Why Many Enclosed Mall Turnarounds Fail

Recently we (TKO) received a call requesting a proposal for leasing a "turnaround" for a mall of a million sq.ft. that is 65% vacant. Turnarounds like this are extremely difficult, and often the buyers of these centers have no idea what they are doing, but because they acquired the project for $10 psf or less, they think they're getting a bargain (which they never are). So before going into our services and costs, I asked some questions on what its owner thought could be done, what type of money he had for TI, how long the owner anticipated waiting before seeing results, etc. (why waste both of our time if we can't do the job) The good news was that the new owner recently did a Steve&Barry's deal, which in my opinion makes sense, since they're so unique that they'll draw from a larger radius than a typical JCPenneys, Sears, Wal*Mart, etc. So our conversation started off on the right track. (Oh, the center can't be demalled).

The owner also built into his proforma a substantial TI budget; is prepared to do "sweetheart" deals and wait 18 months before seeing any real results. A rare and knowledgeable buyer of distressed enclosed malls compared to most I meet. Our conversations went well, but there were two areas I disagreed with him on. First, when we take over a center of this size with problems we want to also manage it, not for the money (you never make real money off managing) but because it provides us with the degree of control we need to make a turnaround work. The owner felt that currently the amount of tenants in the center is small enough where he could manage it until the project begins to lease. Yes, he's right, it's small enough for him to manage as a one-man show BUT you have to treat a turnaround not only as a leasing situation but also have to "turn" the marketing and management around at the same time so not only are new tenants being solicited but the few existing retailers are kept somewhat happy. And keeping existing tenants happy and getting new ones interested means that there has to be traffic in the center and centers with this low of vacancy usually have no traffic to speak of, which is why the center is in trouble (Which came first, the chicken or the egg?).

I've written this before but I'll say it again, traditional advertising doesn't work for a "C" or lower center. You have to do "event marketing" in order to have an impact. Event marketing means having traffic-generating events that bring people in for that specific show but then hopefully they shop the rest of the center. In traditional advertising, you promote the center, the consumer comes, but if the center has few retailers, the shopper is disappointed because of the lack of merchants and they never return (you only have one chance to make a first impression). We've promoted gun shows, arcade auctions, book events, etc, sometimes bringing in as many as 25,000 consumers over a weekend. We gave space for free to hold comedy clubs on alternate Fridays and allowed Yoga teachers use of stores during the week to help increase traffic. All our food and many of the other stores benefit from this increased traffic. They did enough volume to keep the existing retailer's spirits "up." That's why marketing goes hand in hand with leasing.

We also want to have enough control that we can minimize the number of retailers closing every month, and in a problem center there's always a high turnaround. I'm a great believer in temporary tenants, but they have an extremely high failure rate since most are startups with limited capital and with no walk-bye traffic, they usually fail. Therefore, you have to be extremely selective on who/what you put into the center. Also, we've learned that we have to keep cash flow as high as possible or at least keep the losses low, which means working hard on lowering CAM costs. Anyway, that's why we "need" the management.

The next point I disagreed on is that the buyer put together an elaborate and well-documented report on every mall-oriented retailer operating within 20 miles of his project. You could tell there was a lot of time and effort researching this info, BUT I'm not sure how useful it is. The center itself is over 20 years old and there's no doubt in my mind that 99% of all the mall-oriented retailers within 50 miles knows of the project and has a negative view of the center's future. Yes, there are many mall-oriented retailers I'd love to have and some of 'em might be willing to be "bought" in order to entice them in, but besides requiring lot's of TI money and kickouts I don't think they would have an immediate impact on traffic because they are in every mall.(there are three competing malls within 15 miles). Anyway, the new buyer asked that I put together a proposal and list of tenants I'd go after and that got me thinking of my "dream team of mall tenants" and guess what, most are not mall-oriented. I want tenants that build traffic and draw on their own, not needing their neighbors traffic to survive, at least at the beginning. Rent considerations were secondary, since the center was bought "right," so we could make it work.

So here's the type of retailers I'd want to start a turnaround with: (not in any order of importance) Five Below (if I couldn't get them, then Dollar Tree), MJM Shoes or DSW would be excellent draws; While I'd love a Barnes & Noble or Borders, realistically I can probably do a Book Warehouse or Books-A-Million deal. Stein Mart would also be an excellent draw, as would Guitar City. Add to the list Children's Place, Ann Taylor Loft, Radio Shack, Causal Male, Dress Barn, Fashion Barn, Mandees, HomeGoods, Sleepy's, Verizon and in a rear, outside location, the Post Office (a great draw from 9-to-5), Hancock Fabrics/JoAnn's, David's Bridal, Cato Fashion, Deb Shops, K&G Men's Center, Hobby Lobby, Party City, Shoe Carnival, Famous Brand Shoes, Petland, Wood Workers Warehouse, Sally Beauty, Dot's, Eastern Mountain Sports and I could go on and on. As far as food, I'd want a 10,000 sq.ft. Chinese restaurant or Old Time Buffet, they'll cater to my immediate customers and are in the right price points. I can afford to do a deal with the Chinese restaurant, but can't afford a "Friday's" deal. I'd also want a large and well merchandised nursery somewhere on the outside of the property.

What I chose are both strip and mall tenants (in today's world, most retailers are bi-center...(the political correct way of saying it. Ann corrected me; they go either way) and few of the retailers I mentioned are high rent payers. I picked the retailer based on tenant mix and their ability to draw customers into the center on their own. Neither JoAnn Fabrics nor Hancock are high-volume retailers, but they are "unique," not usually found at every street corner and command a high degree of loyalty from their customers. All are destination-oriented tenants, which in the long run will strengthen the entire center. Few of these retailers are considered "trophy" tenants, but they can all do a lot of good for the right center.

Non-category killers, such as a Petland, are good traffic builders for a center. Parents bring in their children to show the "mini-zoo" to their children and animal lovers of all types can't resist the cute rabbits in the front window. The buzz word of our industry today is Lifestyle Centers, but isn't a pet shop part of a "lifestyle," as is a fabric store or hobby shop or a "Guitar City," a well-merchandised nursery definitely adds to my center's "lifestyle" and we've dont it on the "cheap." Maybe they're not all high end merchants but they bring in a dedicated customer willing to spend time and money.

Now in all probability, we won't get the account since I'm taking an unorthodox approach, and all owners would rather hear that we're going after the Limited instead of Dots. And in the perfect world I agree, but we don't live in a perfect world. First, the Limited builds-out costs a fortune and second they are already in every mall within 10 miles. So, while we are making it more convenient for some customers to come to "our" center, the drawing power is probably limited to three miles, while a "Guitar City" will draw customers from a larger radius. Problem centers can't compete with their successful neighbors, they have to complement and that's why leasing and marketing have to take a non-traditional approach.

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NYC ICSC Dealmaking Show

Ann, Alyson, Laurie, Rich, Joe and myself just returned from the ICSC Dealmaking in NYC and the deadline for this issue going to press is in a few hours, so I'll keep this short. Ann and I went to the Barry Davis Memorial Dinner on Sunday night and it was great. Besides honoring and remembering a good friend, there were 150 of the industry's "Who's Who" in attendance, so we started the show off at an excellent dealmaking/networking event. If you didn't attend this year, I highly suggest you do next.

As far as the actual dealmaking was concerned, it was an overwhelming success with the only real concern being on Monday night when reports of a possible blizzard that could have canceled and delayed flights for many of the attendees, therefore affecting attendance. Fortunately, the brunt of the storm missed New York and 7,000 to 7,100 of our closest friends managed to show up to wheel and deal for two days. Monday wasn't that busy, but all the four-star restaurants in New York were packed with dealmakers, as was the case on Tuesday with parties and cocktails being the norm. The closed bar on Monday at the Hilton (makes no sense why it was closed, there were lots of potential customers wanting a drink) was a great place to meet and deal, as all the tables had open site plans and computers. I'm not sure why and can't think of a logical reason, but starting next year, the ICSC is putting the picture of the attendees on all badges (so smile while they're taking yours). It will take a year or two to be completely implemented. However, for the record, I won't feel any safer by having everyone's picture on their badges. But, then again, I don't feel safer flying now than I did on September 10th. The cocktail party on Monday was jammed with everyone in an upbeat mood, with many attendees claiming that 2005 is the best year ever for 'em. While I've always said that no one comes to an ICSC event because of the food, I was impressed with the selection of appetizers at the cocktail party. Of course, to make up for the abundance of food on Monday night, we got a box lunch on Wednesday, which was "blah." After the cocktail party, most of the attendees fled to make their dinner reservations and do more networking. On Tuesday, the start of the Dealmaking, the large crowds started to appear. Fortunately, even with record attendance, registration went well mostly because the badges were mailed ahead of time (an excellent idea).

Numerous attendees complained about the show being held at the Hilton. The show, especially with 7,000 attendees, is extremely crowded to say the least. However, I disagree, since the only alternative is the Javits Center and we don't want it there; it's out of the way, no hotels nearby and too big of a facility. With "only" 7,000 attendees we'd be lost and it would cost double to exhibit. The advantage of having the show at the Hilton is the "togetherness." There's an excitement generated by having so many people in such close proximity to one another (and I don't mean sexual). The herd of people and the noise they generate, at least in my mind, generates an upbeat excitement. As I said, most were upbeat, and because of the holiday season, even the pessimists were somewhat happy. The acquisition of shopping centers is still intense, and while all complained, CAP rates at 6% to 7.5% seem to be accepted as the norm, at least for now. Several buyers said they were able to find centers at 8% to 10%, but they claim the only way to find these deals is not through brokers or even contacting the sellers direct, but to solicit the owner of older centers before they decide to put the property on the market. Every third visitor to our booth wanted to finance a center for us and rates are still low, which is why Cap rates stink.

While it still represents a small percentage of the developers, I heard more people complain about smaller tenants wanting a rent reduction at this show than the last three combined, so unfortunately it's a growing trend. Leasing still appears to be going strong but more and more tenants are requesting (and getting) higher TI money and kickouts. One developer was bitching that he "had to" give a non-credit, 8,000 sq.ft. retailer a vanilla box and $20 per sq.ft.

The reason he "had to" was the space had been vacant for four years and he was getting desperate. His approach was "if the tenant makes it two years, I break even," the right attitude in my opinion. Yes, parting with money, especially for non-credit tenants, is not "fun" but it's becoming more common than not. Most of the chains I spoke to say that, while they are still expanding, they are not expanding as aggressively as they have in the past.

What's scary is the amount of newbies that are starting to buy retail because the market is so hot. I must have spoken to a dozen owners, who in the last year entered the retail real estate industry with absolutely no experience, and now own between 250,000 and one million square feet. When you attempt to provide 'em with some insight, they basically say "you're stupid." That's the "old way" of thinking and they know better. It reminds me during the dot.com boom when people argued that profits don't matter. Yeah, right. When the next recession comes, they're the first to exit the industry.

Even more frustrating is when I spoke to experienced leasing people who complained that their company was acquiring unleasable centers. They're buying centers at a 9% to12% CAP without bringing leasing in (the reason the CAP rate is so good is the center is so bad). Then, once the project is acquired, they hand it over to leasing and saying get it done NOW. One VP of leasing I spoke to bitched that his company brought him in during the due diligence period; he said NOT to buy but they did anyway and are now on his case because he can't lease the center, which he told them up front. Dumb, de, dumb, dumb, dumb.

The percentage of actual retailers at the show, while higher than most events, was still low but there were tons of exclusive reps everywhere trying to hustle up some deals. There weren't that many new developments being promoted/announced and some of the vacancies being promoted have been around for years. I spoke to several retailers who recently filed for Chapter 11 and they complained about the new bankruptcy law, which requires them to quickly make decisions on which stores to dump and which to keep. The law appears to be accomplishing what its goals were. Of course, the negative for the landlord is that because they have to make quick decisions, they often close stores that they MIGHT have kept in the past. But it's rare you can have it both ways. The landlord now gets a fast answer, but the problem is that it might not be the answer he wanted. All the Chapter 11 retailers said that once they filed petition, the landlords that wouldn't return their calls are now talking to them about new locations.

I can't remember the exact number, but ICSC membership is now something like 54,000. That's the great news. The bad news is that the substantial increase doesn't include new retailers, meaning they still have the same number of companies as they did five years ago. The increase is in support personnel (finance, construction, etc. Oh, Google even exhibited in New York, representing their mapping service) and lots of newbie owners. We (the ICSC) has to figure out a way to get more "girls" (retailers) to our parties. If they do it right, we can all expect to take one home with us. Anyway, have a healthy New Year and a great holiday.

Location, Location, Location-Retail Real Estate

Location, Location, Location
Boring, Boring, Boring


I've been leasing and managing over 20 million sqft of retail space in
36 states for RD management for over 27 years and have gained
substantial experience when it comes to being a real estate
asset manager, so I felt comfortable when the publishers of the Caribbean
Business ask that I write a article, feeling I could use my past's
insight to provide useful information for their readers. However, when
they gave me the topic of Location, Location, Location, I was
bewildered. What can be said about the topic that hasn't been said a
thousand times before and it's such an common topic, that there's
nothing exciting to say, but I'll give it a try.

Everyone knows the expression.: What's the three most important things
in real estate ... Location, Location, Location is the answer.
So what makes a location -+good?

A good location is an location where the consumer will shop more then
another location., it's that simple. But the requirements for a good
location are different if it's urban, suburban, rural or nitch. An
outlet center can be in a secondary location but if it has the right
tenant mix, will draw from a substantial trading area and therefore the
location becomes extremely desirable, even if the physical location is
not. The grouping of excellent retailers made the location work.

Besides different categories having different needs in determing what
makes a great location work, an individual retailer can make a location
"work" for a specialty tenant even if the location is not prime
If there's a "hot" restaurant located on a side block, with limited
traffic except for the restaurant's customers, that
by most definition is a poor location BUT the restaurant might be a
strong enough pull to make the street the food operator is located on an
excellent location for a bakery or dessert operation. The restaurant becomes the anchor/draw for the location.

You can be located in the highest grossing shopping center on the
island, a center that literally draws from every part of the island and
still not have a location that is suitable to your type of business. You
can be in the best shopping center but in a secondary location and not
be able to generate the traffic you need to substantiate your operating
costs. You also have to make sure the consumer traffic is your type
of customer. You can be located between Banana Republic and Ann Taylor
and still not be able to sell your merchandise because the consumer
traffic generated by Banana Republic and Ann Taylor is not the
customer base that your merchandise would draw from. If you are selling
discounted merchandise you want to make sure that the are you are
located in is drawing the customer looking for the discounted
merchandise.

Finding the low hanging great locations is easy; everyone know where the
"hot spots" in retailing are and if you don't know, ask any competent
broker or retailer operating in the market and they'll tell you. It's
not a secret.
The problems to great real estate locations are two fold however; first,
even if you know where the great locations are, that doesn't mean you'll
find an available spot and if you do, will the rent be at a number you
can afford? Sometimes, a secondary location can be more profitable then
a primary. The bakery located near the "hot" restaurant can do excellent
volume, because of the traffic drawn to the restaurant, the same or more
volume then a location in a prime area but that doesn't mean two
bakeries could 'work" on the street even through several bakeries can
survive and prosper in a tradional great location, so the determination
of great real estate can vary by the individual tenant needs. A BTB
retailer has a totally different set of criteria then a consumer
oriented one. Prime locations for a BTB retailer could be in an
industrial park, yet tradional retailers would fail in the same location
The business oriented buyer is willing to drive further or go to more difficult locations because they carry merchandise not available elsewhere, therefore location is not quite as important. Determining what's right for your business is the hard part. If your at
the corner of main and main, there's less pressure on your business to
spend quite as much on advertising and usually it's easier to attract
personal. The larger chains, as a rule of thumb have to take better real
estate because the caliber of their managers are not as strong as the
local merchant, where the owner is directly involved. The better real
estate makes the chain less dependant on the manager but more dependant
on the location. There's an expression in retailing; it's easier to change managers then locations
Local tenants are more dependant on it's ownership for survival.

Through outstanding marketing/advertising, having a better selection of
merchandise and knowledgeable personal, a local retailer can take a
secondary location and make it first class. The savings on rent per sq.
Ft. Can run $10-15 psf or more and in the secondary location, the
merchant can demand and receive better lease terms then that in a prime
location, important items such as term, options and tenant improvements.

Location, Location, Location, a simple concept with a difficult answer on where and what it is