealt with Ace Hardware planning to add 180 new stores/franchisees during the next year. That's nearly five million sq.ft. by one retailer that the "media/industry" does not consider sexy. There are hundreds of other retailers similar to Ace who'll "fly" below the radar that are franchised or licensed which add millions of square footage to shopping centers every year that get little publicity or respect, but would be a decent to great tenant in most centers. Few leasing pros follow up with this segment of retail real estate; they wait for the tenant to call them, not the best way to make a quick deal and franchising/licensing is doing better today than ever before. It's a market we're overlooking.
SAME TIME NEXT YEAR
I think half the brokers involved in commercial real estate are either peddling or acquiring 1031 exchanges (which is a polite way of saying "the property is overpriced.” But it's better to overpay for the property than give it to the government. Saying your client is looking for a 1031 is code for "I'm willing to overpay"). This type of product has become super hot in the last few years and, based on the Kraus theory of commercial real estate, if everyone is buying, then SELL. The difficulty is finding that optimum moment to sell, which requires either skill or luck (I’d rather be lucky than skilled). The 1031 industry has had a great run for the last few years, and if you're thinking of selling why not take the profits NOW and run. I personally don't think prices will be higher next year, but it's your money so take the risk if you want.
For whatever it's worth, the three best markets (in my opinion) to make a "deal" in (if there are any left) are: Pennsylvania, Texas and Florida. The problems in Florida and Texas are that both markets are overbuilt, especially when it comes to small space shops. These markets have higher vacancies and more defaults than most of the larger markets. Florida and Texas’ specialty stores also have more "MA&PAs" than a California or New Jersey does. Oh, I was just offered a "tax payer" in midtown Manhattan at a 3.5% CAP and a drug store in Los Angeles for 4.25% and both brokers had a straight face when making the quotes.
While I'm giving opinions, let me ask:. Have you seen the new Sears format converted from Kmarts yet? They don't work, at least that's what I'm hearing. I must have spoken to at least six or eight former Kmart landlords who were initially excited about the switch and, in fact, were able to lease up space at higher rents just on the promise that Sears was coming. The problems began once they opened. In many cases, their traffic is lower as a Sears than it was as a Kmart and no one was happy with the Kmart’s volumes. Hopefully they get their act together. It would be a shame to see another bankruptcy.
I also forgot to mention in the last MyWay that I had lunch with four "developers" who, combined, own 65 centers in the northeast. We were all throwing the bull about the state of the industry and having a good old time until the topic of rent reductions came up and than EVERYONE became serious and intent. All present at the lunch had, during the last six months, new tenants calling asking for rent relief on stores opened less then a year. All the stores involved, except one, were under 4,000 sq.ft. What was really interesting was in 90% of the requests the tenant was a franchisee, which is where a LOT of specialty stores come.
The best "educated" guess we came up with is that the newbie tenants were overly optimistic on what their volume would be, agreed to a ridiculous rent and then got into trouble. Unfortunately, the franchiser was more interested in selling a franchise than protecting the tenant and agreed that their franchisee could afford the rent which they couldn't. All the franchisers had a provision in the lease that they had the right to take over the lease if the franchisee defaults, and none did.
Owners might think it's great that these tenants paid above market rents, but when you get more rent than the tenant can afford, they first are late in making payments, then just plain stop. And nine times out of 10, they get so far behind they just do a "midnight move," owing you three to six months rent; you then have to sue (and get nowhere) and then pay another brokerage commission after the space has been vacant for six months. So your true "net” rent from the deceased tenant is probably what they could have afforded in the first place, and then they wouldn't have left you.
On a more nostalgic topic, in my old age I've been doing lots of reflection on where I've been and where I'm going. The retail real estate industry plays a major role in my life and I've been thinking back to my 33 years of experience. Besides enjoying the travel and opportunity to do deals, one of my favorite aspects of going to the regional dealmaking shows is I get to play Alan ??? in "Same Time Next Year." This industry has provided me an opportunity to make a decent income, have more fun than frustrations and get to meet some really great people (some a*holes also, but that's for another issue). Some have become personal friends and many great business buddies. Because I've been traveling the country for 33 years, I've met and like people in every area. And the regional dealmaking shows provide an opportunity for us to see each other, if not often, at least on a regular basis. Now I'm beginning to realize that in many cases, we've grown old together. Yes, we only meet once or twice a year for 15 minutes to two hours but we condense a year of living into that time frame. I heard about, but never met, children a week after they were born, kept abreast of my colleague's child's college life, marriage and birth of grandchildren. Unfortunately, we've also shared illness and deaths together, but that's part of sharing our lives. We've bonded over these 30 some odd years and for that I'm grateful. This isn't a swan song or anything like one, it's just that in the last three shows I've been to retirement has become one of the most popular topics I've heard (all from old farts like me). Everyone wants to become a "consultant" when they retire, both to supplement their income and keep active. Hate to be killjoy, but there's few real consulting jobs “out there." That's where you get paid for your opinion no matter what the results. What will be available is brokerage, exactly what our industry needs; more brokers. In five years from now, this industry will have a totally different "personality" as the young replace all those leaving.
Next, I just read two disturbing articles. One was in the Wall Street Journal saying the era
of cheap interest rates are over. Then I read Ann's “HerWay," which is also in this issue discussing store closings and concerns about Christmas. And, combined with higher interest rates (notice I said higher, not high. I remember interest rates of 18-20%, so 7% or 8% is baby's play), there's no doubt at this moment that the Fed will continue to raise rates and gas prices, and we’ll see mounting casualties in Iraq, Asian bird flu (now that's one to be REALLY scared of) and terrorists knocking at our door. These issues have the American consumer scared and they don't have a big financial cushion for when things go wrong, which appears to be the norm for the moment; so retail sales are, and will be, effected. We're not saying the sky is falling, but this is a time for intelligent caution.
Oh, I was talking to a fellow broker the other day about some litigation he's involved in. He's a tenant rep and signed a commission agreement saying he would be paid a "market" commission if a lease was executed between the owner and his client. The good news is that the deal was signed. The problem began with a debate over what "market" commission is. He contended it was 5% and the landlord said 3%. He expected me to be sympathetic since we're both brokers, but I explained to him he was stupid. First, I have no idea what "market" is. I've done deals at 1% and some at 6%. The more money involved, the lower my commission. I don't care if $100,000 represents 1% of 5%, it's $100,000 and that's a lot of money to me. Yes, I try like crazy to get paid the most I can but I'm really only concerned about the cash, not the percentage. Also, while I'm no lawyer, nor do I play one on TV, requiring a "market" commission may be illegal under the FTC’s restraint of trade, and violators can go to jail. But even more important, why make the agreement vague? Resolve the number up front and then there's no dispute. Yes, it will cause more friction up front, but sooner or later if a deal is done it has to be resolved.
----------------------------------------
