2006, Not As Great As 2005 But Still Great
Alyson just got back from the Palm Springs show (next year it will be in San Diego, one of my favorite areas in the country. Actually it's La Jolla that I love, the town north. But either way it's a great place to bum. The reason for the change is the hotel in Palm Springs can't handle the increasing size of the ICSC show, a problem we might have in New York). She said that the show was active, with a possibility of nearly 6,000 attending this year compared to last year's 5,240, so California dealmakers are a happy lot. The cocktail party was active, with everyone upbeat, and meetings were being held at every available table. Lee Cherney, a friend and VP of Kin Properties, was there trying to find property for sale. He contends that acquisitions have gotten so tough that one broker didn't want to deal with him because his company knows what they're doing and therefore makes the deal more difficult (a dumb buyer is the best kind of buyer). Another developer told Lee he's currently building shopping centers and then immediately flipping 'em at a 5.25% CAP in California. I'm getting 5% on my CDs. Something is wrong here.
Ann and I are going next week to the Texas dealmaking, and the following week Josh and I are attending the Atlanta show. And in two months, the "mother-in-law of all mothers-in-law," the New York show will be here (God, the year is going fast). Every indication is that the next three shows will also be good, and in all probability New York will set another record, so 2006 appears to be ending with another banner year for the retail real estate industry; maybe not as good as 2005, but what's the difference between an "A" and "A-minus"?
The great unknown is Christmas 2006 and how good or bad it will be. If it's good, we're in for a great start in 2007. If not, lots of retailers will be re-evaluating their expansion plans and a couple of the weaker chains will go bankrupt. Standard operating procedure for a weak Christmas. So far, indications are that while some of the economy is slowing, retail is holding its own; don't understand how or why, but it is. Of course, the ongoing wars, who wins the elections in November, which way interest rates go and the price of oil will all have an impact on us, but right now we appear to be in decent shape. But the smart money, I don't believe, is betting either way. They're as confused as I am. Oh, and the Federal Reserve is saying there will be more defaults on commercial real estate loans. We live in confusing times.
On a different note, I read that Kimco bought 19 centers from GE, which in itself is not significant (they're buying all the time), but the article goes on to say they're in the process of flipping these centers to an investment group, which is now part of their operating philosophy. Buy, Sell, Flip. If anyone did an analysis of Kimco's sales, I'd be willing to bet that from a sales aspect, they are among the largest brokers of retail real estate in the country. I have to give Milton Cooper credit, he's probably the smartest man in our industry. He JVs, manages, buys, sells, loans and anything else that can make a buck. He not only sells the pig, but also the oink. No one does it better. The only thing that scares me is that one company controls nearly 5% of all the centers in the country. Big always bothers me; That's why I hate the government.
Oh well, ranting on. A trend I've noticed since Josh joined the company (he has several freestanding buildings for lease and has gotten involved in leasing smaller space than I'm usually involved in). Because of his canvassing, he's dealing with the smaller chains (under 20 stores) many who want to buy their real estate instead of leasing, wanting the benefit of appreciation or to take advantage of the full value they bring to a location when they open and bring additional traffic to a center. Besides his properties, I'm leasing/selling some vacant big box stores and I must get five to 10 calls a month from brokers representing "big box" retailers (over 50,000 sq.ft., but small chains) wanting to buy distressed centers with large vacancies that their client can open and operate in. (Oh, I also noticed in the last few months an interest from some entrepreneurs to open flea markets in closed big boxes. I haven't gotten these types of calls in years). Half of the tenants Josh is canvassing for on his freestanding buildings expressed interest, but only want to buy and won't lease.
On the same note, we're marketing a 200,000 sq.ft. center with a vacant 100,000 sq.ft. store and I've been approached by several retailers wanting to buy (which the owner is willing to do and the asking price is low at $15 psf, but the buyers want it even lower). One retailer offered our asking price, but wanted "us" to take back paper for the entire amount, pay interest of 6% and provide no real guarantee. They couldn't understand why their offer was rejected. I also noticed that there's lots of bottom fishers in the smaller chain market (the big boys aren't the only ones), offering to move fast if we did a deal 20% to 30% below market. I guess they're all hoping to find a desperate owner. Now, I understand lowballing if you're buying and intend to be the landlord, BUT if you're going to operate a store in the center, it should be location, location, location and demographics being the most important part of the deal, not the cheapest deal that determines if they proceed. Their main business should be retailing, not real estate (on the same philosophy, I think it's crazy when a developer buys a retailer). If, and when, the recession hits, we could be in deep trouble. Few buyers or retailers seem to be concerned about the fundamentals of retailing or real estate anymore.
On a similar note, while we're encountering tough negotiations with the smaller chains, I noticed some of the larger developers, brokers and retailers are taking a totally different approach. I know I spoke about this before, but we're an industry of horse traders (and I'm proud of that fact) and I don't understand this change, the reluctance NOT to horse trade (there's nothing wrong with tough negotiations, but being a tough negotiator and NOT making the deal is NOT an attribute. Being a tough negotiator AND making the deal is a mark of success). I gave a proposal on an outparcel to a developer of "dollar stores," and they came back saying it's too high and then I practically have to beg to get 'em to make a counter proposal. When I asked why they can't come back with a counter proposal, they claimed that the difference is too big. He contended that a million was too much. It took me a month to get him to counter offer at $500,000 and we finally agreed, but why was it so difficult?
Speaking of Josh (remember he's my only begotten child; that I know of). He's proving what I've always knew, but have to be reminded of, canvassing pays, and pays big. Thanks to several friends who gave him centers to work on, he's been doing a decent job of canvassing and in the last three weeks brought in seven or eight proposals. Only one was acceptable but seven or eight proposals ain't bad. The ma&pas are still expanding, but they need someone to call on 'em to get their interest going.
Talking about deals, I also noticed most of the big box users are beginning to become easier (not easy, just easier) to deal with than in the past. I have to assume the reason for this change is not that I've become a better negotiator, but it's getting harder for them to find sites and the amount of vacant big boxes in decent locations is minuscule. However, Real Estate Research Corp. just came out with a report saying that because of the low CAP rates, retail has the lowest interest of buyers of commercial real estate. In addition, second quarter vacancies rose from 7.6% to 8.5%. Maybe too much of a good thing is bad.
Ann and I are going next week to the Texas dealmaking, and the following week Josh and I are attending the Atlanta show. And in two months, the "mother-in-law of all mothers-in-law," the New York show will be here (God, the year is going fast). Every indication is that the next three shows will also be good, and in all probability New York will set another record, so 2006 appears to be ending with another banner year for the retail real estate industry; maybe not as good as 2005, but what's the difference between an "A" and "A-minus"?
The great unknown is Christmas 2006 and how good or bad it will be. If it's good, we're in for a great start in 2007. If not, lots of retailers will be re-evaluating their expansion plans and a couple of the weaker chains will go bankrupt. Standard operating procedure for a weak Christmas. So far, indications are that while some of the economy is slowing, retail is holding its own; don't understand how or why, but it is. Of course, the ongoing wars, who wins the elections in November, which way interest rates go and the price of oil will all have an impact on us, but right now we appear to be in decent shape. But the smart money, I don't believe, is betting either way. They're as confused as I am. Oh, and the Federal Reserve is saying there will be more defaults on commercial real estate loans. We live in confusing times.
On a different note, I read that Kimco bought 19 centers from GE, which in itself is not significant (they're buying all the time), but the article goes on to say they're in the process of flipping these centers to an investment group, which is now part of their operating philosophy. Buy, Sell, Flip. If anyone did an analysis of Kimco's sales, I'd be willing to bet that from a sales aspect, they are among the largest brokers of retail real estate in the country. I have to give Milton Cooper credit, he's probably the smartest man in our industry. He JVs, manages, buys, sells, loans and anything else that can make a buck. He not only sells the pig, but also the oink. No one does it better. The only thing that scares me is that one company controls nearly 5% of all the centers in the country. Big always bothers me; That's why I hate the government.
Oh well, ranting on. A trend I've noticed since Josh joined the company (he has several freestanding buildings for lease and has gotten involved in leasing smaller space than I'm usually involved in). Because of his canvassing, he's dealing with the smaller chains (under 20 stores) many who want to buy their real estate instead of leasing, wanting the benefit of appreciation or to take advantage of the full value they bring to a location when they open and bring additional traffic to a center. Besides his properties, I'm leasing/selling some vacant big box stores and I must get five to 10 calls a month from brokers representing "big box" retailers (over 50,000 sq.ft., but small chains) wanting to buy distressed centers with large vacancies that their client can open and operate in. (Oh, I also noticed in the last few months an interest from some entrepreneurs to open flea markets in closed big boxes. I haven't gotten these types of calls in years). Half of the tenants Josh is canvassing for on his freestanding buildings expressed interest, but only want to buy and won't lease.
On the same note, we're marketing a 200,000 sq.ft. center with a vacant 100,000 sq.ft. store and I've been approached by several retailers wanting to buy (which the owner is willing to do and the asking price is low at $15 psf, but the buyers want it even lower). One retailer offered our asking price, but wanted "us" to take back paper for the entire amount, pay interest of 6% and provide no real guarantee. They couldn't understand why their offer was rejected. I also noticed that there's lots of bottom fishers in the smaller chain market (the big boys aren't the only ones), offering to move fast if we did a deal 20% to 30% below market. I guess they're all hoping to find a desperate owner. Now, I understand lowballing if you're buying and intend to be the landlord, BUT if you're going to operate a store in the center, it should be location, location, location and demographics being the most important part of the deal, not the cheapest deal that determines if they proceed. Their main business should be retailing, not real estate (on the same philosophy, I think it's crazy when a developer buys a retailer). If, and when, the recession hits, we could be in deep trouble. Few buyers or retailers seem to be concerned about the fundamentals of retailing or real estate anymore.
On a similar note, while we're encountering tough negotiations with the smaller chains, I noticed some of the larger developers, brokers and retailers are taking a totally different approach. I know I spoke about this before, but we're an industry of horse traders (and I'm proud of that fact) and I don't understand this change, the reluctance NOT to horse trade (there's nothing wrong with tough negotiations, but being a tough negotiator and NOT making the deal is NOT an attribute. Being a tough negotiator AND making the deal is a mark of success). I gave a proposal on an outparcel to a developer of "dollar stores," and they came back saying it's too high and then I practically have to beg to get 'em to make a counter proposal. When I asked why they can't come back with a counter proposal, they claimed that the difference is too big. He contended that a million was too much. It took me a month to get him to counter offer at $500,000 and we finally agreed, but why was it so difficult?
Speaking of Josh (remember he's my only begotten child; that I know of). He's proving what I've always knew, but have to be reminded of, canvassing pays, and pays big. Thanks to several friends who gave him centers to work on, he's been doing a decent job of canvassing and in the last three weeks brought in seven or eight proposals. Only one was acceptable but seven or eight proposals ain't bad. The ma&pas are still expanding, but they need someone to call on 'em to get their interest going.
Talking about deals, I also noticed most of the big box users are beginning to become easier (not easy, just easier) to deal with than in the past. I have to assume the reason for this change is not that I've become a better negotiator, but it's getting harder for them to find sites and the amount of vacant big boxes in decent locations is minuscule. However, Real Estate Research Corp. just came out with a report saying that because of the low CAP rates, retail has the lowest interest of buyers of commercial real estate. In addition, second quarter vacancies rose from 7.6% to 8.5%. Maybe too much of a good thing is bad.
posted by tedkraus at 2:01 PM
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