We all Need To Take Leasing 1.01 Again
I recently received a phone call from an enclosed mall owner who just bought the center out of bankruptcy and wanted to know what "we" (TKO) could do to turn the center around. I gave him my standard pitch and sent an e-mail outlining how we work and what our fees are. He called me back the next day and started arguing/debating our costs (we charge a monthly retainer against a commission). I tried explaining that on turnarounds you work twice as hard to produce half the results and, without the retainer it isn't worth our while to work on the project.
He went on to explain that the turnaround would be easy (yeah, right), as all the past problems were the result of the incompetent managers/owners/leasing agents over the past ten years and with my superior leasing and management skills the center should be fully leased in less than a year. I tried explaining that we're not that good and at best the turnaround will take three years and millions in TI, but he could not agree and we went our separate ways.
Anyway, that conversation got me thinking; we've all heard that about a third of all the enclosed malls in the country are, or will be, failures in the next few years and will either be demolished or de-malled, and the 33% is as good of a number as anyone can come up with. I've said it before and I'll repeat it now, there are two types of malls: Good and Bad, and usually the good are very, very good and the bad are disasters. I only get calls on the latter of the two.
The major REITs such as Simon and General Growth all have their "problem" malls on the sales block, hoping to find a "live one" willing to "bet" they can do more to turnaround a loser mall than the biggest mall owners in the country can. It's somewhat like the stock market; when someone "sells" they believe that the value of the stock will drop while the buyer believes the value will go up. The only thing for sure is one of them is wrong and the other is right. However, as a rule of thumb, if Simon or General Growth can't make a mall work then the "little guy" with no clout with mall-oriented retailers has no chance. Oh, a "turnaround" by my definition is keeping the mall leased, not demolishing and rebuilding it as a strip, power or lifestyle center.
Over the years, other "consultants" I'm friendly with and myself have worked on dozens of these enclosed malls and, in most cases, the turnaround failed, either because the center's reputation had deteriorated so badly that there was no going back, the market and competition had changed radically or the owner or management company was incompetent. But for whatever the reason, the center failed. As I get older, in most cases I believe a mall turnaround is NOT worthwhile; it's just wasting time and money. Rip it down and just plain redevelop. Think about it. Simon and General Growth are both selling its weaker projects and if anyone was capable of changing the Titanic's direction it would be them, but they're giving up. The best most turnarounds can do is keep the center alive while the immediate area improves so a redevelopment can be done a few years down the road (In other words, wait until Wal*Mart, Target or Home Depot wants the property).
Changing the subject, as most of you know, Josh, our son, has joined the company as a leasing agent and I won't and can't brag about how good he is (he isn't yet but I'm hopeful) but it's fascinating watching him learn and following his progress. It brings back old memories. Not only the enthusiasm and innocence but also the determination to make a deal even when there's no deal to be made. Maybe I've gotten too old, but after a "reasonable" (whatever reasonable means) period of time, if a deal isn't progressing, I give up on it. He hasn't learned that lesson and he's probably better off if he never does; why accept defeat? Also, because he's learning and a newbie, we have him calling almost all the 7,000 retailers in TenantSearch and, believe it or not, he's getting results. No deals yet, BUT he's talking to people and some have promised LOIs. Not bad for four weeks experience. Of course we all know what it means when a retailer says I'll send you a proposal; nothing, but Josh is an optimist. We also have him canvassing, the most time consuming way to lease but he's learning about retailers and why they DON'T want into the centers he's leasing. In order to overcome objections you first have to learn what the objections are. Retailers are telling him in plain terms why his property stinks, which is bad for the landlord but great for his education. While he's going to the ICSC University in Lansing, MI next month, Canvassing 101 is the best education he'll ever get. As I said, he hasn't made any deals yet, but he's brought proposals to the landlords. All his deals have been shot down as I knew they would (he contends landlords are too picky) but he's brought in some proposals that make the owners think, which is good. What he has learned is that developers and retailers both lie (and brokers aren't too honest either). Only four weeks experience and he has learned the fundamentals of commercial real estate.
Hiring some young kid to do telemarketing and canvassing makes sense (if you can find 'em, and that's the hard part). The leasing person you're paying $80,000 to $120,000 a year won't make 100 calls a day or canvass the locals on a weekly basis, but a young, enthusiastic kid will and I believe that over a six to nine-month period of time, they'll produce more than they're paid. Time will tell and I'll keep you informed on Josh's progress.
Oh, I had two interesting conversations with two landlords over the last week, which ties into Leasing 101. In one case we were negotiating rent and were $5 psf apart. The owner explained why he couldn't go lower on the rent and I explained that based on projections of sales, our offer was as high as we could go. The owner's response, which was sincere, was "You have to redo your projections so you can pay higher rents." I explained that it doesn't work that way and he couldn't understand why not. Raise the projection, even if it doesn't make sense, and you can raise the rent that can be paid was his thinking. What's the problem?
In another conversation, I was looking for 50,000 sq.ft. for a retailer and the center I was interested in didn't have 50,000 sq.ft. of continuous space, so the owner was trying to convince me to convince the tenant to take a space of 30,000 sq.ft. and six doors down another spot of 20,000 sq.ft. I again explained the extra costs involved in operating two stores and why it won't work. But again it was wasted on deaf ears.
What's needed in this industry is a course on Retailing 101 for "owners" who have no idea what they are talking about when they deal with tenants. Going back to Josh for a moment, it's to his long-term benefit to canvass "ma&pas," since the conversations generated when dealing with these retailers give him great insight into what a retailer needs in site selection and merchandising to succeed. It also provides a solid foundation to build his career on, something I think a lot of older owners need now.
I remember back when Abe was still president and I was doing some work for Kmart; I called up one landlord and said I was looking for 80,000 sq.ft. to 100,000 sq.ft. He said he didn't have that much space but had 10,000 sq.ft. he could lease. I said no thanks, but he wanted to continue on how great Kmart would do there. I tried explaining that they couldn't downsize a 100,000 sq.ft. store to operate in 10,000 sq.ft. and still be a "Kmart," but my answer seemed lost on him. Again, a need for Retail Real Estate 101.
If the owner was a 21-year-old with four weeks experience, I could understand BUT here's a grown man that owned several centers and still had no idea how retailing works. Dumb de dumb de dumb.
He went on to explain that the turnaround would be easy (yeah, right), as all the past problems were the result of the incompetent managers/owners/leasing agents over the past ten years and with my superior leasing and management skills the center should be fully leased in less than a year. I tried explaining that we're not that good and at best the turnaround will take three years and millions in TI, but he could not agree and we went our separate ways.
Anyway, that conversation got me thinking; we've all heard that about a third of all the enclosed malls in the country are, or will be, failures in the next few years and will either be demolished or de-malled, and the 33% is as good of a number as anyone can come up with. I've said it before and I'll repeat it now, there are two types of malls: Good and Bad, and usually the good are very, very good and the bad are disasters. I only get calls on the latter of the two.
The major REITs such as Simon and General Growth all have their "problem" malls on the sales block, hoping to find a "live one" willing to "bet" they can do more to turnaround a loser mall than the biggest mall owners in the country can. It's somewhat like the stock market; when someone "sells" they believe that the value of the stock will drop while the buyer believes the value will go up. The only thing for sure is one of them is wrong and the other is right. However, as a rule of thumb, if Simon or General Growth can't make a mall work then the "little guy" with no clout with mall-oriented retailers has no chance. Oh, a "turnaround" by my definition is keeping the mall leased, not demolishing and rebuilding it as a strip, power or lifestyle center.
Over the years, other "consultants" I'm friendly with and myself have worked on dozens of these enclosed malls and, in most cases, the turnaround failed, either because the center's reputation had deteriorated so badly that there was no going back, the market and competition had changed radically or the owner or management company was incompetent. But for whatever the reason, the center failed. As I get older, in most cases I believe a mall turnaround is NOT worthwhile; it's just wasting time and money. Rip it down and just plain redevelop. Think about it. Simon and General Growth are both selling its weaker projects and if anyone was capable of changing the Titanic's direction it would be them, but they're giving up. The best most turnarounds can do is keep the center alive while the immediate area improves so a redevelopment can be done a few years down the road (In other words, wait until Wal*Mart, Target or Home Depot wants the property).
Changing the subject, as most of you know, Josh, our son, has joined the company as a leasing agent and I won't and can't brag about how good he is (he isn't yet but I'm hopeful) but it's fascinating watching him learn and following his progress. It brings back old memories. Not only the enthusiasm and innocence but also the determination to make a deal even when there's no deal to be made. Maybe I've gotten too old, but after a "reasonable" (whatever reasonable means) period of time, if a deal isn't progressing, I give up on it. He hasn't learned that lesson and he's probably better off if he never does; why accept defeat? Also, because he's learning and a newbie, we have him calling almost all the 7,000 retailers in TenantSearch and, believe it or not, he's getting results. No deals yet, BUT he's talking to people and some have promised LOIs. Not bad for four weeks experience. Of course we all know what it means when a retailer says I'll send you a proposal; nothing, but Josh is an optimist. We also have him canvassing, the most time consuming way to lease but he's learning about retailers and why they DON'T want into the centers he's leasing. In order to overcome objections you first have to learn what the objections are. Retailers are telling him in plain terms why his property stinks, which is bad for the landlord but great for his education. While he's going to the ICSC University in Lansing, MI next month, Canvassing 101 is the best education he'll ever get. As I said, he hasn't made any deals yet, but he's brought proposals to the landlords. All his deals have been shot down as I knew they would (he contends landlords are too picky) but he's brought in some proposals that make the owners think, which is good. What he has learned is that developers and retailers both lie (and brokers aren't too honest either). Only four weeks experience and he has learned the fundamentals of commercial real estate.
Hiring some young kid to do telemarketing and canvassing makes sense (if you can find 'em, and that's the hard part). The leasing person you're paying $80,000 to $120,000 a year won't make 100 calls a day or canvass the locals on a weekly basis, but a young, enthusiastic kid will and I believe that over a six to nine-month period of time, they'll produce more than they're paid. Time will tell and I'll keep you informed on Josh's progress.
Oh, I had two interesting conversations with two landlords over the last week, which ties into Leasing 101. In one case we were negotiating rent and were $5 psf apart. The owner explained why he couldn't go lower on the rent and I explained that based on projections of sales, our offer was as high as we could go. The owner's response, which was sincere, was "You have to redo your projections so you can pay higher rents." I explained that it doesn't work that way and he couldn't understand why not. Raise the projection, even if it doesn't make sense, and you can raise the rent that can be paid was his thinking. What's the problem?
In another conversation, I was looking for 50,000 sq.ft. for a retailer and the center I was interested in didn't have 50,000 sq.ft. of continuous space, so the owner was trying to convince me to convince the tenant to take a space of 30,000 sq.ft. and six doors down another spot of 20,000 sq.ft. I again explained the extra costs involved in operating two stores and why it won't work. But again it was wasted on deaf ears.
What's needed in this industry is a course on Retailing 101 for "owners" who have no idea what they are talking about when they deal with tenants. Going back to Josh for a moment, it's to his long-term benefit to canvass "ma&pas," since the conversations generated when dealing with these retailers give him great insight into what a retailer needs in site selection and merchandising to succeed. It also provides a solid foundation to build his career on, something I think a lot of older owners need now.
I remember back when Abe was still president and I was doing some work for Kmart; I called up one landlord and said I was looking for 80,000 sq.ft. to 100,000 sq.ft. He said he didn't have that much space but had 10,000 sq.ft. he could lease. I said no thanks, but he wanted to continue on how great Kmart would do there. I tried explaining that they couldn't downsize a 100,000 sq.ft. store to operate in 10,000 sq.ft. and still be a "Kmart," but my answer seemed lost on him. Again, a need for Retail Real Estate 101.
If the owner was a 21-year-old with four weeks experience, I could understand BUT here's a grown man that owned several centers and still had no idea how retailing works. Dumb de dumb de dumb.
posted by tedkraus at 1:22 PM
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