Micky bombed out for me
Several months ago I mentioned that we (TKO) were going to exhibit at the Home Builders Show in Orlando, FL in January. The thinking behind this decision was that there would be over 100,000 professionals involved in the residential business attending, with many of them acquiring 100 to 200-acre sites that use the front 10 to 20 acres to develop retail and therefore might require our services. In theory, my thinking was brilliant. In reality it bombed. I was half right; there were 100,000 professionals in attendance and some "do" need our services. The problem came down to that there were too many people in attendance and only 1% or 2% were directly involved in retail real estate, a percentage way too small to reach with a 10 by 10 booth. We spent three days smiling as tons of people walked by. But less than one in 100 had any interest in us (should I take that personally?) I did learn a few things however. First, while never good, the food at an ICSC event is better than what we were served at the Home Builders event. Second, you get more bang for your buck at an ICSC show than at the builders' event and third, I think I'm going to try exhibiting at a local (northeast) Home Builders show instead of their national show, since it might be more productive. I "know" the concept is correct, it's the execution I'm having problems with. We did have 10 or 20 people drop by that are subscribers to Dealmakers and that was "rewarding," and a few dozen more who were members of our e-mail forums, so "some" of "our" people were there but I had no conversation at the show that showed promise to bring in business for the coming year.
I did have an interesting conversation with one builder who's looking to acquire dilapidated shopping centers or ones with surplus land so they could either demolish the center to build residential or build residential on the surplus property. For years, many retail developers bought land that was substantially more than they needed for their center and flipped or JV'd the rear portion of the property to a residential developer. Now the worm has turned and residential wants the commercial site to redevelop. Most of the home builders I spoke to said that business has slowed a little bit, but not much. The low-end homes ($150,000) were still going strong but the $400,000 and up housing was down 10 to 15%. I believe them more than newspaper reports, so residential is slowing, which is not a good sign. Several of the larger condo developers expressed concern that with higher interest rates and a slowdown appearing in residential, speculators might drop out of the market and they "guessed" that speculators account for 15 to 25% of sales, so they could really be hurt. While I don't believe speculators represent a large portion of our industry, I do believe we'll see a lot of "opportunists" dropping out this year.
If Ann buys everything she liked at the show (from a consumers point of view it was great, you got to see the latest gadgets, appliances and home improvements available), I may have to declare personal bankruptcy. But if I ever, in a moment of insanity, decide to build instead of buy a home, it did provide great ideas. The show, from a consumer viewpoint, was fantastic. The trip wasn't a total waste as Josh and his girlfriend Mindy joined us for the week and we did have an excellent family adventure.
Anyway, back to business. I'm writing this in the middle of January and, while business isn't poor, we (TKO) haven't experienced our normal rebound after the New Year. Hopefully this is just an aberration and not a trend for the year, but what does concern me is that retailing seems to be slowing down but development doesn't, which means there could be a lot more product available than companies needing space. That doesn't mean the world is coming to an end (if it does, what difference does retail real estate make) but it does mean we might have to hustle more to produce less. The true stars of leasing, sales and acquisitions will not be affected, since they always produce. But the second and third-string players could have a bad year or two coming up. Now even if the economy drops, it won't be a total tailspin. But because business has been relatively good for the last 10 to 15 years, the slowdown becomes a shock to our system whether it's a deep slowdown or not, and most don't know how to handle a slowdown since it's been over a decade that they had a problem like what I think is coming. This is the time to get your house in order; lower costs, improve personnel and do upgrading (but don't get carried away) at your centers.
Changing subjects, I keep hearing a lot about Sears and Kmart and their plans to improve sales. Well, if they don't get their act together this year, I'm willing to bet they will not be in business that much longer. Their asset, as we all know, is their real estate and that's going to be cherry picked by all the big box retailers. As I said before, Sears Essentials seems to be bombing, their traditional Sears store is going downhill and Kmart seems to want to mimic National Wholesale Liquidators in appearance but with lower sales. Their problem, as is the problem of most retailers today, is that they don't have merchants in charge, just bean counters. Here's a company with major problems.
I recently read that Kmart intends to lay off thousands of employees this year. My question is: "How, they don't have enough now to service the store." Yes, I understand they lack customers so they want to lower costs to reflect lower sales, but if they lay off that many people, who is going to open the door or work the cash register. I've been in convenience stores with more personnel than in Kmarts. Oh well, ranting on...while brick and mortar stores may see a slowdown this year, retailer's web sites are going strong. JCPenney just broke the BILLION dollar mark online and most of the web's retail business is going to conventional retailers with brick and mortar stores, not just an online presence. Just a few years ago, the fear was that online would kill offline business. It's hasn't done that yet, but the growth is tremendous and the stores that had name recognition as conventional stores are now attracting customers to their web site. Nearly 94% of our national and regional retailers have a web presence, making them a little less dependant on developers. I'm willing to bet that in 10 years, 50% of most larger chains' sales will come from online sales.
Here's a couple of observations I've noticed lately. In the January issue of Shopping Centers Today, the theme of the issue appeared to be about master developers and mixed-use projects abounding everywhere. Long story short, the buzz in the industry is about 100 to 500-acre sites combining residential, condos, office and retail or, on smaller scales, just office and retail with perhaps a touch of condos. James Rouse did that four decades ago with Columbia, MD, the Levittown complexes were built 60 years ago and, as I said at the beginning of this story, I went to the home builders show to find the residential developer that has surplus land for retail development; a group that's been combining retail with residential for 100 years. The only difference today is it's quite often built today by a single organization instead of specialists handling each segment. The costs of these projects can run into the billions, which means it's not a segment of the industry for the "little guy." Yes, there's more sophistication today than in the past, but the world is more sophisticated today than in the past. But it's only an old concept that's been updated; nothing new. I think these complexes have a place, but they are not the future of retail real estate, just another niche. I for one have no desire to live in a community with retail and offices next door. I try to live in areas which limit growth, not promote it (developers hate me). I read that currently 20% of all residential sales currently are in master/mixed-use complexes. I don't believe that trend will continue. Oh, in the same issue of Shopping Centers Today, it was reported that the Related Cos. was acquiring Equinox Holdings, operator of 25 fitness clubs. They intend to use Equinox gyms as an anchor in many of their mixed-use projects. IMHO, this is a disaster looking for a place to happen. If you're old like me, you'll remember Arlen (now CBL) acquiring Korvettes, Crown buying Hess, LJ Hooker buying a bunch of retailers or Bob Campeau, who bought and bankrupted Federated Department Stores. All these developers and their retailers went bankrupt because they (the developer) have no idea how to be a merchant. I'm not saying Related is going "11" but the past usually tells the future.
My last observation is on "creative" acquisitions. We're in the process of selling a center to a REIT. It took about a month to agree to the price and I thought the hard part was over but it wasn't. We're creatively lowering the management fee, reserves for roof and structure replacement so that the 6.5% CAP rate turns to a 7% (on paper) return based on these "inappropriate" numbers. What's the expression? Figures don't lie, but liars do figure? I guess it's a problem of being public. Everyone knows what you're doing.
I did have an interesting conversation with one builder who's looking to acquire dilapidated shopping centers or ones with surplus land so they could either demolish the center to build residential or build residential on the surplus property. For years, many retail developers bought land that was substantially more than they needed for their center and flipped or JV'd the rear portion of the property to a residential developer. Now the worm has turned and residential wants the commercial site to redevelop. Most of the home builders I spoke to said that business has slowed a little bit, but not much. The low-end homes ($150,000) were still going strong but the $400,000 and up housing was down 10 to 15%. I believe them more than newspaper reports, so residential is slowing, which is not a good sign. Several of the larger condo developers expressed concern that with higher interest rates and a slowdown appearing in residential, speculators might drop out of the market and they "guessed" that speculators account for 15 to 25% of sales, so they could really be hurt. While I don't believe speculators represent a large portion of our industry, I do believe we'll see a lot of "opportunists" dropping out this year.
If Ann buys everything she liked at the show (from a consumers point of view it was great, you got to see the latest gadgets, appliances and home improvements available), I may have to declare personal bankruptcy. But if I ever, in a moment of insanity, decide to build instead of buy a home, it did provide great ideas. The show, from a consumer viewpoint, was fantastic. The trip wasn't a total waste as Josh and his girlfriend Mindy joined us for the week and we did have an excellent family adventure.
Anyway, back to business. I'm writing this in the middle of January and, while business isn't poor, we (TKO) haven't experienced our normal rebound after the New Year. Hopefully this is just an aberration and not a trend for the year, but what does concern me is that retailing seems to be slowing down but development doesn't, which means there could be a lot more product available than companies needing space. That doesn't mean the world is coming to an end (if it does, what difference does retail real estate make) but it does mean we might have to hustle more to produce less. The true stars of leasing, sales and acquisitions will not be affected, since they always produce. But the second and third-string players could have a bad year or two coming up. Now even if the economy drops, it won't be a total tailspin. But because business has been relatively good for the last 10 to 15 years, the slowdown becomes a shock to our system whether it's a deep slowdown or not, and most don't know how to handle a slowdown since it's been over a decade that they had a problem like what I think is coming. This is the time to get your house in order; lower costs, improve personnel and do upgrading (but don't get carried away) at your centers.
Changing subjects, I keep hearing a lot about Sears and Kmart and their plans to improve sales. Well, if they don't get their act together this year, I'm willing to bet they will not be in business that much longer. Their asset, as we all know, is their real estate and that's going to be cherry picked by all the big box retailers. As I said before, Sears Essentials seems to be bombing, their traditional Sears store is going downhill and Kmart seems to want to mimic National Wholesale Liquidators in appearance but with lower sales. Their problem, as is the problem of most retailers today, is that they don't have merchants in charge, just bean counters. Here's a company with major problems.
I recently read that Kmart intends to lay off thousands of employees this year. My question is: "How, they don't have enough now to service the store." Yes, I understand they lack customers so they want to lower costs to reflect lower sales, but if they lay off that many people, who is going to open the door or work the cash register. I've been in convenience stores with more personnel than in Kmarts. Oh well, ranting on...while brick and mortar stores may see a slowdown this year, retailer's web sites are going strong. JCPenney just broke the BILLION dollar mark online and most of the web's retail business is going to conventional retailers with brick and mortar stores, not just an online presence. Just a few years ago, the fear was that online would kill offline business. It's hasn't done that yet, but the growth is tremendous and the stores that had name recognition as conventional stores are now attracting customers to their web site. Nearly 94% of our national and regional retailers have a web presence, making them a little less dependant on developers. I'm willing to bet that in 10 years, 50% of most larger chains' sales will come from online sales.
Here's a couple of observations I've noticed lately. In the January issue of Shopping Centers Today, the theme of the issue appeared to be about master developers and mixed-use projects abounding everywhere. Long story short, the buzz in the industry is about 100 to 500-acre sites combining residential, condos, office and retail or, on smaller scales, just office and retail with perhaps a touch of condos. James Rouse did that four decades ago with Columbia, MD, the Levittown complexes were built 60 years ago and, as I said at the beginning of this story, I went to the home builders show to find the residential developer that has surplus land for retail development; a group that's been combining retail with residential for 100 years. The only difference today is it's quite often built today by a single organization instead of specialists handling each segment. The costs of these projects can run into the billions, which means it's not a segment of the industry for the "little guy." Yes, there's more sophistication today than in the past, but the world is more sophisticated today than in the past. But it's only an old concept that's been updated; nothing new. I think these complexes have a place, but they are not the future of retail real estate, just another niche. I for one have no desire to live in a community with retail and offices next door. I try to live in areas which limit growth, not promote it (developers hate me). I read that currently 20% of all residential sales currently are in master/mixed-use complexes. I don't believe that trend will continue. Oh, in the same issue of Shopping Centers Today, it was reported that the Related Cos. was acquiring Equinox Holdings, operator of 25 fitness clubs. They intend to use Equinox gyms as an anchor in many of their mixed-use projects. IMHO, this is a disaster looking for a place to happen. If you're old like me, you'll remember Arlen (now CBL) acquiring Korvettes, Crown buying Hess, LJ Hooker buying a bunch of retailers or Bob Campeau, who bought and bankrupted Federated Department Stores. All these developers and their retailers went bankrupt because they (the developer) have no idea how to be a merchant. I'm not saying Related is going "11" but the past usually tells the future.
My last observation is on "creative" acquisitions. We're in the process of selling a center to a REIT. It took about a month to agree to the price and I thought the hard part was over but it wasn't. We're creatively lowering the management fee, reserves for roof and structure replacement so that the 6.5% CAP rate turns to a 7% (on paper) return based on these "inappropriate" numbers. What's the expression? Figures don't lie, but liars do figure? I guess it's a problem of being public. Everyone knows what you're doing.
posted by tedkraus at 6:39 AM
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