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.
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.
posted by tedkraus at 7:47 AM
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