I'm Depressed And To Complicate Matters, Nothing Is Wrong

Up until recently, I’ve been an avid news junky, reading two or three newspapers a day, watching the news on TV for an hour a day and checking Yahoo’s news every few hours to see what’s happening. But in the last year it’s gotten so depressing that I’m limiting myself on how much news I inject into my mind in any given 24-hour period.
The stock market is up, next day its down, inflation is high, next day inflation is low (I don’t know about you but my cost of living is increasing at a substantially higher rate than the government claims). Everyday our citizen soldiers die in Iraq's civil war or Afghanistan, the war in Israel is still on as I write and hopefully is over by the time you get this issue but it could, with some bad luck, lead to WWIII. BUT what’s really scary is that the Wall Street Journal today had an article on how 200,000 religious right individuals are gathering to support Israel so the day of rapture comes SOON. That’s scary, praying for the end of the world? Sick, sick, sick.
Besides innocent civilians dying everyday, we have immense trade deficits along with substantial overspending (and that’s after discounting for the costs of “war”) by our beloved government and again that’s with Republicans in charge. Then add all the political rhetoric we hear every day from the politicians (notice we no longer have statesman-only politicians running our country) about idiotic laws that benefit no one and do little to serve the public's interest. The president has a 39% approval rating, congress is at 25% and 60% of Americans believe we, as a nation, are headed in the wrong direction, plus 60% of the parents in America believe their children's economic future is poor. I could go on and on, but Ann contends that I get too depressing, so I’ll drop it here. But FYI, my life in general is fine. Business is decent, my personal world is great and, besides the world's problems, I have no real complaints.
So how does all this relate to retail real estate? Well the economic cost of “fighting terrorism” has to come back to haunt us in the near future, similar to what happened in Vietnam, when inflation was running 12% to 13%. Add to this the government and trade deficits and you have a nation that’s broke. And citizens of broke nations don’t buy as much, which means we don’t need as many centers, brokers, developers or retailers. I’m not saying the sky is falling, what I’m saying is we’re at a point in time in which, IF we don’t make major changes, then the sky will fall. In the meantime, let’s enjoy the sunshine.
On a more pleasant topic, Ann, Alyson, Terry, Josh and myself took the train to Beantown for the Boston ICSC dealmaking show where 1,500 retail real estate professionals (most of the time) gathered to wheel and deal at the first show after Vegas. The good news is attendance was up 300 (25%) from last year and, while Boston is traditionally a smaller show than most, an increase of 25% is always great. The cocktail party the night before the show was active with everyone busy networking, gossiping and either complaining or bragging. The tone, while optimistic, was concerned about the apparent signs of a slowdown the individuals are personally experiencing, not based on what the news reports. Of course, most of the pessimism was from the older dealmakers who have encountered numerous slowdowns in their business life, not the Next Generation that has never encountered anything but a growing industry. A large number of the exhibitors complained about a “slow floor” but I personally believe that there was no real slowdown, this was the first year the event was held at the The Boston Convention and Exhibition Center and the aisles were 10 feet wide, providing more walking space for the attendees. The slowdown was more perception than reality. I personally felt the show went well for the size. I overheard one retailer complain that there were too many “LAZY” brokers, developers and retailers who don’t attend events such as this, but should. I don’t know if lazy is the correct word, but I wholeheartedly agree with the statement’s intent.
I had a somewhat embarrassing conversation with Jeffrey James of Lamar at the cocktail party. While having a philosophical discussion on the purpose of life, we somehow got onto a discussion of business (how boring) and Jeff asks if I had any centers for sale. I said yes and briefly outlined two deals. He then asked why I hadn’t offered his company the properties before, not only because we’ve known each other longer than either can remember but because his company advertises with us all the time. I thought about his question for 30 seconds and than answered, “Because I’m not too swift.” I’ve talked to more companies then I can count about the centers but “forgot” to present ‘em to a company I already have a relationship with. Stupidity is the only answer and hopefully I do remember Sales 101’s number one rule; talk to everyone about your center for sale/lease, especially if they're a friend. I’ll repeat a true tale of not following this rule. Way back when Abe was still president, I started TKO and got an assignment to lease a center in Detroit. I worked on the project for three months when the landlord informed me they just did a deal with Fayva Shoes (any deal the owner did was exempt from paying me a commission). Fayva’s VP of Real Estate was a friend of mine, Jack Podger, so I called Jack up and asked why he did a deal direct with the owner and not through me. His response was: “Ted, you never called me but the landlord did. You have to offer me the property in order for me to say yes.” A very valuable lesson I learned that served me well for years but I must have forgotten in my old age, but it won't happen again.
Another mistake I made involved the same two centers. I put together a brief package on both of the centers for sale, had ‘em made into PDFs and then called and emailed the information to companies aggressively acquiring centers. Every time I found an interested party, they would ask a question not in the package and I’d either research the answer or if I already had the info, emailed the requested info out. This must have happened 25 times for the two centers. Now if I hadn’t been lazy/stupid or forgetful, I would have spent an additional hour or two initially putting together a more complete package, making the potential buyers happy from the start and saving me time. Dumb, de, dumb, dumb, dumb.
Oh, another interesting conversation I had in Boston. We were talking about the changes happening in the industry as the old timers retire/die and the “kids” take over the industry. One of the people at the table said that the typical person entering the industry today has an MBA (which is not correct) and that type of “personality” is making drastic changes on how we act and think. I agree to some extent but believe that the vast majority of MBA’s entering retail real estate are NOT going after the leasing jobs (it’s beneath them) and are more involved in finance or acquisition. Leasing requires that you get your hands dirty and too many MBAs are not comfortable lying in dirt. But yes, they are making major changes in the industry as they figure out ways to put less cash into a deal and carry more debt (too much debt in my opinion), which is fine for immediate growth but bad for future earnings. But the one thing we all agreed on was the industry of 10 years from now will have nothing to do with the industry we're in today.
One last comment. In conversations with three or four institutional buyers, they all mentioned how they're being offered a lot more deals from owners that are either interest-only or adjustable rates, which no longer have a positive cash flow. These deals were done in the heydays of low interest rates. And with the increase in interest rates these owners are in trouble and have to sell fast.

My Dreams Come True, I'm a Porn Star

Recently, Ann received an email saying: "I just wanted to make a suggestion, I think Ted needs to update his picture. I can't even get myself to read what he writes because I look at the picture and I can't take him seriously... He looks like a 1970s porn star. The first time I picked up a Dealmakers Magazine I had to check the date; I thought I had a vintage copy... No offense, just a suggestion..."

Now I admit the picture is at least 15 years old, maybe 20, and it is on my "to do" list to be updated (I'm going to put it on the top of the list soon, real soon) but I didn't think I looked like a porn star. WOW, thanks, I take it as a compliment. Anyway, I get the hint and we'll have a picture of an old man instead of a young kid up here soon.

Not meaning to continually harp about my son, "But" I was talking to a broker friend and he asked how it was going with Josh joining the company. After a few minutes of discussion he said that he doesn't know if he would let his kid be a tenant rep in particular and that he wasn't sure about brokerage in general. I asked "Why?" His contention is that with all the consolidation going on between retailers and developers (Example; Kimco acquiring Pan Pacific's 138 shopping centers for $4 billion or Centro Watt buying Heritage's 176 centers for $3.2 billion just in the last few weeks and Bain acquiring Burlington Coat, Michaels and Toys R Us) much of the properties and leasing power will be in the hands of a small group with lots of clout, making it much more difficult for tenant reps to survive and prosper but putting a bigger demand for leasing agents working directly for the retailer and owner (like the "good old days"). At what point in time will a "Kimco" say to Target or Wal*Mart, who have brokers in every region, "Hey fellas, you're our tenant in 125 centers, we have a close working relationship, we DON'T WANT to have to pay a broker that does nothing but show you a property we've presented to you over 10 times during the last five years. We already know how to do a deal with you, why do we need a broker?" They'd be saving HUNDREDS of thousands of dollars on every deal and no matter how big or rich these companies are, spending money is not one of their priorities." Most REITs already have a "Meet the Retailers" day periodically where their in-house leasing staff meet with a different retailer once every two weeks or so. The retailer does a "show 'n tell" on who they are and what type of real estate they require and then each individual agent presents property they're handling that makes sense or they think makes sense for the retailer.

By directly dealing with the retailer, the REIT is beginning to cut out the broker and the time will come when the broker is cut out completely. However, in my opinion, the company with a small or regional portfolio will still need brokers to help assist their in-house leasing agent and this change is still up to 10 years off, but change will occur, it's when that's the unknown. My friend also contends that the future of "consultants" is bright for companies and individuals that can assist large owners in obtaining entitlements from towns/states, or other support services that require the type of experts that usually do not work well as employees, but do great as outside support personnel/consultants. I'm not sure if I agree with him, but there is logic behind his beliefs.

Which brings me to my next thought; while figures don't lie, they can be confusing. I was researching the ICSC's membership list and came up with some interesting numbers. First, "we've" grown to 65,000 members, which is a hell of a number and a substantial increase just in the last five years. But (like I say, there's always a "but") there are only 15,000 individual companies involved. In other words, each company averages four members and the majority of growth of the membership is in support services, not retailers or developers. What makes matters more startling is that of the 15,000 member firms, only about 1,600 are retailers, so basically about 10% of our industry are the "girls." Reminds me of the days when I was single and hit the bars to find female companionship. There were usually 10 guys for every female, and like many developers you "settle" for what you can get at 3 a.m., but you know it's not a long-term commitment.

Anyway, considering that our industry spends and earns BILLION$ a year and the impact of what we do for the economy and world is tremendous, we're a small group with lots of influence; I always find our influence amazing since I know who's involved and it's hard to be impressed.

Right now, the prospect of the economy going into a recession is slim. Even with a slowdown in leasing, the industry is doing well. Instead of being great, it's good and good is great. Rents for "A/B" properties and new developments are hitting record highs. Part of the reason for increases in rent is that land and construction costs are accelerating but most of the increase is occurring because the owner can command bigger numbers from the tenant. Not all these centers will do the sales to justify higher rents, but some retailers have to expand annually to keep Wall Street happy. New developments are the quickest and easiest way to open numerous stores year after year; so they're willing to pay the high asking rent. Also, new construction has an advantage over existing centers in that there's no history of sales to depress rental numbers, and by their nature retailers are optimists, so they tend to think/believe that the next new store will be a home run and therefore worth paying a premium for. God bless optimism.

My concern (and for the record, if I was an owner who COULD command high rents, even if the tenant couldn't do the numbers to justify the rent, I would) is that I have a gut feeling which I can't prove, that a high percentage of retailers are only making a profit from their older stores with low rents and that their newer units have either no or little cash flow. Let's hope I'm wrong.