Brokers & Retail Real Estate
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.
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.
posted by tedkraus at 7:41 AM
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