Monterey here we went
Ann and I went to the Monterey ICSC dealmaking, where attendance increased nearly 25% from last year's 1,200 dealmakers, so no one can complain about "the action." The show was active all day Wednesday, the day before the actual dealmaking, with leasing plans, cell phones and computers spread on every flat surface while everyone attempted to do a deal (some even did). The cocktail party was also active on Wednesday evening with most attendees going out to wine and dine afterwards and, topping it off, the actual dealmaking on Thursday was busy until the closing bell, which is unusual for a dealmaking event. That's the good news. The bad news is that I kept hearing of a leasing slowdown from many (if not most) of the attendees, not a drastic one but a slowdown. Reports of this slowdown started six to nine months ago and it seems to be gathering steam. Those working on new projects or ones approved a year or two ago are still active troopers, but many of the brokers and smaller developers complained that 1) There's very little space to lease; the excellent economy for the last few years has rid the industry of almost all its semi-decent vacancies 2) Retailers are slowing down in their expansion plans (again, not drastically but slowing down) 3) Land costs are so high it's a substantially bigger risk than normal to do new development and the majority of "owners" that got into retail real estate in the last decade are not developers, but are either flippers or owners so they have no idea how to develop 4) With CAP rates being insane (in California people were complaining of CAP rates of 4% to 6%) it makes more sense to put your money in CDs and 5) Retailers, especially big box users, complained that even if they wanted to expand there's little vacancy around except for new development which few can afford. None of these problems means the end of the world is near (but based on how the environment has been acting lately, the end may come sooner than we thought) but it means that if the trend continues we'll all be working a lot harder and hopefully smarter to make a deal than we have in the past. The "easy" decade of leasing and sales may be coming to an end.
Over the years I've noticed our (TKO) leasing business does well when the economy does well. When the economy does fair, we do poorly but when the economy is doing poorly our leasing department does well (two out of three ain't bad). Never made total sense to me, but after 35 years I can accept the facts, whether or not they make sense. Of course, we do better and work less in a booming economy over a failing one but money is money. I only hope for all our sakes that my business starts doing better because of an improving economy, not because of a slowing one.
In a conversation with three leasing guys from three different REITs, they all brought up that their companies were considering selling their "C" and lower grade properties (for one REIT that's almost half of its portfolio). The last few years have been excellent for REITs and they're flush with cash and buying power. What they've learned is that it's easier to lease "quality" centers than tired workhorses (it took 'em a decade to learn that), so they intend to eliminate their problems, spend more per property on acquisitions and try to upgrade. That's excellent news for entrepreneurs, since they're the only logical candidate to acquire and turnaround some of these dogs the REITs will be selling. One of the problems is even though the REIT can't lease the problem center, they still want top dollar for their product and their economics don't work, which is why it's taking so long to do the sell-offs. The entire real estate industry has gotten fat and somewhat lazy over the last five years sending everyone to want to acquire "better" property that's easier to lease. REITs want to go the upscale route (it's easier), as do many companies that were originally formed to either do urban development or turnarounds but are no longer in that business since they decided they had to work too hard to make the projects profitable and did not get a great return. With raising money so easy right now, they've taken the road most traveled, meaning they borrow more to "upgrade their acquisitions," leaving the dogs for others.
Everywhere we went there was talk about the Vegas show. And while most, or many, admit there's a slowdown going on, they're all optimistic about Vegas and there's no doubt in my mind that another attendance record will be reached. There will be lots of bodies in Vegas this year, but I'm willing to bet that most will be gone by Tuesday. And only the exhibitors and workaholics will be around on Wednesday. The show, because of the low vacancy factor that the industry currently has, will be highlighting new developments, more so than in the past with "lifestyle" centers leading the pack. Of course, with over 40,000 +++ in attendance, there will be millions of sq.ft. of existing space being offered but that's down from year's past. The economy totally confuses me. Forgetting the stock market, which makes absolutely no sense, retail is doing decent for the most part. Employment is high (retailers are having a tough time finding help), rents are rising and prices of centers are commanding record highs. But something is wrong. I'm not sure what, but something is wrong. I can't put my finger on it, but there's a problem brewing. Maybe Vegas will bring it to the forefront.
As I said, most developers and retailers today want to go upscale, and to some extent I understand why. By changing from popular price offprice/outlet retailers to more upscale tenants, outlet centers are beginning to change years of declining sales in their outlet centers to improving sales per sq.ft. Lifestyle centers can only survive in an upscale settings and Nordstrom is having a banner year. BUT, and I repeat BUT, that's not where America shops. Retailers like Foreman Mills and Shoppers World, which cater to blue collar and urban customers, are doing great also. Too many retailers and developers don't believe there's money to be made catering to the blue collar, lower middle class market, and they're wrong. One of the reasons for this disbelief is Kmart's sales, which keep declining; but they're declining not because of the market they sell to, but they're just plain bad merchants who, IMHO will not exist in five years or less. However, Kmart is still Kmart and is No. 3 in the discount industry. Target, No. 2, is considered "upscale," with Kohl's being middle class. Only Kmart caters to the blue of the blue and they're a rotten merchant. Stores like Dollar Tree, Family Dollar and K&G Clothing are expanding and profitable, but they're just not sexy and we're an industry that loves sexy. (Remember, never make a pretty woman your wife if you want to be happy the rest of your life).
Changing subjects, I had an interesting conversation last week with a gentlemen by the name of David Tepper (847-919-8162) who is coming out with an interesting and I believe new approach to doing brokerage (for disclosure purposes, I am NOT involved with his business and have no idea if the concept will work but it sounds interesting and worth a try. I don't even know David). The idea is relatively straightforward. He acts like the "back office" for developers and brokers. He does a demographic study of the market and property (the demographics are substantially more then a one, three or five-mile radius), and then he divides the market into segments and determines what retailers make sense to pursue based on this study, and more importantly what retailers are doing well in the market. (Oh, I forgot to mention that there's NO exclusive required and you only pay him based on results). The reason for a detailed study of the market and center is to promote the retailer's probability of success and the center's interest in their success. It also helps identify those retailers who actually understand the market. The leasing process itself, once the targets are identified, is as old as time. Phone calls, emails, letters and follow ups. The warm leads are then turned over to the broker or owner (he goes both ways). He does NOT close; the agent or landlord does, so his telemarketing approach works nationwide and he's paid a "finder's fee," not a full commission. Again, remember, this is done on a contingency basis; they only get paid on signing. Ten or 15 years ago, we (TKO) set up a telemarketing department to offer a similar service (but we did the actual close). While the idea produced deals, we found we couldn't make enough money promoting it. David's approach of just providing leads may make the concept workable. If you have space that isn't leasing that quick, give David a call. What do you have to lose?
Over the years I've noticed our (TKO) leasing business does well when the economy does well. When the economy does fair, we do poorly but when the economy is doing poorly our leasing department does well (two out of three ain't bad). Never made total sense to me, but after 35 years I can accept the facts, whether or not they make sense. Of course, we do better and work less in a booming economy over a failing one but money is money. I only hope for all our sakes that my business starts doing better because of an improving economy, not because of a slowing one.
In a conversation with three leasing guys from three different REITs, they all brought up that their companies were considering selling their "C" and lower grade properties (for one REIT that's almost half of its portfolio). The last few years have been excellent for REITs and they're flush with cash and buying power. What they've learned is that it's easier to lease "quality" centers than tired workhorses (it took 'em a decade to learn that), so they intend to eliminate their problems, spend more per property on acquisitions and try to upgrade. That's excellent news for entrepreneurs, since they're the only logical candidate to acquire and turnaround some of these dogs the REITs will be selling. One of the problems is even though the REIT can't lease the problem center, they still want top dollar for their product and their economics don't work, which is why it's taking so long to do the sell-offs. The entire real estate industry has gotten fat and somewhat lazy over the last five years sending everyone to want to acquire "better" property that's easier to lease. REITs want to go the upscale route (it's easier), as do many companies that were originally formed to either do urban development or turnarounds but are no longer in that business since they decided they had to work too hard to make the projects profitable and did not get a great return. With raising money so easy right now, they've taken the road most traveled, meaning they borrow more to "upgrade their acquisitions," leaving the dogs for others.
Everywhere we went there was talk about the Vegas show. And while most, or many, admit there's a slowdown going on, they're all optimistic about Vegas and there's no doubt in my mind that another attendance record will be reached. There will be lots of bodies in Vegas this year, but I'm willing to bet that most will be gone by Tuesday. And only the exhibitors and workaholics will be around on Wednesday. The show, because of the low vacancy factor that the industry currently has, will be highlighting new developments, more so than in the past with "lifestyle" centers leading the pack. Of course, with over 40,000 +++ in attendance, there will be millions of sq.ft. of existing space being offered but that's down from year's past. The economy totally confuses me. Forgetting the stock market, which makes absolutely no sense, retail is doing decent for the most part. Employment is high (retailers are having a tough time finding help), rents are rising and prices of centers are commanding record highs. But something is wrong. I'm not sure what, but something is wrong. I can't put my finger on it, but there's a problem brewing. Maybe Vegas will bring it to the forefront.
As I said, most developers and retailers today want to go upscale, and to some extent I understand why. By changing from popular price offprice/outlet retailers to more upscale tenants, outlet centers are beginning to change years of declining sales in their outlet centers to improving sales per sq.ft. Lifestyle centers can only survive in an upscale settings and Nordstrom is having a banner year. BUT, and I repeat BUT, that's not where America shops. Retailers like Foreman Mills and Shoppers World, which cater to blue collar and urban customers, are doing great also. Too many retailers and developers don't believe there's money to be made catering to the blue collar, lower middle class market, and they're wrong. One of the reasons for this disbelief is Kmart's sales, which keep declining; but they're declining not because of the market they sell to, but they're just plain bad merchants who, IMHO will not exist in five years or less. However, Kmart is still Kmart and is No. 3 in the discount industry. Target, No. 2, is considered "upscale," with Kohl's being middle class. Only Kmart caters to the blue of the blue and they're a rotten merchant. Stores like Dollar Tree, Family Dollar and K&G Clothing are expanding and profitable, but they're just not sexy and we're an industry that loves sexy. (Remember, never make a pretty woman your wife if you want to be happy the rest of your life).
Changing subjects, I had an interesting conversation last week with a gentlemen by the name of David Tepper (847-919-8162) who is coming out with an interesting and I believe new approach to doing brokerage (for disclosure purposes, I am NOT involved with his business and have no idea if the concept will work but it sounds interesting and worth a try. I don't even know David). The idea is relatively straightforward. He acts like the "back office" for developers and brokers. He does a demographic study of the market and property (the demographics are substantially more then a one, three or five-mile radius), and then he divides the market into segments and determines what retailers make sense to pursue based on this study, and more importantly what retailers are doing well in the market. (Oh, I forgot to mention that there's NO exclusive required and you only pay him based on results). The reason for a detailed study of the market and center is to promote the retailer's probability of success and the center's interest in their success. It also helps identify those retailers who actually understand the market. The leasing process itself, once the targets are identified, is as old as time. Phone calls, emails, letters and follow ups. The warm leads are then turned over to the broker or owner (he goes both ways). He does NOT close; the agent or landlord does, so his telemarketing approach works nationwide and he's paid a "finder's fee," not a full commission. Again, remember, this is done on a contingency basis; they only get paid on signing. Ten or 15 years ago, we (TKO) set up a telemarketing department to offer a similar service (but we did the actual close). While the idea produced deals, we found we couldn't make enough money promoting it. David's approach of just providing leads may make the concept workable. If you have space that isn't leasing that quick, give David a call. What do you have to lose?
posted by tedkraus at 10:08 AM
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