Chicago Was Hot and So Was The Cheesesteak

Alyson and I attended the Chicago (oh, congratulate her, she's now our vice president) ICSC dealmaking event and, besides the beautiful weather, the show was "hot," with some 3,400 dealmakers in attendance, setting another record, which all the shows seem to be doing for the last few years. And while I'm hopeful, I doubt this trend can continue, especially with all the mixed economic reports that have been coming out for the last few months (I know I keep saying this but eventually I'll be right).

There were two major complaints I heard at the show: 1) the 45 minute to hour and a quarter wait to get your photo and badge IF you didn't pre-register and send in your photograph on time. About 25% of the attendees had not mailed in their photo, which caused the long waits. I recommend to anyone planning on attending future shows that they e-mail their photos to the ICSC NOW so they're not stuck in these lines, especially for Vegas where the wait might be hours. The good news is that at the New York show photos won't be required because they don't have the space in which to take 'em. BUT most of the other shows and Vegas will require it, so don't stall, just do it; 2) was the lack of "real" retailers. There were lots of brokers representing retailers but few actual ones. The only large group of retailers represented was fast food-oriented and some banks. While the Philly show didn't have a problem with registration, the complaint about the lack of retailers was the same.

Anyway, back to Chicago. I attended the Harold Eisenberg Memorial Dinner the night before the show and it was a sellout with 550 in attendance. It pays to attend this event; not only are you supporting a good cause, but you're also getting a great networking opportunity at the same time; two for the price of one (Oh, and the food at the dinner was fantastic).

The ICSC cocktail party the following day was jammed and what was really surprising was that the food was decent (no, I don't have a food fetish). Everyone was upbeat but concerned that the good times can't last much longer (I am not alone). Once again, I heard complaints about the price of acquiring centers and how they're getting a 10% return when they purchase industrial, which a lot are now doing since they "say" they've given up on retail (I don't believe 'em, they've made too much money off of it). The Chicago show, more than most dealmaking events, attracts small developers (other shows that attract these entrepreneurs are Atlanta and Charlotte), in addition to the Simons and Kimcos. I'm more at home with the "little guy" than the "Simons" of the world. They move quickly, know what they want and understand that if they don't produce they die. And above all, since most are self made millionaire$ they're not too conceited or arrogant. The large companies have one major advantage over 'em, MONEY, lots of it, which usually covers their butt on some of their dumber moves. Because the larger companies have been doing so well lately, they can afford numerous blunders before they're in real trouble. The little guy doesn't have that luxury. Now I'm not saying the big guys are dumb, I just believe their size prevents them from making the most logical and efficient decisions (bureaucracies are a bummer). For example, larger companies add to their layers of leasing personnel by having individuals that specialize in "Big Box," medium box and small shop leasing. I'm waiting for them to add a specialist for Chinese buffets. Makes no sense to me; can't their people handle the whole gamut of retailers wanting to lease space in a particular center? It really isn't that hard. Anyway, rambling on, I read an article in SCT Xtra that lifestyle centers will represent 65% of all new developments over the next three years. If that's true, a lot of "poor" performing centers will be built, as lifestyle centers, by their nature, are not meant to be located at every street corner (it's not the concept I have problems with; it's the execution). The economics of these centers don't work for Middle America and the "upscale" consumer represents only 15% to 20% of the population, so there's limited markets they make sense in. Plus, a lot of these "lifestyle" centers are really power centers in disguise, using lifestyle as a name because it represents today's "vanilla."

Every mall developer is converting their "C, D and F" centers to mixed-use and lifestyle centers, and I contend that in 60% of the cases these redeveloped projects will fail. It's a little like 25 years ago when all the failed malls were being converted to outlet centers. The developers believed they found the magic cure, but five years later the failed center was still a bummer. Then they believe their "salvation" was entertainment centers and that also failed. To prove I'm old, I remember my grandmother living over retail stores in Newark, NJ in the 1940s and saving up money so she could move into an apartment, which was considered more prestigious. Today, the condo over the retail is considered upscale, proving my grandmother was a smart lady.

Rambling on...Ann, Alyson, Terry, Rich, Josh and myself attended the Philly show the following week after Chicago and another winner in attendance was posted; Philly was smaller than Chicago (the East Coast considers the Philly and the New York shows as "theirs," so many wait for December to attend a show instead of attending both. I disagree, but that's what makes horse racing. Attendance was up about 400 to 2,300 this year over 1,900 last year. The cocktail party the night before was jammed with everyone upbeat. After the cocktail party, most attended private parties such as Fameco's event at the Hard Rock (which was the busiest). Legend Properties' party was packed also and they announced Maria Aristone was appointed president of the company; they bumped Jim Depetris to chairman. Smart move on their behalf. Also, Marcus and Millichap and Metro Commercial had parties, which were packed. One thing our industry does well is eat, drink and party.

The Philly show got off to a slow start on Thursday morning, but by 10 a.m. it was hectic and stayed busy until the end at 3 p.m., which is good. It used to be this show ended right after lunch, so its value over time is improving. The best comment I heard at the show was from Rene Daniels, who said: "Lot's of people present, but few decision makers." Cute, but unfortunately true. As our industry expands we gain membership, but the ability for these dealmakers to make decisions is lacking, which is why every deal takes forever to be finalized. Oh, I read an interesting article last week; the author contends that if we don't have a good Christmas (guesses are between 2.5% to 5% in sales increases) then Sears will start selling off underperforming Kmart and Sears stores, just what our industry needs, more available real estate.

Mickey Hits Another Home Run

Ann, Alyson, Terry and myself attended the Orlando ICSC dealmaking convention, which proved to be another home run. Lots of busy and happy dealmakers gathering for three days to wheel and deal, a task they were all equipped to do and do well.

The cocktail party on Sunday, while active, seemed (but I'm not sure) to have a little less in attendance than in the past, and I have two theories why (the third is I'm wrong) 1) Airfare and hotel costs have gone up, so some elected to come for one day less to save some expenses; 2) There was confusion on which day the cocktail party was, many thinking it was on Monday, not Sunday night. Either way, the show itself ended up with nearly 5,000 attending over last year's 4,300 and the cocktail party was a success with all attendees being in an upbeat mood. We can't ask for more than that.

The reoccurring complaint I heard was on the increasing costs of construction and insurance in the Florida market since last year's hurricanes. The details have been reported everywhere, but I'm told some insurance costs have gotten close to the $3 psf mark and construction costs are up 25% to 30%. Some claimed that it marks the beginning of the end of Florida's great retail market, but I doubt that. It will make dealmaking more difficult, as more secondary sites are rejected and greater "discussions" on acceptable rents than in the past occur. The great curse of life. May you live in interesting times.

Ann and Alyson attended the Ladies in the Biz cocktail party on Sunday and they seemed happy with the networking opportunity and the excellent turnout. From what I could see, the booths at the actual dealmaking show were sold out with just a few no-shows, so by every definition, Orlando was a winner, as has become tradition with this event. Every exhibitor I spoke to expressed satisfaction with the show, so even with some problems on the economic horizon, the Florida market is still hot. Of course, trying to figure out the economy is impossible; One day inflation is down, the next up. One day consumer spending is up, the next down. One week, unemployment figures are up, the next down. It's totally confusing, and anyone claiming to understand what's happening is a fool or a liar.

I'm writing this during the last week of August and, to say the least, business is slow, at least from the brokerage end; publishing is busy preparing for all the upcoming ICSC dealmaking events. Phone calls have slowed to a trickle, most people I call are on vacation or getting ready to go on one and 99% of the deals scheduled to open for this coming Xmas season are finalized, so no one is under pressure to do a deal; they want to enjoy what's left of the summer. Hopefully, as has been true in the past, this changes after Labor Day and business becomes hectic once again.

The hunt to find centers for sale is as strong as ever, with most of the brokers and buyers confused and frustrated on why CAP rates aren't going up as interest rates have (In theory, they have; in realty, they haven't). I guess the only logical answer is "If they can get their asking price, whether it makes sense or not, why not." The single largest complaint I constantly heard was where/how to acquire property that makes economic sense, and there is no answer. Where I'm really confused is all the reports that I've read contend there's a slowdown in leasing and retail sales, but in the majority of markets, rents are still increasing and a retailer has to be a real fool to pay higher rents on declining sales. I must be the exception to the rule because every property we're leasing I'm finding it harder to get decent rents and tenants are fighting harder on renewals. Of course, some of it is sticker shock, when after 10 years a tenant's rent goes from $7.50 psf gross to $18.25 psf net, it can be difficult to accept. Of course, the retailer's gross has increased substantially over the years and that they have no problem accepting higher sales volumes and the incoming profits.

Another change in the sale of properties is that, while CAP rates have not risen, it is taking longer to make a deal and I've noticed more deals are coming back onto the market after a LOI was signed. Deals seem to be dying more often; it now often takes several acceptable offers from different buyers before an actual deal is finalized. If the due diligence doesn't come through perfectly the buyer wants to renegotiate.

Switching subjects, Josh, as I mentioned attended the ICSC's University in Lansing, MI and they appear to have done a decent job of teaching him the basics and providing lots of networking opportunities, many of which will probably last him a lifetime. The reason I think they did a decent job is that he came back with lots of buzz words and sat down with Ann and myself and explained all the things we've done wrong over the last 30 years. God, I never realized how ignorant I've been. I guess that's what children are for, to point out all your mistakes. Forgetting the sarcasm for a moment, the University was well worth the time and money involved. Josh said the "teachers" were great and over the five days he had 10 or 11 teachers covering all aspects of leasing and management. It reminds me a little of talking to him after his first day of kindergarten; I was more excited than him.

On a different note, we're marketing a center for sale that, to say the least, is problemed and we're having trouble generating any interest. I called a few brokers I know who specialize in sales and said we should co-broker and then sent out a complete package. A week or two later one of the brokers called, saying very apologetically that one of his clients made an offer but he was ashamed to make the offer. I used a line from Lee Cherney of Kin Properties; "As long as you don't insult my kids or wife, I won't take it personally. So give me the offer." He was right, it was low ($10 psf to buy) and I promptly turned it down, BUT I did call the seller and tell him of the offer. The good news is that, even though he didn't accept the offer, he didn't get uptight and came back with a counter offer, which the buyer turned down, but at least I got him an offer. The other brokers reluctant to present a low-ball offer reminded me of a trend I've noticed over the last few years. The amount of real "horse traders" in our industry is declining. I'm not talking the typical deal between a landlord and tenant where the rent starts out at an asking price of $25 psf and ends up at $19 psf, but on marginal properties for lease or sale. It used to be that companies and individuals would make an offer on marginal centers IF the deal could be bought "right" (and there are still companies that only want marginal properties where they can get in cheap), but I guess that secondary centers are either too much of a risk or too much work for most of the "next generation" to be bothered with. Nickel and dime negotiations aren't popular anymore to many (not all) companies and too many people seem ashamed to make a low ball offer; a big mistake in my opinion.