Puerta Rico, Chicago, LA, or Bust ...Oh, Don't forget New Orleans
t's been a busy month, starting with Ann and I attending the Puerto Rico dealmaking, not to get away from the cold (it was in the 50s in Jersey), but to do actual work, since one of our clients is looking for 50,000 sq.ft. to 75,000 sq.ft. locations on the island. The Puerto Rico show is small, in fact the smallest we go to, with maybe 250 to 275 people in attendance. But it's a close-knit group where everyone knows your name. The Island is undergoing major changes in ownership, with Kimco acquiring the RD Management portfolio, DDR acquiring a couple of million sq.ft. last year and Vornado and Thor Equities also being players in the market. Slowly but surely, developers from the United States are taking over. I also bumped into numerous "buyers" from the states who want to acquire centers (good luck), so while the CAP rate in the States is low, Puerto Rico's is even lower, which is hard to do and still have a positive cash flow. What makes matters worse, for all the retailers wanting to expand there, rent per sq.ft. is about 50% higher than in the states. However, in fairness, volumes are 50% or higher. I guess you get what you pay for.
This is my fourth visit to Puerto Rico during a "dealmaking" show and every year I talk to four or five stateside retailers that hope to enter the market. The good news is they all get excited about the market's potential, the bad news is most back off when hearing the rents. This year was no different. I had conversations with three retailers looking to enter the Island for the first time, but they all had problems accepting the rents they were being offered. I'm told consumer spending, as a percentage of personal income, is twice that of the United States. That's A BIG difference, which is why apparel does so well on the island and why retailers want to be there. Now if they could just get over their hangup on rent. Picky, picky, picky.
What really shocked me was when one developer quoted $18.50 psf for CAM on a 60,000 sq.ft. building (the rent was even more insane). One of us is nuts. Yes, rents are higher on the island, partially because it takes as long to get approvals from the government as it does in California. However, it is mostly because the developer can command it (the vacancy rate is real low). Where I heard the most complaints from retailers is the "newer" (meaning stateside owners) landlords are doubling CAM costs, making it into a profit center, which it shouldn't be. I'm told numerous tenants are on a rent strike because of CAM. Ripping off retailers on auxiliary charges has never made sense to me.
I have to thank Larry Campbell for an invitation to his party on the night before the PR show. He had the "who's who" in retail real estate in Puerto Rico. Of the 125 to 150 attending, probably half were retailers and half developers. It was a great crowd and networking at its best.
Oh, I just read an interesting article. If you "counted" the Internet as a single entity, then took all the sales for computers, cars, eBay, Amazon, airline tickets, etc. and counted all sales on the Internet, it would be the second largest retailer in the world. Who is number one? It's Wal*Mart of course. That's scary to think that they sell more every year than the entire Internet.
Changing subjects, I had a meeting with a potential client the other day who just acquired a center and wanted us to manage and lease the 40% vacant property. After a few minutes of looking at the site plan and individual sales for the tenants, I asked, "Did you buy it at an 11 or 12% CAP?" He answered, "Eleven percent, and it's a great deal, since there's positive cash flow without leasing the vacancies." I told him to look at the expiration period for the two largest tenants and it was in 18 months. He said that they would renew, and I asked why he felt they would, since sales are less than $75 psf for both. His answer: Their rent is cheap (wrong answer). I explained that he did a bad deal, the "anchors" will leave and he's screwed. Needless to say, he didn't like my response and I didn't get the assignment (Sidebar; when I'm trying to get an assignment, I'm usually asked why they should hire us over another management/leasing company. My answer is, "We'll tell you you're wrong and yell at you to get a deal done," something the competitors won't do. (I believe this answer helps the property in the long run, but it costs me lots of assignments).
Many "investors" in their desperation to find deals that make economic sense (which usually don't), but have little leasing experience, are jumping on deals with high CAP rates (10% to 14%) that after a two or three year period make no sense. You usually get what you pay for. I'm not saying that there are no great opportunities "out there." There are plenty, BUT most of these opportunities can only work for an experienced developer with deep pockets, especially now. The growth of real estate as a major investment segment has brought in players that have no right to be in the business. Especially if my observations are correct that there's not a huge but still significant slowdown in leasing (but not sales) making it even harder to lease a second tier center by an inexperienced developer. Most of the retailers I'm talking to, while still expanding, are slowing down their expansion program. And, of course, every day we hear of another chain closing 20 to 700 stores. 2006 will be an interesting year.
Speaking of "deals," I was talking to a fellow broker the other day who just sold a center to a REIT for a 6.5% CAP. Another deal that makes no sense. As our conversation continued, we discussed the subject of the Mills Corporation and its latest scandal and then Enron came up and we spoke about those crooks (hell, the head of Radio Shack couldn't provide an honest resume; big business like the government has problems telling the truth). Then I had a thought, which I'm not saying is true, but still a thought: What if a lot of the sales of centers that are being bought by REITs or by smaller companies are based on funny numbers? Then these ridiculous CAPS make sense. Just a thought, but the truth should be coming out in the next year or two.
Anyway, Alyson and I were on the road last week, with her traveling to the Los Angeles dealmaking and I to the Chicago show. Both are small events with 1,220 to 1,500 dealmakers in attendance, but with enough "dealmakers" to make 'em successful networking events.
According to Alyson, it was the first year the show was held at the LA Convention Center; and the overall reaction from the attendees was good. No one said great, but no one said slow either. There were 100 exhibitors, compared to about 70 in Chicago; overall both were decent events.
The Chicago show was combined with the Alliance Program, which is where cities exhibit their vacancies to retailers and brokers. The first day of the Chicago show was geared 100% towards the Alliance Program and the second towards seminars and dealmaking. The LA show had its mayor speak in the morning, and there was lots of urban development buzz throughout the show, which is currently the "vanilla" of the day for retail real estate. The Chicago show was upbeat and the majority of dealmakers came in on the second day for the Dealmaking event. Of course the night before was hectic with lots of bodies going out for dinner and partying.
I bumped into Joel Siebert of Mandees at the Chicago show. His company is in the process of opening its first three stores in the market and looking for more. Most of the retailers in attendance were the same group that have been expanding into the market for years, as Chicago is one of the nation's better retail markets and can still be profitable with decent sales even with the high rents Chicago commands.
The Chicago dealmaking overall was upbeat with retailers being more aggressive than in most regions. We didn't attend the New Orleans show, but a friend said the count was 654 and was a decent, but not a great, show. Since it's the first show since the hurricane, that reaction wasn't bad, but I was told by several attendees that if you left the downtown area, parts of the city looked like a third world nation that lost the war. I guess we can call New Orleans an "added value" city...lots of potential.
This is my fourth visit to Puerto Rico during a "dealmaking" show and every year I talk to four or five stateside retailers that hope to enter the market. The good news is they all get excited about the market's potential, the bad news is most back off when hearing the rents. This year was no different. I had conversations with three retailers looking to enter the Island for the first time, but they all had problems accepting the rents they were being offered. I'm told consumer spending, as a percentage of personal income, is twice that of the United States. That's A BIG difference, which is why apparel does so well on the island and why retailers want to be there. Now if they could just get over their hangup on rent. Picky, picky, picky.
What really shocked me was when one developer quoted $18.50 psf for CAM on a 60,000 sq.ft. building (the rent was even more insane). One of us is nuts. Yes, rents are higher on the island, partially because it takes as long to get approvals from the government as it does in California. However, it is mostly because the developer can command it (the vacancy rate is real low). Where I heard the most complaints from retailers is the "newer" (meaning stateside owners) landlords are doubling CAM costs, making it into a profit center, which it shouldn't be. I'm told numerous tenants are on a rent strike because of CAM. Ripping off retailers on auxiliary charges has never made sense to me.
I have to thank Larry Campbell for an invitation to his party on the night before the PR show. He had the "who's who" in retail real estate in Puerto Rico. Of the 125 to 150 attending, probably half were retailers and half developers. It was a great crowd and networking at its best.
Oh, I just read an interesting article. If you "counted" the Internet as a single entity, then took all the sales for computers, cars, eBay, Amazon, airline tickets, etc. and counted all sales on the Internet, it would be the second largest retailer in the world. Who is number one? It's Wal*Mart of course. That's scary to think that they sell more every year than the entire Internet.
Changing subjects, I had a meeting with a potential client the other day who just acquired a center and wanted us to manage and lease the 40% vacant property. After a few minutes of looking at the site plan and individual sales for the tenants, I asked, "Did you buy it at an 11 or 12% CAP?" He answered, "Eleven percent, and it's a great deal, since there's positive cash flow without leasing the vacancies." I told him to look at the expiration period for the two largest tenants and it was in 18 months. He said that they would renew, and I asked why he felt they would, since sales are less than $75 psf for both. His answer: Their rent is cheap (wrong answer). I explained that he did a bad deal, the "anchors" will leave and he's screwed. Needless to say, he didn't like my response and I didn't get the assignment (Sidebar; when I'm trying to get an assignment, I'm usually asked why they should hire us over another management/leasing company. My answer is, "We'll tell you you're wrong and yell at you to get a deal done," something the competitors won't do. (I believe this answer helps the property in the long run, but it costs me lots of assignments).
Many "investors" in their desperation to find deals that make economic sense (which usually don't), but have little leasing experience, are jumping on deals with high CAP rates (10% to 14%) that after a two or three year period make no sense. You usually get what you pay for. I'm not saying that there are no great opportunities "out there." There are plenty, BUT most of these opportunities can only work for an experienced developer with deep pockets, especially now. The growth of real estate as a major investment segment has brought in players that have no right to be in the business. Especially if my observations are correct that there's not a huge but still significant slowdown in leasing (but not sales) making it even harder to lease a second tier center by an inexperienced developer. Most of the retailers I'm talking to, while still expanding, are slowing down their expansion program. And, of course, every day we hear of another chain closing 20 to 700 stores. 2006 will be an interesting year.
Speaking of "deals," I was talking to a fellow broker the other day who just sold a center to a REIT for a 6.5% CAP. Another deal that makes no sense. As our conversation continued, we discussed the subject of the Mills Corporation and its latest scandal and then Enron came up and we spoke about those crooks (hell, the head of Radio Shack couldn't provide an honest resume; big business like the government has problems telling the truth). Then I had a thought, which I'm not saying is true, but still a thought: What if a lot of the sales of centers that are being bought by REITs or by smaller companies are based on funny numbers? Then these ridiculous CAPS make sense. Just a thought, but the truth should be coming out in the next year or two.
Anyway, Alyson and I were on the road last week, with her traveling to the Los Angeles dealmaking and I to the Chicago show. Both are small events with 1,220 to 1,500 dealmakers in attendance, but with enough "dealmakers" to make 'em successful networking events.
According to Alyson, it was the first year the show was held at the LA Convention Center; and the overall reaction from the attendees was good. No one said great, but no one said slow either. There were 100 exhibitors, compared to about 70 in Chicago; overall both were decent events.
The Chicago show was combined with the Alliance Program, which is where cities exhibit their vacancies to retailers and brokers. The first day of the Chicago show was geared 100% towards the Alliance Program and the second towards seminars and dealmaking. The LA show had its mayor speak in the morning, and there was lots of urban development buzz throughout the show, which is currently the "vanilla" of the day for retail real estate. The Chicago show was upbeat and the majority of dealmakers came in on the second day for the Dealmaking event. Of course the night before was hectic with lots of bodies going out for dinner and partying.
I bumped into Joel Siebert of Mandees at the Chicago show. His company is in the process of opening its first three stores in the market and looking for more. Most of the retailers in attendance were the same group that have been expanding into the market for years, as Chicago is one of the nation's better retail markets and can still be profitable with decent sales even with the high rents Chicago commands.
The Chicago dealmaking overall was upbeat with retailers being more aggressive than in most regions. We didn't attend the New Orleans show, but a friend said the count was 654 and was a decent, but not a great, show. Since it's the first show since the hurricane, that reaction wasn't bad, but I was told by several attendees that if you left the downtown area, parts of the city looked like a third world nation that lost the war. I guess we can call New Orleans an "added value" city...lots of potential.
posted by tedkraus at 10:19 AM
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