Another Josh Story...well almost

I was speaking to a friend of mine who's VP of leasing for a decent sized shopping center company. As many people do (since I first mentioned that Josh started working for us) he asked how Josh was doing and I responded with my typical line: "Great on Monday, Wednesday and Friday but I'm thinking of firing him on Tuesday and Thursday (three out of five ain't bad). He replied: "No really, I want to know for personal reasons since we're having trouble finding decent people at a salary we can justify and our Chairman wants me to hire young, aggressive, recent college graduates to train how to lease."

"Don't do it, quit first," I replied, "it's a full time job that requires the patience of a saint. You'll accomplish none of your other work if you have to deal every day with the untrained and some days the untrainable. Your job will go downhill."

Now don't get me wrong, young people are the future of our industry and they can add a lot to what we've already accomplished, BUT man are they a pain to deal with. Their inexperience in retail real estate and life in general requires a commitment of substantial time and the ability to deal with their mishigosh which too many of us "old timers" (Ann asked me not to call people old farts) don't have.

They have to be taught EVERYTHING, from how to fax, to picking up business cards from every retailer they canvass, to NOT to canvass a regional square foot mall for tenants for a 100,000 sq.ft. supermarket-anchored strip, to "forcing 'em to call 60 to 80 retailers a day so as to start to get a "feel" on how to talk to retailers, and to making 'em canvass two or three times a week even if they're tired. They KNOW NOTHING and they're always worried about embarrassing themselves.

Now they can be an asset also, as they often are, since most of the time they think outside the box. They come up with unusual ideas and some are good. Because they're new to the industry, they have no preconceived ideas and that's great, so I'm not opposed to hiring the uninformed, I just realize it requires a structure and commitment of time to do it right. Otherwise, the newbie quits out of frustration or is fired because the supervisor becomes too frustrated. It's a "lose-lose" for everyone.

There are many development and brokerage companies that have a formal training program with supervision from full time trainers, and that can work great. These companies are educating our future leaders. But to tell a VP of a company to be the trainer is a problem looking for a place to happen. The good news when it comes to these newbies is that they are perfect for telemarketing to retailers and canvassing, something that is hard to justify when you're paying a leasing guy $100,000 to $150,000.

Josh's trials and tribulations must be common for most young folks, as I recently received this e-mail: "Hi, I am 24 and new in Retail after just finishing school in Southern California. I was reading your Real Estate 101 article today about your son Josh and I couldn't help to chuckle at the similarities between him and I when it comes to being optimistic about deals that will never get done. I am currently cold calling like crazy to fill my listings in Northern Utah. Anyway, I wanted to further my education as a new "optimist" in the industry and wanted to speak to Josh about his experience at the ICSC University in Michigan. Would you be able to give me his contact info when he gets back?"

I give him credit, he knows he doesn't know and wants to talk to another newbie to reassure himself that he's not alone. And he not. Josh just left for the University and I'm extremely anxious to hear his thoughts and see what he learned.

Changing subjects, I recently came across an article saying: "Wal*Mart Builds, Waits for Communities to Catch Up." In essence, it says Wal*Mart started out in mostly rural areas where other large retailers chose not to build and now is saturating urban and suburban areas. Now, the retailer is looking to add stores in communities "in the making." In other words, they're store "banking." opening up in areas that are not quite ready for a Wal*Mart but will be in the near future. They buy and build now, banking on future growth to make the store profitable, which it isn't now but will be in the near future. I give Wal*Mart credit for being forward thinking but it's nothing new, since Sears, Kmart and JCPenney were doing that 30 to 40 years ago. But as the costs of acquiring land and then operating these non-profitable stores grew, they stopped expanding based on future growth. Wal*Mart has the money to wait and they are. Smart and long-term thinking, something most retailers don't do.

Ranting on...I recently had a meeting to try and get the leasing for a decent sized, well-anchored center in an affluent market that has about a 5% vacancy rate. The owner had called me to set up a meeting saying they desperately needed help. I hadn't been to the center for several years, so I arrived early to walk the property and see what was happening. Except for being a little tired, the center was in good shape, well leased with a mixture of regional, national and local tenants. Candidly, I couldn't see what the problem was and I'm used to seeing problems. My first question when the meeting began was: "What's the problem. You have a 5% vacancy and the center looks decent, just needs a facelift."

The owner explained that they will be undergoing a major rehab shortly and will be replacing most of the facade, so they knew that problem without my help His concern is that the center's traffic has been off over the last few years (FYI: over 500,000 sq.ft. of new developments have opened within five miles in the last three years and, while the market is good, it's not that good) and about 10% of the tenants are complaining and asking for a rent reduction. I asked what they currently do to market the center to tenants and was told they wait for brokers to call. Not exactly a pro-active approach. I asked why they were not doing more and was told they never had to, enough people called in the past to keep the center leased. I explained that they were no longer that cute, little 18-year-old girl; they're now a mature woman who, before going out on a date has to put on makeup, spend time on their hair and dress right. Their body appeal ain't what it used to be, but that doesn't mean no one wants to date 'em.

I think this problem is too common today; we've all gotten a little fat and lazy after a decade of expanding retailers, tons of new developments and easy money. We, as an industry, don't pay attention to our existing centers. We're too busy planning the next center to be developed or acquired. Long term planning is not part of the gameplan and that's a problem. Back in "the good old days," it was a leasing agent's job to market a center even if it was 100% leased; replacing weaker tenants with more aggressive ones and having a tenant in their "back pocket" if and when an existing tenant defaults. It ties into a conversation Ann had recently with one of the ICSC's people. They were talking about the ICSC's "University" and Ann asked why they didn't teach a course on "marketing" a property from a leasing aspect. She was told that business has been so good for the last 10 years there's no need, and that's true unfortunately.

Parting thoughts: I'm trying to do a deal for a big box retailer I'm representing and, of course we're fighting over rent. After I made my "final and best" offer, I was told it wasn't enough and that they'd lose money on the deal. Now I don't claim to be bright or an expert on redevelopment, but "we" are taking a portion of a former "superstore" and I know the cost of TI for us, have an idea what the property costs, brokerage commission, etc. And my offer provides cash flow to the owner above all these expenses. When I explained this to the owner I was told; "What about the vacancies?" I replied "What do you mean?" and was told that there was a substantial amount of vacancies after doing the deal with us and if we don't pay more rent, they have a negative cash flow. Huh? You want me to guarantee the entire project is profitable even if I'm only taking a portion of it? No way. I tried to explain they had to add to their acquisition costs the cost of carrying the property for two or three years while looking for additional retailers, but they didn't seem to understand that concept. We have too many novices in the business. If, and when, the recession "hits," we'll eliminate many of them and that's good.

The Slowdown Is Here...Now What?

Well, the slowdown in the economy appears to be taking hold, getting stronger or weaker every day depending on how you look at it. But the downturn is still having a minimal effect on retail real estate (thank God, I need the money). Two observations I've noticed in the last month. First, as many of you know, we manage eight forums on the sale, leasing and finance of commercial real estate (to join, go to http://www.dealmakers.net/sub_unsub.asp). The amount of condos and conversions being offered on the forum for sale have tripled in the last month, mostly for Florida and Vegas properties, and I have to assume the reason for the vast increase in these offerings is that the speculators, who were developing or buying condos on the spec, are trying to get out now before they get massacred. Also, while not a scientific approach, we recently ran a help wanted ad for an administrative assistant and probably 25% of those applying were/are real estate agents wanting the security of a weekly paycheck instead of counting on commissions. Again, I have to assume the residential real estate market is becoming weaker and the tertiary players are not making money. However, to really complicate matters, every report I read says that leasing is up nationwide in almost every segment except industrial. Of course, to further complicate the matter, I was speaking to a friend of mine who represents a big box tenant that demands great deals. Long story short, he contends that in the last five months, the number and quality of 70,000 sq.ft. to 100,000 sq.ft. boxes being offered to them has quadrupled and the asking rent has dropped, and if leasing is strong, why are so many properties being offered to him? I'm confused.

I also see a "little" more resistance to low CAP deals, especially if you can get CDs paying 5.5%. And, most importantly, consumer spending was weak for a fourth straight month in June as rising gasoline prices left Americans with little to spend on other items (but July's sales numbers were good). A key measure of inflation rose at the fastest pace in more than a decade, not a good sign to keep the Fed from raising interest rates. The good news is that retail sales are still decent, but middle class and blue-collar oriented retailers seem to be slowing down their expansion plans. And to make matters even more interesting, is it's becoming "in" for non-retailers to acquire retailers, such as Lord & Taylor being acquired by NRDC Equity Partners and National Realty & Development Corp. The trend started 35 years ago when Arlen Shopping Centers bought E.J. Korvettes, which later went bankrupt and every developer since who has acquired a retail chain has filed either "11" or "7" after the acquisition. It's one thing to acquire a chain for it's real estate and then sell it off piecemeal (that makes some sense) BUT developers can't retail and retailers can't develop; totally different skills are required.

Now some good news: in conversations with smaller retailers (we call 500 to 750 retailers a week because of TenantSearch). We're hearing that the smaller chains (under 25 stores) are doing well and want to expand, a substantially higher percentage than we hear when talking to the "big boys." I guess the philosophy that smaller chains can respond to their customers quicker and more efficiently than the larger chains is correct.

All that being said, I've also spoken with a dozen buyers of low CAP centers and, while the CAPS are slowly rising, they still don't make sense. What's worse is that the only decent centers they're finding available are still being offered at a 6.5% CAP, about what they are paying for money, so they can't justify the deal. Also, in conversations with numerous developers and brokers, they say they're busier this summer than usual, so all the news is mixed with good news coming Monday, Wednesday and Friday and bad news on Tuesday, Thursday and Saturday. If you understand the economy please let me know 'cause I'm confused.

On a different topic, we're working on a center that, being polite, I could call "problemed" but being honest it's a disaster. Anyway, we got a "big box" tenant to make an offer, a rotten one but an offer. The center is 80% vacant and they're willing to anchor 60,000 sq.ft. at terms extremely favorable to them. I made the offer to the owners and had my head handed to me (Oh, no cash outlay is required by the owner, just cheap, cheap, cheap rent).

Yes, I understand that the deal stinks BUT the center is in a high-crime area, low income and the last deal made there was two years ago with a beauty salon of 1,200 sq.ft. at $8 per sq.ft. and their rent is always late. The owner's argument is IF the tenant believes in the property, they should make a "respectable" offer. Huh? Just because the landlord owns a dog doesn't mean the retailer wants to be stuck (oh, besides low rent, they want kickouts) with their problems. They're willing to give it a try and if they succeed, the landlord can succeed by being able to lease the satellite space (that's the philosophy of the '80s but the economy has been so good for so long, the newbies don't know and the old farts have forgotten the basic rules. FYI, I'm one of the old farts. Hell, I still use DOS software occasionally.

When you have a "winner" center, charge high rents since retailers can and will pay for proven success. The retailer may bitch but you can justify the extra money BUT when you're stuck with a dog the risk is on you and NEVER, never kill the messenger (the broker) because you don't like the deal. At least an offer was made, which is better than no offer at all.

Going on with a personal rant for the moment, I recently went to Best Buy to get another computer and monitor for the office. I spent about 20 minutes looking at their selection and finally decided on what I wanted but there was no inventory for the two items in sight, so I looked around for a salesperson, which took another 10 minutes to find. He was waiting on another customer and, after a moment of me standing nearby, said there was another customer he'd have to help after this customer, so it would be awhile. I asked if there were any other salespeople around and he said no, so I left and went to CompUSA and almost the identical scenario occurred. I became extremely frustrated and left, went back to the office and spent 10 minutes online with Dell Computers where I placed a $1,300 order for a monitor and computer. Three days later it was delivered to our office. I understand that $1,300 won't make or break Best Buy or CompUSA, but I have to believe I'm not the only customer that storms out of their stores because of incompetency. I'm willing to bet they lose million$ every year because of a lack of help. In the "pre-Internet" days, stores might be able to get away with poor service, but with such a convenient, easy to use competitor called the Internet, more retail store sales will be lost to the Net because so few retailers believe in service. They're more concerned about keeping payroll costs low than keeping the consumer happy and therefore force the consumer to shop online. The Internet will not cause the demise of physical retail locations, but it will cause the end of marginal stores for retailers that can't get their act together.

Parting thoughts...In addition to the troubled center I've described above, we're working on another problem property that's for sale. We spent about a month marketing it and couldn't generate any interest or offers, so I called the owner and suggested he try another brokerage company. He asked what I thought of auctions to get rid of the property. I said the good news is that they can generate high interest in a short time period (but you need a good auction company that knows how to market), but it's my experience they don't generate a sale, but do generate "leads." After the auction is over, you contact everyone that bids and see if there's a way to structure a deal, and in 50% of the time, a deal is done. Of course, to make this work, you have to have a reserve, and with a reserve many potential buyers won't bid. No system is perfect, but it's worth a try. Personally, I'm not an auction believer.