Retail Real Estate -MyWay

After 35 years, I'm Still Working in the Trenches...And After You've Been

2007-03-23T07:45:00.000-07:00

After 35 years, I'm Still Working in the Trenches...And After You've Been
Working the Sewer Long Enough, You Think Everything Stinks.

I attended the Washington, DC ICSC Dealmaking show and, attendance-wise, it
was a hit, with 2,300 dealmakers present, up about 10% from last year. Can’t
complain about that. Tuesday night’s cocktail was a super success with the
hall jammed. (But the food was horrible even though it was a sponsored
event. As I say, you don’t go to these events for the food, but it would be
nice to be able to nosh while networking.) I spoke to a dozen or so people
at the cocktail party who came for the party, but weren't attending the
actual dealmaking. Makes no sense to me.

The luncheon on Tuesday with Sam Donaldson as the keynote speaker was
jammed, as were the retailers' runway and classes held in the morning.
Everything "jelled" and people were upbeat. Nearly everyone I spoke to was
happy with their leasing activities for the year so far, but many said they
noticed a mild slowdown. (I heard that at the Chicago and Charlotte shows
also.) While the residential real estate market may or may not be having a
meltdown, the desire to acquire shopping centers is as strong as ever, with
several people mentioning they were being offered strips at a 5 ½ CAP rate.
It’s insane out there. One company president I spoke to said he wouldn't buy
a center at less than an 8% CAP. I asked when was the last time he acquired
anything and it was two years ago.

Wednesday, the day of the actual dealmaking, was another story. There were
forecasts of snow for the day before and the day of the dealmaking. Most of
the attendees became paranoid and left early. My questimate is that 30% left
by 1-1:30, but it still ended up a decent event and worth attending. Unlike
the Chicago show a month ago, where it also snowed (but anything under two
feet of snow doesn’t faze anyone who lives in Chicagoland), Mid-Atlantic
people tend to be more "meek" and get uptight when they hear the word
"snow," but they made sure to make all their appointments and network as
much as possible before heading out.

Even with so many punking out early, everyone present definitely wanted to
do a deal. Of course, the fact that the DC market is one of the most stable
areas of the country doesn’t hurt and I heard many of the retailers
complaining that the rents were getting out of control, but I’ve been
hearing that for a decade and it doesn’t seem to stop most from expanding.
All the retailers I spoke to complained about CAM charges and contend the
developers are ripping them off.

Without going into a "Josh" story, he couldn’t attend the DC show because he
was at the ICSC school at Wharton in Philly. His opinion of the instructors
and learning were high, but what I found most interesting is that he
contends that about 25% of those taking classes were former residential
sales people who now want to get into commercial. That should be an
interesting addition to our industry He also contends another large segment
of attendees were "support" personal (legal, finance, operations) that
wanted to gain some insight into leasing, since in most cases, lawyers and
bean counters have absolutely no idea what we do for a living or how
difficult it can be. But after three days of schooling, they should be
instant experts. Yeah, right. Oh, Josh went to the AZ ICSC show, and while
it’s a smaller event than most (under 800 attendees), he contends it was
upbeat, and, because he’s new to these events, he felt the show should have
lasted two or three hours longer. Can’t agree with him on that, but his
attitude is right. He also said he saw more new development at this show
than any other. He just called me from the Monterey show and said the
retailers' runway was packed with people.

On a different note, "we" (the Dealmakers) have done several e-blasts (we
send an email to 55,000 real estate pros on behalf of retailers) looking for
space. The response rates are excellent, but what’s really interesting is
the amount of "problemed" real estate being offered. In one case, the same
retailer was offered four different locations within one mile of each other
in the same town on the same road. Talk of a problem market. One of the
respondents was an experienced leasing professional, but in his email he
said: "And my location is far superior to that of Rouse's mall, a 1/4 mile
away. All the tenants in their center are leaving, mine have been here for
up to four years." Not a great response, but an interesting approach to
leasing in a weak market.

The good news is that with the industry expanding like crazy for the last
decade, the amount of vacant retail real estate is minimal. Nationwide, we
just have a few weak "pockets" to deal with, so with few exceptions, the
"bottom fishers" (and I say that in the most respectful manner) are having a
hard time finding as many locations as they want (and can justify rent for).
I tend to exaggerate when it comes to the amount of “C” and lower retail
properties available because after 35 years, I’m still working the trenches,
and after you’ve been working the sewers long enough, you think everything
stinks. But there’s been a major decline in vacancies, even in low quality
property. If you can’t lease now, maybe you should look into changing the
use of the center or get another job.

On another topic, one of the biggest complaints I hear at all the shows is
the difficulty of finding somewhat experienced leasing people. At least five
companies have called me this month alone wanting to know if I knew of
anyone "looking." What’s "cute" is that they all say: 1) I don’t want to
hire some dumb broker. (Duh, any idea what I do for a living?) and 2) We don
’t want to hire any "old" geezer. (FYI, I’m 61, I guess I’m an old geezer.)
But, they’re all willing to pay a decent buck for a warm body with two years
experience. While I don’t think I’d be willing to start over again in this
industry if I was in my twenties, the starting salaries are great compared
to what we "old geezers" made. Of course, as my grandmother would have said,
bread was only five cents a loaf in the good old days. The salaries in our
industry are high -- for the moment. Of course, if you can't lease or
acquire, you're fired fast, but that's part of the game.

Oh, before I forget, I highly recommend you make your plans for Vegas NOW,
as there’s a good chance this year will be another record-breaker. I’m told
many of the hotels are sold out and we just got our plane reservation and
finding desirable times was difficult, since many of the direct flights were
already booked.

On a different note, several years ago we worked on a center that had a
closed Kmart and the small shops were struggling because of a lack of
traffic. We brought the owner several offers running between $3.50 and $5
psf but were turned down because TI was required. Long story short, he
leased the Kmart to a flea market for $3.50 psf but no TI, just six months
free rent. I recommended against doing the deal but then, what do I know? I
just got a call from him today wanting to know if we’d try leasing again. He
lost 90% of his small shops and just bought out the flea market. (Guess he
ended up paying TI after all.)

As we talked, he explained he now needs $9 psf net, since he has to get back
the money he spent buying out the flea market. I tried to explain that his
"costs" didn’t matter, only the market rent did, but he wouldn’t listen. He
also explained he wasn’t putting any money into the deal. It was "as-is,"
take it or leave it.

I suggested he try one of our competitors that I don’t like to do the
leasing and gave him their number. Some people never learn. His real estate
isn’t bad, but it’s not that good, so coming up with some TI isn’t
unreasonable. I had suggested he either sell the center now or find a JV
partner so he’d have TI money available, but that was rejected also.

Now don’t get me wrong, I’m not opposed to flea markets. In “my younger
days,” I did dozens of flea market, roller rink and bowling alley deals in
centers, but I always knew it wasn’t the best use for the property.
Sometimes you got to do what you got to do to keep a center alive. But in
today's world, where raising money is easy and finding a JV partner is even
easier, it makes even less sense to screw up the tenant mix.

Snow, Heat and Great Weather Couldn't Stop the ICSC From Having Terrific Shows

2007-02-22T11:56:00.000-08:00

I was at the Puerto Rico ICSC show, and while it's the smallest event we
attend every year, the show, with only 259 in attendance, was upbeat and
productive for this extremely cliquish group of dealmakers. As is the case
at most shows, for two days most of the attendees wined and dined at various
parties (I have to thank Thor Equities and Larry Campbell for invites to two
great dinners) and all did a great job of networking, which in reality is
the ICSC's major strength. What I found interesting is that retail sales are
down in PR between 3% and 5% (depending on who you're listening to since
they added a sales tax on the island) but rental rates are up. An
interesting combo. Anyway, for the three days I was there, the low in
temperature was 72 and the high, 86 degrees.

On the day we left PR, I complained to Ann about it being too hot and after
we landed back in Jersey, I started complaining about the cold. I guess Ann'
s right about me being a compulsive complainer. Oh, I've been coming to this
show for about five years and every year, three to six NEW retailers from
the states come to the event who hear how great the PR market is and hope to
open the island for their companies. After doing some primary investigation,
discovering how high the rents are and seeing the scarcity of space, 60% to
70% drop the idea of opening in Puerto Rico. I can vouch for these facts:
Rents are high and vacancy is low, worse than California. But what makes it
all worthwhile is high, high sales.

Going from the beauty and great climate of PR, I went to the Chicago ICSC
show. (The small one, not the biggie that occurs in Chicago every October.)
While attendance was respectable at 1,183, the weather sucked. It started
snowing when I arrived and the wind chill factor was -15 degrees at its
worst. Driving conditions, because of the horrific snow, were dangerous at
best and the starting day for the show was a mini blizzard. But dealmakers
are dealmakers and there was an excellent turnout for the cocktail party.
(But the food was blah, since it was a "non-sponsored" event.) But in spite
of the poor food and bad weather, the ballroom filled up with happy
dealmakers. For most in attendance, 2007 is stacking up to be a good year.

The next morning, the round table discussions and seminars were jammed. This
is a group that really wants to learn PLUS do deals and this was shown when
later that afternoon the Dealmaking area was jammed for three hours with
retailers, brokers and developers saying, "Do I have a deal for you."
Overall, anyone who attended couldn't complain.

I didn't attend the L.A. show in California, but Alyson did, and she said
the show with 801 dealmakers present was "OK," but not great. The cocktail
format for this show, since it was a one-day event, was different than other
shows in that the "cocktail" party was mixed with the actual dealmaking. So
you visit a booth and then eat, drink and try to be merry. (Puerto Rico has
a cocktail party the night before the show AND then has food as part of the
dealmaking. I guess they love to eat.) Everyone appeared upbeat, and there
were about 100 exhibitors with most in attendance staying past the closing
bell of 4 p.m., so chalk up another successful dealmaking

I don't understand the economy, since some days the economic reports are
great and the next day dreadful, but I have not been to an ICSC show in
years that hasn't been good. It's almost scary, and I don't expect that to
change in the near future. But now that I'm not being a contrarian, I guess
a recession will start.

On a different note, we (TKO) specialize in leasing and selling "problemed"
properties. (Or "value-added," as they are called today. But if you have a
great center for lease or sale, feel free to call. We'll be glad to work on
it.) Two of the properties we've been working on that are for sale are real
"challenges," and both now appear to be going under contract, BUT the
reasons being are 1) the centers are being sold cheap ($12 psf to $16 psf
and, more importantly, 2) in both cases the buyers had a retailer in place
to lease the vacant big box before entering into a contract. Doesn't take
Einstein to understand if you can buy a center for $13 psf, put another $25
into TI and then have a mini-anchor or anchor of 50,000 sq.ft. to 75,000
sq.ft. willing to pay $6 rent, net, not only are you improving the CAP rate
immediately, but you just started on the turnaround for the rest of the
center. I've noticed this as a trend over the last year or so and it seems
it's becoming more common. You have a second generation anchor, then go buy
a center. Used to be first you buy the center, then you find the anchor. All
these "pocket" tenants are either discount (usually low-end) or
entertainment-oriented and have difficulty finding locations at rental
numbers they can afford. By having a "preferred" developer (If CVS can do
it, why not mini-anchors?), they can control their growth better than just
making calls looking to lease space. I think it's great. I'd love to have
this type of relationship with some tenant. I could make a good buck.

Oh, I had an "interesting" phone call the other day. I get a call from
another broker wanting to know if I can help his client sell a 16-acre
parcel that he recently got rezoned for retail. I was told it was an "A"
location and leasing would be easy. My first question was, "Why are you
calling me?" I've learned over the years if it's easy and profitable, they
don't call me. I'm then told that they tried to sell the property to a major
developer I'm friendly with and were "insulted" by their offer. I replied
with, "Why not try and sell it to someone else if it's that good?" and was
told they "like" this particular developer. Since it was an outright sale,
that didn't make sense. The color green is the only thing anyone should care
about and they wanted my help to sell to that developer and that developer
only. I was confused.

Long story short, it costs the owner about $25,000 a month to carry the
property and the developer offered $5,000 a month for a year for an option.
I said that makes sense to me. What's the problem? In "the good old days"
when I worked for Arlen Shopping Centers in the '70s, we'd go out and get
some farmer to give a one- or two-year option for $200 a month on 20 to 100
acres. Build in inflation and it seems things haven't changed much in 30 or
40 years. The only problem I see is feeling insulted. (It's the sellers'
problem, not the potential buyers'.) You don't have to accept an offer, but
at least appreciate that they made one. Think about it: We must offer a
location to 60 to 100 retailers before any express real interest and make an
offer. At least with an offer we have a starting point and this buyer did
make an offer. Don't be insulted, be glad. The whole discussion didn't make
sense to me, so I turned down the assignment. Josh was in my office while
this conversation was being held and afterwards couldn't understand why I
didn't take the assignment. "We could make a commission," he said. (He's
greedy, which is good for a broker, but he's young and doesn't understand.)
I tried to explain we're a small company and it just doesn't pay to work on
projects that probably never will be made. Pick your assignments and then
make 'em happen. It probably took me 10 years in brokerage before I
understood this simple rule. Hopefully, I can teach it to him quicker.

Oh, another trend I've noticed is SOME, not all, CAP rates are moving
upward. It appears some sellers are now realizing that not all property is
created equal, and while prime locations can still command 6 1/4% CAPs
(California is at 5 to 5 ?%.), secondary or locations with short-term leases
and non-credit tenants are now going for 7% to 8 ?%. Maybe this is a trend
that will continue. (Who knows? It's a pure guess.) Some of the "younger"
generation people contend I don't understand the "new" economics. I contend
I do and they make no sense, especially if and when a recession hits.

Changing the subject. Besides taking forever and a day for a deal to close,
I think the boom of our industry for the last eight years has gotten a lot
of people to become either inconsiderate or unprofessional. Besides the
rudeness of NOT returning phone calls, I've noticed that a number of
companies are either sending or signing an LOI (which is never binding on
anyone) and then when the other party follows up, they don't respond.
Typical of that is we recently received an LOI from a tenant on a property
we're leasing. We, within hours, sent back a counteroffer. We then waited a
day and phoned their real estate rep. Didn't receive a return call, so we
e-mailed the next day. Still no response. We then e-mailed and called again
and again, no response. We called the VP of the company, got voice mail and
explained our problem. Still no response. Over an eight-day period, we
called and e-mailed at least seven times. Yes, I realize that the deal is
probably dead, but why not have the consideration to either return the call
or reply with an e-mail telling us to get lost. Purely unprofessional.

-----Original Message-----

Thank God the Fire Marshal Doesn't Work Hard

2007-01-08T14:06:00.000-08:00

It was a “really big show” to say the least in describing the NYC ICSC dealmaking, with a record of nearly 8,000 in attendance, all of whom were happy with their results for 2006 and looking forward (with some trepidation) to 2007. Upbeat is the most common word used to describe everyone’s outlook for the show and the New Year.

Ann and I got into Midtown on Saturday (Josh is still living at home, he won't be moving into his own home until the end of January) to get some “privacy” and rest up for a hectic three-day deal-a-rama. Saturday saw few
ICSC members checking into the hotel or walking the lobby, but by Sunday they were starting to fill the hotel rooms and Sunday night saw large groups going out for dinner to celebrate the holidays and renew friendships. On Monday, the crowds really started to pour in and the cocktail party was a great success. (Even the food was good, compared to the junk we were served for lunch on Tuesday.) There were mixed feelings on the new format for the Retailer’s Runway but attendance was packed for the event. Anytime this group can see or hear a retailer, they come in large herds hoping to be able
to "reach out" and “touch” ‘em.

The crowd for the three-day show was heavy to say the least and that caused many to complain...Of course, if the show wasn’t jam packed, they would have complained about the lack of attendees. These complaints led some to say the show should be moved and I couldn’t disagree more. Think it through logically. Sunday, Monday and Wednesday, the crowds were always under control. So the only time they were uncontrollable was on Tuesday between 11
a.m. and 3 p.m., for a total of four hours when it was a pain to walk the floor. (This is why we should be grateful the fire marshal doesn't work hard.) We can live with four hours of discontent if it means NOT going to the Javit’s Center. There are few benefits Javit’s can offer except for having more room. There are no hotels nearby and the traffic to get to and come from the convention area would be a nightmare. The ICSC tried having some booths at the Sheraton across the street from the Hilton, but it was a
lonely place for the exhibitors on Tuesday, the only day they could exhibit.

Either the ICSC has to create more of a critical mass of exhibitors for the Sheraton (which they can do over a three- to four- year period of time) OR my suggestion would be to use the banquet hall where we had the cocktail party as exhibit space and hold the cocktail party at the Sheraton. Anyway, the show was not only jammed on Tuesday, but continued strong until closing on Wednesday, something you don’t see often. Short of Vegas, it was the best
show of the year. Let’s hope this trend continues throughout '07.

I read an article in Retail Traffic that said investors' interest in retail was dropping and other forms of commercial real estate were replacing retail as their favorite child, BUT based on the hundreds of people dropping by our booth asking if we had anything for sale, they’re wrong. I think what has occurred is the A, B and C+ properties sold fast at a 6 to 6 ½% CAP and now the owners of C and lower quality properties are trying (but not succeeding)
to sell their projects at that same CAP rate. So, it's true, there is a slowdown in secondary centers at low CAP rates, but that means nothing.

Also, “everyone” wants “value-added” centers to acquire, but when the value-added center sells at a 6 1/4 CAP, even if you can succeed at adding value, you still might not make money. Offer an investor a decent center at 6 ½% CAP and see how quick it sells. Yes, other forms of investment might show better returns at the moment, but the crowd in New York LOVES retail and they prefer to acquire a strip than an apartment building any day. All that said, I still think the current prices of centers are insane. Also, we've all read of mega acquisitions done by the likes of Kimco and DDR etc.,
and there might be a drop in these mega-deal acquisitions this year, but the majority of centers in America are owned by "small" developers (I should be so small) and they're actively buying and selling every day with no slowdown in sight. In the majority of cases, they can do a better job of "adding
value" to a center than any REITs can, and let's be candid: How many of "us" can do a $1 billion to $5 billion deal compared to being able to finance a $1 million to $5 million acquisition. So, the small deals are still the future for the majority of us. Also, a complaint I've heard from numerous retailers is once either a REIT or mega company acquires a center, it's usually downhill for maintenance and TLC. The retailers' complaint is, under
their old ownerships, management was always around and the center was relatively well-maintained. After the large organization takes over, they rarely see "ownership," CAM always increases and the center, to some extent, deteriorates, and that's the good news.

While walking the floor, I noticed there were lots of space for lease being offered but not much in new construction and what was under development was usually either mixed-use (or lifestyle, whichever you prefer) or urban, the two “vanillas” of the day. We’re (TKO) leasing an urban project in Chicago proper and the politics and government approvals required are nuts. Because we have to deal with all sorts of city officials, this will be a three- to
five-year project just to get approved. You need deep pockets and a lot of patience to do urban development, especially when it comes to dealing with local officials and neighborhood organizations. On that same note, I’m trying to do a deal for a retailer in an urban setting and the site is
fantastic (millions of bodies in five miles) but the rent is insane. The center will take nearly five years to get all approvals and built, and the acquisition costs for the land were outrageous. The biggest problem with these properties is there’s a 50/50 chance they will never be built and the cash layout while trying for all approvals is huge. It takes a lot of guts
to do these deals, so the payout has to be big, and it is.

On a different topic, we recently did a survey to the members of the commercial real estate email forums we manage. (There are over 29,000 members and it’s totally free to join.) Great way to make deals in sales,acquisitions or leasing. To join, go to
http://www.dealmakers.net/sub_unsub.asp. Anyway, among the questions asked was: "Have you done a deal because of the forums?" It appears about 18% have finalized a deal on-line because of our forums. The next question was: "Do you post (That means, do you list property for sale or lease or list your acquisition needs) at least once a month to our email forums?" Over 70% of the people who had done a deal on the forums also “posted” at least once a
month. So, 70% of the people doing deals are also aggressively posting to the “world” what they have or need. The “doers” do and the rest watch. That, I believe, is similar to the readers of the Dealmakers. Most read, but a smaller percentage that are more aggressive, send in their press releases, available space, property for sale, etc. and I’m willing to bet dollars to donuts, they do more deals than the passive subscribers. The harder you
work, the luckier you get. Sending in your press releases, needs or
availability is easy and free. (Just email it to Ann@dealmakers.net or fax it to 609-587-3511. Just send it in, we’ll rewrite it to fit.) You should also do that to all the trade publications. (And send press releases to your
local newspaper.) If you follow my New Year’s advice, I guarantee you’ll do more deals in 2007.

Oh, before I forget, RETAILER ONE ON ONE is having their 2007 dealmaking conference on April 11-12th in Orlando. (This is NOT an ICSC event but I highly recommend it if you do work in Florida.) They have a great turnout of "real" retailers. For details go to
http://www.retaileroneonone.com/event.htm. I've gone for four years now and have never been disappointed.

Parting thoughts: Well, the results of Christmas are in, and while it wasn't the holiday most retailers wanted, it was "OK," meaning there will be less bankruptcies and expansions will continue, but I think the majority of retailers will be more selective on where they locate and what they'll pay, and will be asking for more TI money. Also, while there will be less Chapter "11's," there will be more retailers closing LOTS of unprofitable stores in 2007. The two big winners for Christmas '06 were electronics and "high-end
retailers," so look for these categories to expand big in 2007.

It’s All Over With, But the Shouting -- and There’s a Lot of That to Come

2006-11-20T07:33:00.000-08:00

The second largest gathering of retail real estate professionals of the year is coming together in New York and there’s a lot to celebrate. With 2006 ending up as being a great year (We can debate which was better, 2005 or 2006, but what difference does it make?), the big question is, “What will 2007 be like?“ and that’s a question that no one really knows the answer to. If they claim they do, they’re either lying or insane, but that won’t stop “the experts” from making predictions anyway. My answer? I have no clue. Right now, my money is on 2007 being decent but not as good as 2006. But, there are too many outside factors that can make 2007 a disaster (more can go wrong than right), so all we can do at the show is meet and greet old and new friends, go out and party in one of the greatest cities in the world and do a lot of dealmaking and praying. (Oh, before I forget, Alyson went to the ICSC show in Sacramento. It was a small show, with 350 in attendance (last year was 295), but she said the size made it "intimate" and very entrepreneurial. Right now, the show is marginal, but give it three or four years and it could be another winner.)

For good or bad, the change in Congress after the last election will have an impact on our industry and my “gut” says the Fed will raise interest rates in January or February. (Hopefully, I’m wrong) So, be prepared to live in “interesting times” for the next year.

There’s no doubt in my mind -- short of a blizzard (God forbid) hitting the show the day before or the day it starts -- New York will set another attendance record and, candidly, the Hilton can’t handle the crowd, but somehow we’ll all make it through the event and be better off because of it. What makes me feel old and sometimes not as successful as I thought I might be is when I speak to some friends of 20 or 30 years and I ask where they’re staying in New York. Many of ‘em reply, “I’m not going, I’m getting too old and tired for it; I’m sending 'my people' instead.” I guess I’m not important, because I still have to attend, along with “my people.” But then, I'll be in good company.

Talking about ICSC shows, several of the dealmaking conferences in other towns are being relocated because “we’ve” outgrown the old facilities. Unfortunately, the Hilton (short of the Javits Center) is the largest conference facility in the city and I personally don’t want to go to the Javits Center or move outside of New York, so we’re stuck with the problem, a great problem, but a problem.

Changing subjects, we’re an industry where you don’t have to be a rocket scientist to succeed and make a good buck, BUT I sometimes wonder if some (not all) of those in the business have any idea what they’re doing. I got a call last week on a building we’re leasing from another broker who inquired about the lease rates. I told ‘em we had a lease out on the property, but leave me your number and if the deal dies, I’ll call. He then asked what it would take to get his client the deal over the current prospective tenant and I said $13.50 psf, net. He then explained I was nuts, the market rent is only $10 to $11 psf and I agreed and said that’s what the current tenant is willing to pay BUT if the owner is going to be a whore, they want to be a well-paid one. We got into a major debate and I ended the conversation saying, “Why don’t I call you if this one doesn’t work out. I’d be a lot more cooperative.” He then called me a thief and hung up. Now don’t get me wrong, I have no pride. If my current deals dies, I’ll call him BUT I would have been less offended with being called a whore than a thief. I tried explaining that with a tenant “in-hand,” why would I even try to be “fair?” (Oh, both tenants have similar financial statements.) He wanted to me to do a deal with him for 25 cents-per-foot more; fortunately my client works 5th Avenue, not 42nd Street.

Anyway, changing topics again, retail seems to be dividing our industry like politics, but instead of blue and red states, we have high and low end retailers with the ones in the middle struggling. The Nordstroms of the world are doing great (department stores are "back in" with the consumer) but it seems that even the almighty Wal*Mart is having some problems. The middle class in America finds their purchasing power diminishing and they’re having difficulty surviving and when they hurt, so will our industry.

I’ve heard a dozen reports on what type of Christmas we’ll have this year, anything from setting records to down 3%. So, it’s a wait-and-see to find out how 2007 will start off. But what really confuses me is Wall Street. I’m the first to admit that finance is not my strong point but as I write this, the Dow is climbing because the Fed has indicated they won't be raising rates in December. That in itself I understand but the other news that Wall Street seems to be ignoring is that sales and, for many companies, profits, are dropping. To my way of thinking, I rather have higher interest rates along with good profits than lower rates and lower profits. I think there’s trouble brewing in Dodge.

When it comes to stupidity, right now, I feel like the king. A couple of months ago, we got a shopping center to sell and through a MAJOR miscommunication on my behalf, we underestimated the income by $150,000. During this period we received several offers for about $1 million less than the owner wanted and I, by pure luck, convinced the seller to lower his price substantially. Long story short, we finally got an interested party that, before going into a LOI, wanted more information than what we had. So, I requested it from the seller and after reviewing the numbers, realized my screw-up and before sending the info out to the potential buyer, I called the owner and confessed to my stupidity. He asked how long it would take to “repackage” and get new offers and I said 60 to 90 days, whereby he responded, "No, close faster at the lower price." (Thank you, thank you, thank you.)

I then sent the info to the buyer and told him of my screw-up. To say the least, he was a happy camper but wanted to know if he was competing with anyone else. I said, “Yes and no.” No one else had received the updated information BUT I will be resending the new numbers to companies that made unacceptable offers in the past, explaining my screw-up and seeing if there was new interest. It was then that the conversation got nasty; he contended I was being unfair (at least he wasn’t calling me a thief) and should not provide the income statement to anyone else.

I asked if he was prepared to go into contract and he replied, “Not for another week.” I said that I therefore HAD TO keep marketing the property. We’re still talking and I do believe he’ll make an offer, but we’re not as friendly as we were in the past. No deal ever seems to go smoothly.

Speaking of whores, I was talking to the VP of acquisitions for a decent-sized company and he was explaining how he “beats” the competition out on deals. Say the seller wants $12 million and they only want to pay $11.2 million. They enter into a contract for $12 million, do their due diligence and then, about 10 days before closing, call the seller and say they can’t close at $12 million but can at $11. Take it or leave it. Ninety percent of the time, the seller gets upset and calls off the deal but calls back in a day or two and after much negotiation, agrees to $11.2 or $11.3 million. There was nothing found in the due diligence period that could justify the lower price, the buyer just plays the game.

In a conversation with another director of acquisitions, we were talking about their latest purchase and I asked how they could justify a 6.5% CAP on a 360,000 sq.ft. center and he said part of it is that they jack up CAM and make it into a profit center, which makes the numbers work -- what a business. Overall, we're a great industry, but we do have our share of a-holes.

Anyway, here's wishing you a great show and holiday.

The South Not Only Rise Again, It Won, Oh and More About Josh..Almost

2006-10-30T12:21:00.000-08:00

Ann and I attended the Texas Dealmaking show and over 3,000 “Tall hats”
showed up to wheel and deal, nearly a 20% increase compared with last year’s
show. You can't ask for more than that, especially considering it was only
five or six years ago that the show attracted only 750 or so dealmakers.
High energy is the only way to describe this event. Texans love dealmaking
and socializing, and they do it well. Here's another market in which small
developers excel. The South seems to be an area that smaller developers
love; they’ve found a niche that the REITs can't touch. They may never be
Kimco or DDR, but they live the good life and have fun -- a great way to
make a living. The only real complaint we heard at the show was the lack of
“real” retailers, and that seems to be the rule at most events, so get over
it. The broker has become the mainstay of dealmaking for many, if not most,
retailers and you're going to pay that commission, like it or not.

Another change I noticed at this and most shows is that the actual
dealmaking is lasting longer. In the “old days,” if the dealmaking started
at 8 a.m., for all practical purposes, it was over by 1 p.m., even if the
official closing time was 3 p.m. or 4 p.m. Now, the activity goes on ‘til 2
p.m. or 3 p.m. So, people are staying longer and hopefully making more
deals. I had one interesting conversation with a developer who had just
finished building a Starbucks. He wanted to know what I thought the CAP rate
could be. I responded with a 6.2% to 6.5% rate. He said that's what his
friends are telling him, he just didn't think anyone was that dumb. I agreed
with his outlook but said there's a lot of dumb buyers out there. Anyway,
moving on, Josh and I went to the Atlanta show, which was larger than Texas
with about 4,000 dealmakers compared to last year’s count of 3,500. (It’s
almost getting boring to announce all these increases in attendance. I'm
warning you in advance: The New York show in December will be a nightmare;
there will be way too many people.)

The energy level of the Texas show was higher than Atlanta's, but the
attendees still did their share of "dealmaking." Like Texas, Atlanta has a
lot of smaller developers and, like Texas, their biggest complaint was the
lack of real retailers. Atlanta has their “Retailers” show the day before
the actual dealmaking and I’d guess they had 40 to 50 retailers exhibiting
at this busy event. But, my gut tells me that the amount of retailers
exhibiting was less this year than last. BUT, that didn't stop the wave of
developers/brokers stopping by each booth hoping to do a deal. The cocktail
party in Atlanta was jammed and most people in attendance had dinner
invitations for various gatherings right after the show. So, there were a
lot of tired people the next day, which explains why the show got off to a
slow start on Wednesday. BUT, by 10:30 that morning, the trade floor was
hopping and stayed that way until 30 minutes before closing.

I did hear one interesting tidbit: It seems that the government of Puerto
Rico has sent letters to the major retailer developers on the island saying
they are about to start an investigation into the possibility that these
landlords are gouging the tenants on CAM and electrical charges. Talk about
a disaster looking for a place to happen. Now, I'm totally opposed to owners
making more than nominal amounts of money on CAM, taxes, etc.; their profit
center should be the rents. BUT, I'm also a great believer in, “The
government that governs least, governs best.” Let’s hope the developers do
something before the government does. Otherwise, it might give some ideas to
states in the U.S., and then we all lose.

Changing subjects, as you are aware, I've been chronicling the “Adventures
of Josh” since he joined the company going on 5 months ago, and I have to
admit, it’s becoming LESS frustrating (but still frustrating) while trying
to teach him the business. Well, I guess my remarks struck home to a lot of
people, since we received LOTS of e-mail on those MyWay's. Here's two, which
are typical of the rest:

Ted,
I just started in the real estate business a few months ago and enjoy
reading your articles. I am in the same boat as Josh and can understand what
he is going through. (Cold calling, asking what seem to be logical questions
to a higher authority.) I, however, disagree with the statement that we have
to be taught EVERYTHING. It’s not that we don't know how to fax or pick up
business cards, it’s that we understand that our superiors are succeeding at
what they do and we want to learn their style to emulate them. I think it’s
a good thing that you have new workers craving to learn more and more each
and every day. You should see that and be excited to teach them. This is
your passion, isn't it? As for me, I guess I am getting the best of both
worlds. I am starting out like everyone else does, however, I think my
bosses have a different view, one tailored more to getting me to their level
and watching me succeed. I think their reply to your friend would be, “Do
it, and find new possibilities.” We are not embarrassed. If we were, we
would sit at our desk waiting for you to come to us. We are seekers, ready
and willing to combat new things each day. I for sure know that if I don't
ask questions, I won't succeed. For you it's “Location, Location, Location.”
For me, it’s “Questions, Questions, Questions.” Shouldn't you always ask
questions before you worry about a location? In closing, I think we are an
asset and need to be accepted. All those VPs who are training should
understand and be willing to teach because I am sure, back in the day, those
were the guys bugging their bosses up the wall.
Tom DiCicco
Database Manager

Ted,
I read your articles in every issue of Dealmakers and, typically, they're
perfectly written and have humor to them. This is something I appreciate and
like, since sometimes I feel this industry lacks some comic relief and tends
to be too serious too often. Having said all that, your article about Josh,
while well taken and a point probably shared by many seasoned
brokers/retailers, has some “holes” to it. I started in this business just
over six years ago, when I was 22. Now, my story is somewhat different in
that my father has been in this industry since 1981. Because of that, I had
a very small and limited knowledge of this business when I started. I, too,
however, needed that training to get the necessary knowledge to be
successful. Here was the key that helped me become successful:

Our company is a very small company in terms of number of employees.
However, we compete on a larger scale with the likes of the Mid America's
and CB Richard Ellis’s of the world. Our inventory is massive compared to
the amount of people we have that work the brokerage end of this business.
Currently, we only have three brokers here, including myself. When I started
here, there were only four: The three principals of the company and one
other broker. Since my father is the President and principal of this
company, he certainly had no time to train me each and every day. His
partner was and still is equally as busy as my father. The third principal,
too, was busy doing her own thing.

My job was simple. I began as Database Manager here. I took an “old school”
3-ring binder crammed full of years and years of contacts (both locally and
nationally) and computerized them. Now I didn't just type them in a
computer, I called each and every one of them. Some were long gone and no
longer in business, but most were still active. Throughout my life, my
father has always preached to me about work ethic and striving to be “more
successful than he is.” Obviously, that is a typical statement and wish from
a father to his child. So, for as busy as my father was, he always took the
time to tutor me because, not only was I an investment to him personally as
his child, I was and still am an investment to his company. Additionally,
this was his way of training me. He put me on the phones making calls,
getting to know who people were, learning terms of the business and getting
my own name out there.

See, that is what the “elders” of this industry need to realize: Young
newcomers in this business are not a pain in the neck. We're an investment
to the companies we work for. We're not just around to bug busy brokers to
ask questions. We're here to soak in the knowledge from them. The one thing
I will always do is, when someone young enters into this business, whether
it be a friend or just someone coming to work at our company, I will always
take the time to talk to them and give them as much help and information as
they need. I needed it when I started, so will they.

Remember this, at some point or another, we (meaning all of us in the real
estate business) were all in the same boat. I'm sure you were when you
started in real estate, and I'm sure there was someone there to tutor and
mentor you along the road. That's why CB Richard Ellis is as successful as
it is today. It seems as though the majority of seasoned brokers from the
Baby Boomer era all started at CB (formerly, just Coldwell Banker). They had
it down perfectly. Each new entrant into the business “ran” for someone who
was seasoned. My father happened to get his first real estate job with CB,
and the man he “ran” for taught him some valuable lessons, which were passed
down to me.

All in all, let's take it easy on the young newcomers because one day, we
will be the generation that is the majority within this industry. And again,
I know for sure that when the next wave of young sales people come through
when I am old and have many years under my belt, I’ll be sure to fill them
up with as much knowledge as I can!
Jason R. Lenhoff
Horizon Realty Services, Inc.

Nick D'Amore

2006, Not As Great As 2005 But Still Great

2006-10-06T14:01:00.000-07:00

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.

Chicago Was Hot and So Was The Cheesesteak

2006-09-25T06:10:00.000-07:00

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

2006-09-01T08:19:00.000-07:00

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.

Another Josh Story...well almost

2006-08-24T07:49:00.000-07:00

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?

2006-08-08T07:47:00.000-07:00

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'm Depressed And To Complicate Matters, Nothing Is Wrong

2006-07-27T12:48:00.000-07:00

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

2006-07-15T03:33:00.000-07:00

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.

We all Need To Take Leasing 1.01 Again

2006-06-30T13:22:00.000-07:00

I recently received a phone call from an enclosed mall owner who just bought the center out of bankruptcy and wanted to know what "we" (TKO) could do to turn the center around. I gave him my standard pitch and sent an e-mail outlining how we work and what our fees are. He called me back the next day and started arguing/debating our costs (we charge a monthly retainer against a commission). I tried explaining that on turnarounds you work twice as hard to produce half the results and, without the retainer it isn't worth our while to work on the project.

He went on to explain that the turnaround would be easy (yeah, right), as all the past problems were the result of the incompetent managers/owners/leasing agents over the past ten years and with my superior leasing and management skills the center should be fully leased in less than a year. I tried explaining that we're not that good and at best the turnaround will take three years and millions in TI, but he could not agree and we went our separate ways.

Anyway, that conversation got me thinking; we've all heard that about a third of all the enclosed malls in the country are, or will be, failures in the next few years and will either be demolished or de-malled, and the 33% is as good of a number as anyone can come up with. I've said it before and I'll repeat it now, there are two types of malls: Good and Bad, and usually the good are very, very good and the bad are disasters. I only get calls on the latter of the two.

The major REITs such as Simon and General Growth all have their "problem" malls on the sales block, hoping to find a "live one" willing to "bet" they can do more to turnaround a loser mall than the biggest mall owners in the country can. It's somewhat like the stock market; when someone "sells" they believe that the value of the stock will drop while the buyer believes the value will go up. The only thing for sure is one of them is wrong and the other is right. However, as a rule of thumb, if Simon or General Growth can't make a mall work then the "little guy" with no clout with mall-oriented retailers has no chance. Oh, a "turnaround" by my definition is keeping the mall leased, not demolishing and rebuilding it as a strip, power or lifestyle center.

Over the years, other "consultants" I'm friendly with and myself have worked on dozens of these enclosed malls and, in most cases, the turnaround failed, either because the center's reputation had deteriorated so badly that there was no going back, the market and competition had changed radically or the owner or management company was incompetent. But for whatever the reason, the center failed. As I get older, in most cases I believe a mall turnaround is NOT worthwhile; it's just wasting time and money. Rip it down and just plain redevelop. Think about it. Simon and General Growth are both selling its weaker projects and if anyone was capable of changing the Titanic's direction it would be them, but they're giving up. The best most turnarounds can do is keep the center alive while the immediate area improves so a redevelopment can be done a few years down the road (In other words, wait until Wal*Mart, Target or Home Depot wants the property).

Changing the subject, as most of you know, Josh, our son, has joined the company as a leasing agent and I won't and can't brag about how good he is (he isn't yet but I'm hopeful) but it's fascinating watching him learn and following his progress. It brings back old memories. Not only the enthusiasm and innocence but also the determination to make a deal even when there's no deal to be made. Maybe I've gotten too old, but after a "reasonable" (whatever reasonable means) period of time, if a deal isn't progressing, I give up on it. He hasn't learned that lesson and he's probably better off if he never does; why accept defeat? Also, because he's learning and a newbie, we have him calling almost all the 7,000 retailers in TenantSearch and, believe it or not, he's getting results. No deals yet, BUT he's talking to people and some have promised LOIs. Not bad for four weeks experience. Of course we all know what it means when a retailer says I'll send you a proposal; nothing, but Josh is an optimist. We also have him canvassing, the most time consuming way to lease but he's learning about retailers and why they DON'T want into the centers he's leasing. In order to overcome objections you first have to learn what the objections are. Retailers are telling him in plain terms why his property stinks, which is bad for the landlord but great for his education. While he's going to the ICSC University in Lansing, MI next month, Canvassing 101 is the best education he'll ever get. As I said, he hasn't made any deals yet, but he's brought proposals to the landlords. All his deals have been shot down as I knew they would (he contends landlords are too picky) but he's brought in some proposals that make the owners think, which is good. What he has learned is that developers and retailers both lie (and brokers aren't too honest either). Only four weeks experience and he has learned the fundamentals of commercial real estate.

Hiring some young kid to do telemarketing and canvassing makes sense (if you can find 'em, and that's the hard part). The leasing person you're paying $80,000 to $120,000 a year won't make 100 calls a day or canvass the locals on a weekly basis, but a young, enthusiastic kid will and I believe that over a six to nine-month period of time, they'll produce more than they're paid. Time will tell and I'll keep you informed on Josh's progress.

Oh, I had two interesting conversations with two landlords over the last week, which ties into Leasing 101. In one case we were negotiating rent and were $5 psf apart. The owner explained why he couldn't go lower on the rent and I explained that based on projections of sales, our offer was as high as we could go. The owner's response, which was sincere, was "You have to redo your projections so you can pay higher rents." I explained that it doesn't work that way and he couldn't understand why not. Raise the projection, even if it doesn't make sense, and you can raise the rent that can be paid was his thinking. What's the problem?

In another conversation, I was looking for 50,000 sq.ft. for a retailer and the center I was interested in didn't have 50,000 sq.ft. of continuous space, so the owner was trying to convince me to convince the tenant to take a space of 30,000 sq.ft. and six doors down another spot of 20,000 sq.ft. I again explained the extra costs involved in operating two stores and why it won't work. But again it was wasted on deaf ears.

What's needed in this industry is a course on Retailing 101 for "owners" who have no idea what they are talking about when they deal with tenants. Going back to Josh for a moment, it's to his long-term benefit to canvass "ma&pas," since the conversations generated when dealing with these retailers give him great insight into what a retailer needs in site selection and merchandising to succeed. It also provides a solid foundation to build his career on, something I think a lot of older owners need now.

I remember back when Abe was still president and I was doing some work for Kmart; I called up one landlord and said I was looking for 80,000 sq.ft. to 100,000 sq.ft. He said he didn't have that much space but had 10,000 sq.ft. he could lease. I said no thanks, but he wanted to continue on how great Kmart would do there. I tried explaining that they couldn't downsize a 100,000 sq.ft. store to operate in 10,000 sq.ft. and still be a "Kmart," but my answer seemed lost on him. Again, a need for Retail Real Estate 101.

If the owner was a 21-year-old with four weeks experience, I could understand BUT here's a grown man that owned several centers and still had no idea how retailing works. Dumb de dumb de dumb.

All I Really Want Is A Grilled Cheese Sandwich

2006-05-31T13:33:00.000-07:00

People, lots of people, tons of people, more people then I ever want to deal with.

That sums up the Vegas show; another record was set with the official count being over 45,000. That's even more than was expected, up about 10% from last year, which is in keeping with the local show increases. In one of the ICSC's daily newspapers they had a timeline of the growth of our industry's membership. The timeline went back to 1976 when President Ford spoke; I was a newbie then, with about five years experience and was impressed that an industry of only 5,500 members could attract such a major player. Of course, at 31, I thought 5,500 members was big. Looking back I realize how lucky I was to begin my internship in such a SMALL industry. We all knew each other's name and were "friends," relationships that have benefited me for the last 30 years. Today it's impossible to know such a large percentage of the membership as we did in the good old days, and that's everyone's loss.

While we can't and don't want to turn the clock back to when the industry was more intimate, networking still works today and Vegas was THE place to network in 2006, especially on Wednesday if you were one of the smart ones to stay (talking of smart, make sure you get your picture to the ICSC ASAP or don't bitch when you're stuck in long lines having yours taken at one of the upcoming shows so you can get your badge). The reason for saying that the smart ones stayed for Wednesday is that it was the only slow day of the show, providing an opportunity to network with people you never met before and learn about projects and companies you never heard of, in addition to having more time to "putter."

Monday at the show was the busiest I've ever seen at any event. At first I was worried, as from 8 a.m. to 9:30 a.m., our booth was slow. But at 9:31 a.m. the dam busted and didn't stop until 6 p.m. when the parties started. Monday was too busy for my own taste, since I can't handle a conversation with three people on four topics at one time. Tuesday was perfect. Between meetings and the crowd I was busy all day, but was comfortable with what was happening. Meetings were "interesting" in that when I had my landlord hat on every retailer complained the rents were too high and when I had my retailer hat on, I knew rents were getting out of hand. Unlike most, I don't believe I "made" any deals in Vegas but I did start a lot. And with a little bit of luck, 25% will be made, making me a very happy broker.

No one I spoke to had a negative word to say about the show; some were giddy, some reserved, but all were optimistic. However, I sensed some degree of concern from many of the more experienced old farts. Leasing was slowing and yes, for the prime locations, rents were going up even if it took longer to make a deal. But for anything under a strong B, leasing was tougher.

Lots of people came into our booth wanting leasing help for centers they recently acquired at a 9-12% CAP and, after looking at the centers, I understood why the price was "right;" It's because the center was "wrong." They were all "added value" opportunities and that's where my pessimism comes in. Over the last five years, vacancies in our industry have dropped drastically because a rising tide raises all ships (a booming economy), some more than others, but C & D center's vacancies dropped, making the value of many centers increase BIG. Now, if I'm correct and there is a slowdown occurring, not only will filling the existing vacancies in these marginal centers become more difficult but vacancies in these centers will rise substantially. And if these properties were acquired with extremely high leverage, the banks are in trouble, making the "guy" with cash King again (for the last five years it didn't matter if you had money, the banks were willing to provide up to 100% financing, so everyone was "equal." Rich or poor you can/could borrow millions and the only thing that mattered was a willingness to pay top rice.) I personally believe those days are coming to an end BUT the banks aren't there yet, as we must have had 30 to 40 bankers coming to our booth with programs to provide 80% to 100% of the money for an acquisition.

Changing the subject to a lighter menu, if I had the money spent on all the parties I attended (forget the money spent for all the parties) I'd be retired with more money than I ever dreamed of. Some of the parties had to cost over $350,000. You know CAM went up at a lot of centers. Of course, the Bar Mitzvah of all Bar Mitzvahs was the New York Developers party with number two being the Henden event. But all the parties were jammed and upbeat. Between the parties and the dinners and then having to go to Louisiana for my in-laws' 50th anniversary, not only was I partied and dinnered out but I began to fantasize about a grilled cheese sandwich; no more steak, lobster or shrimp, just grilled cheese on rye. I may never go out to eat or drink again.

Anyway, as I said, the attendance set records and I believe the increase came predominantly from finance people, city government personnel and brokers, but not retailers, which have had no substantial increase in ICSC's membership in the last five years. We're at a bar with 200 guys and only 20 girls; the odds are against us. Yes, the "girls" can participate in numerous locations (thank God they are not monogamous) but they still can't service all of us. I've been saying this for ten years and, if I live that long, another 10; we need to attract more retailers as members.

While there might be a sense of a slowdown in leasing, the sale and acquisition of centers was hotter than ever. I think every third visitor to our booth wanted to know if we had property for sale and all promised a 30-day closing. Where are they when I do have property for sale? Then they fight with me over price and seem to need forever to close. But before they get into the negotiation they all contend to be big spenders.

Before I forget, about a month before Vegas I attended the Retailers One on One show in Orlando, FL, which is one of the few NON -ICSC events a year I attend and a show well worth the trip. It attracted about 1,300 dealmakers, small in comparison to the 4,000 to 5,000 that attend the ICSC's Orlando event in August and nothing in comparison to Vegas. BUT if you deal in Florida, it's a "must attend" show. The event makes up for size by its gusto. There was lots of energy spent in this action-packed, one-day event.

What really makes this show stand out is that 1) they allow REAL retailers in for free, so there were 250 or so in attendance 2) It's a one day, dealmaking show, starting at 10 a.m. and going until 10 p.m. A long day, but no seminars, no speeches, just dealmaking and networking at its finest (Oh, and the food is better). The "negatives" are that it costs $1,500 to exhibit and $350 to attend, higher then an ICSC event BUT again, 250 REAL retailers.

Monterey here we went

2006-04-24T10:08:00.000-07:00

Ann and I went to the Monterey ICSC dealmaking, where attendance increased nearly 25% from last year's 1,200 dealmakers, so no one can complain about "the action." The show was active all day Wednesday, the day before the actual dealmaking, with leasing plans, cell phones and computers spread on every flat surface while everyone attempted to do a deal (some even did). The cocktail party was also active on Wednesday evening with most attendees going out to wine and dine afterwards and, topping it off, the actual dealmaking on Thursday was busy until the closing bell, which is unusual for a dealmaking event. That's the good news. The bad news is that I kept hearing of a leasing slowdown from many (if not most) of the attendees, not a drastic one but a slowdown. Reports of this slowdown started six to nine months ago and it seems to be gathering steam. Those working on new projects or ones approved a year or two ago are still active troopers, but many of the brokers and smaller developers complained that 1) There's very little space to lease; the excellent economy for the last few years has rid the industry of almost all its semi-decent vacancies 2) Retailers are slowing down in their expansion plans (again, not drastically but slowing down) 3) Land costs are so high it's a substantially bigger risk than normal to do new development and the majority of "owners" that got into retail real estate in the last decade are not developers, but are either flippers or owners so they have no idea how to develop 4) With CAP rates being insane (in California people were complaining of CAP rates of 4% to 6%) it makes more sense to put your money in CDs and 5) Retailers, especially big box users, complained that even if they wanted to expand there's little vacancy around except for new development which few can afford. None of these problems means the end of the world is near (but based on how the environment has been acting lately, the end may come sooner than we thought) but it means that if the trend continues we'll all be working a lot harder and hopefully smarter to make a deal than we have in the past. The "easy" decade of leasing and sales may be coming to an end.

Over the years I've noticed our (TKO) leasing business does well when the economy does well. When the economy does fair, we do poorly but when the economy is doing poorly our leasing department does well (two out of three ain't bad). Never made total sense to me, but after 35 years I can accept the facts, whether or not they make sense. Of course, we do better and work less in a booming economy over a failing one but money is money. I only hope for all our sakes that my business starts doing better because of an improving economy, not because of a slowing one.

In a conversation with three leasing guys from three different REITs, they all brought up that their companies were considering selling their "C" and lower grade properties (for one REIT that's almost half of its portfolio). The last few years have been excellent for REITs and they're flush with cash and buying power. What they've learned is that it's easier to lease "quality" centers than tired workhorses (it took 'em a decade to learn that), so they intend to eliminate their problems, spend more per property on acquisitions and try to upgrade. That's excellent news for entrepreneurs, since they're the only logical candidate to acquire and turnaround some of these dogs the REITs will be selling. One of the problems is even though the REIT can't lease the problem center, they still want top dollar for their product and their economics don't work, which is why it's taking so long to do the sell-offs. The entire real estate industry has gotten fat and somewhat lazy over the last five years sending everyone to want to acquire "better" property that's easier to lease. REITs want to go the upscale route (it's easier), as do many companies that were originally formed to either do urban development or turnarounds but are no longer in that business since they decided they had to work too hard to make the projects profitable and did not get a great return. With raising money so easy right now, they've taken the road most traveled, meaning they borrow more to "upgrade their acquisitions," leaving the dogs for others.

Everywhere we went there was talk about the Vegas show. And while most, or many, admit there's a slowdown going on, they're all optimistic about Vegas and there's no doubt in my mind that another attendance record will be reached. There will be lots of bodies in Vegas this year, but I'm willing to bet that most will be gone by Tuesday. And only the exhibitors and workaholics will be around on Wednesday. The show, because of the low vacancy factor that the industry currently has, will be highlighting new developments, more so than in the past with "lifestyle" centers leading the pack. Of course, with over 40,000 +++ in attendance, there will be millions of sq.ft. of existing space being offered but that's down from year's past. The economy totally confuses me. Forgetting the stock market, which makes absolutely no sense, retail is doing decent for the most part. Employment is high (retailers are having a tough time finding help), rents are rising and prices of centers are commanding record highs. But something is wrong. I'm not sure what, but something is wrong. I can't put my finger on it, but there's a problem brewing. Maybe Vegas will bring it to the forefront.

As I said, most developers and retailers today want to go upscale, and to some extent I understand why. By changing from popular price offprice/outlet retailers to more upscale tenants, outlet centers are beginning to change years of declining sales in their outlet centers to improving sales per sq.ft. Lifestyle centers can only survive in an upscale settings and Nordstrom is having a banner year. BUT, and I repeat BUT, that's not where America shops. Retailers like Foreman Mills and Shoppers World, which cater to blue collar and urban customers, are doing great also. Too many retailers and developers don't believe there's money to be made catering to the blue collar, lower middle class market, and they're wrong. One of the reasons for this disbelief is Kmart's sales, which keep declining; but they're declining not because of the market they sell to, but they're just plain bad merchants who, IMHO will not exist in five years or less. However, Kmart is still Kmart and is No. 3 in the discount industry. Target, No. 2, is considered "upscale," with Kohl's being middle class. Only Kmart caters to the blue of the blue and they're a rotten merchant. Stores like Dollar Tree, Family Dollar and K&G Clothing are expanding and profitable, but they're just not sexy and we're an industry that loves sexy. (Remember, never make a pretty woman your wife if you want to be happy the rest of your life).

Changing subjects, I had an interesting conversation last week with a gentlemen by the name of David Tepper (847-919-8162) who is coming out with an interesting and I believe new approach to doing brokerage (for disclosure purposes, I am NOT involved with his business and have no idea if the concept will work but it sounds interesting and worth a try. I don't even know David). The idea is relatively straightforward. He acts like the "back office" for developers and brokers. He does a demographic study of the market and property (the demographics are substantially more then a one, three or five-mile radius), and then he divides the market into segments and determines what retailers make sense to pursue based on this study, and more importantly what retailers are doing well in the market. (Oh, I forgot to mention that there's NO exclusive required and you only pay him based on results). The reason for a detailed study of the market and center is to promote the retailer's probability of success and the center's interest in their success. It also helps identify those retailers who actually understand the market. The leasing process itself, once the targets are identified, is as old as time. Phone calls, emails, letters and follow ups. The warm leads are then turned over to the broker or owner (he goes both ways). He does NOT close; the agent or landlord does, so his telemarketing approach works nationwide and he's paid a "finder's fee," not a full commission. Again, remember, this is done on a contingency basis; they only get paid on signing. Ten or 15 years ago, we (TKO) set up a telemarketing department to offer a similar service (but we did the actual close). While the idea produced deals, we found we couldn't make enough money promoting it. David's approach of just providing leads may make the concept workable. If you have space that isn't leasing that quick, give David a call. What do you have to lose?

Friends Don't Let Friends Buy Centers at a 5% CAP

2006-04-24T09:44:00.000-07:00

It's Vegas time again (God, time goes fast when you're making money) and 40,000 +++ of our closest friends will be congregating to wheel, deal and have a great time eating, drinking and being merry. What a fantastic business we're in; being paid to eat, drink and gamble (whether it's on your property or at the tables).

I "think" this is my 35th convention (I'm VERY old), and while the current shows aren't as much fun or as wild as the conventions 30 years ago (but then again, I'm not as much fun or wild as I was 30 years ago) they're more productive; we all know what we're doing or at least think we do; 30 years ago we winged it. Most of you will arrive on the scene on either Sunday or Monday morning and leave sometime on Tuesday, a waste in my opinion, since staying until Wednesday can make the show more productive for all involved and increase the probability of making a deal. I write this every year and every year the show is desolate on Wednesday after 11, so some things never change.

Either way, 2006, so far, has been an excellent year for all those involved. In addition, the regional dealmaking shows have been growing even faster than in the past, with attendance increases of ten percent or more not uncommon (I'd guesstimate a 7% to 10% increase for Vegas, and considering there were 40,000 attendees last year that's a big increase) and some shows have had a 25% increase. The only negative on the horizon is the apparent slowdown in leasing.

This is a make-or-break show for retailers and developers needing additional stores opened for Christmas 2006. If you can't get on the fast track by the end of this month the odds are that no store will open until 2007. In reality, the vast majority of 2006 deals are already done, with few retailers having an open to buy for the remainder of the year. But there's always a few stragglers who either NEED, or want, another deal for this year, so if you have vacancies (and there's not a lot around) this is the time and place to hustle, otherwise the deals started here will be opening in 2007.

I have to give leasing agents credit for being aggressive when it comes to scheduling meetings for the show. For the last month, I've been bombarded with e-mails and phone calls trying to set up meetings. In the vast majority of cases, I declined, since the projects offered were of no interest to our clients. Everyone is trying hard to fill up their dance cards so they can impress the boss, but meeting for the sake of a meeting makes no sense to me. Of course, if they were really smart they'd leave a few hours every day to just walk the show, do basic networking and see what's new instead of wasting unnecessary time on unproductive meetings. This year will be easier than next, when the convention floor will be doubled in size and most of the exhibitors or attendees will be lost or confused by the vast size of the exhibit hall. Yes, having a larger exhibit area will benefit all, but I personally prefer to shop Ace Hardware over Home Depot because the size is easier to maneuver. Of course I'm not getting as good of a selection, but sometimes I'm lazy.

Ranting on...I'm not going to go into the details of the Mills Company and their problems since we've all heard and read what's happening with that REIT (and probably more will come out by the time this is published), but I will comment on Mill's desire to mix entertainment with retailing, which doesn't appear to be working or at least profitable (and in a capitalistic business, if it isn't profitable it isn't working). If you look at the history of entertainment in shopping centers, it's a checkered past, mixed with lots of failures, whether it be Discovery Zone, Jeepers, indoor skate parks, roller coasters, or whatever, or the fact that movie theaters have been in and out of retail projects for over 20 years. One year, developers think theaters should be included in a center's mix; the next year they're buried in the back with no viability (the only way theaters could become profitable was by going bankrupt a few years ago).

Few entertainment complexes combined with conventional retailing work and I don't believe that will change in the near future. The difference today from when I put roller rinks into centers 30 years ago is that the costs and risks are substantially higher. When I did a roller rink deal 30 years ago, the rent was usually under $4 GROSS and that was for a vanilla box. Today, the Mill's project in North Jersey will cost billion$ to develop and no one knows if the entertainment aspect will be the attraction and profitable as projected. Today it's not uncommon to develop entertainment beside mixed-use and baseball parks, where the costs will run into the hundreds of million$, and again I don't think it will work. (Of course, if you can convince some foolish city to provide millions of taxpayers' money to the project, it does improve the probability of success). Entertainment is NOT a high sales per sq.ft. generator and you don't have to be Einstein to understand that if your development costs are high, your rents have to be in the same league. Overall, entertainment retailers can't afford high rents and that's where the problem lies. I also think the industry is getting itself into trouble with many of the high-end, mixed-use projects, especially ones promoting residential housing in a cooling housing market. (Somehow I can't justify spending $500,000 for a condo located in a retail/office complex. I don't want to live where I shop). One of the industry's current problems is that money is so easy to raise today; developers who sign non-recourse mortgages are willing to try any idea THAT MIGHT work (it's not their money, so who cares because they get leasing, development and management fees no matter what).

Changing topics...friends don't let friends buy centers at a 5% or 6% CAP rate. Even with leasing activity slowing, the market for acquiring centers is still hot (why is another question) and while I predict a slowdown in sales (or an increase in CAP rates in the near future) a few select centers are being sold at 5% to 5.5% CAPs. And CAPs of 6% to 6.5% are not uncommon. Yes, millions have been made in the last five years by "flippers" who kept a center for six to 12 months and then flipped (with no increase in income) for millions more than they acquired the center for. But with a slowdown in leasing and rising interest rates, acquiring centers based on these numbers makes no sense. Remember the dot.com boom, it BUSTED really fast. I believe the same can be true for retail real estate. Pricing of property has gotten so bad that some sellers that normally would have elected to do a 1031 exchange now elect to pay the taxes instead of buying a Walgreens at a 5% CAP, and when you're willing to pay taxes over acquiring real estate there's a problem.

Of course, the other end of the spectrum isn't that rosy either, since I hear a lot of developers complain that with costs so high they're only getting a 10% to 11% return on NEW development. High risk for low reward. The only reason 10% looks good is because of the 6% CAP on existing property. Either way, the leasing mall will be pounded by thousands of buyers and brokers wanting to know if you have a center for sale.

Oh, as I mentioned in the last MyWay, the amount of available space is down substantially over prior years because of the robust economy. But the amount of new construction, especially lifestyle centers and urban redevelopment, is up (we're even involved in an urban redevelopment in Chicago) substantially over last year (merchant developers keep the economy moving whether we need more centers or not) so I highly recommend you walk the leasing mall to see what the current trends are, where they're happening and who the anchors are. It's a good education and will provide ideas for your project.

On a different note, I had dinner with two friends the other day, both of whom are directors of real estate for their development companies. That's where their similarities end. One complained that even though his company has over 12 million sq.ft. of retail, he gets no support from the company's executives; they look at leasing as an expense, not the prime income generator for the company. Whenever he proposes mass mailings, advertising, e-mail blasts or going to local dealmaking shows, they turn him down because of the cost and their belief that "marketing" doesn't work. The other company does their own mailings to ALL their existing tenants, plus the ones in their corporate database (they promote heavily to brokers) and uses outside mailing services to reach "ma&pas," sends thousands of e-mail blasts to promote vacancies and goes to almost as many local dealmaking shows as I do. His company has over 20 million sq.ft. with a vacancy factor of 4%. The other company runs a 6% to 7% vacancy factor consistently. Which company would you rather be? Oh, the "smart" company looks at vacancies as a "cost," and the longer the vacancy the higher the cost, so they're willing to make sweetheart deals on property vacant for a long time while the "other" company says "this is our rent, pay it or don't go into our center."

Have a great and productive show.

P.S. Don't forget to drop by the RD/TKO/KIN booth at 667 Sixth Avenue on Monday after 4 p.m. for our annual Beer Blast. Booze, fun and friends, what more can you want? Oh, I almost forgot, drop by and let me introduce you to my son Josh, who's entering the industry.

Ann Called Me A Relic...and her point was?

2006-03-20T14:03:00.000-08:00

Ann and I went out for drinks last week and one of the problems of being both partners and lovers is that business comes up more often than not (intimate talks and making love is a lot more fun). Anyway, during the conversation she politely and, as diplomatically as possible, brought up that in her opinion my friends and I are relics, a dying breed with no future (but a great past).

She contends that "my generation" (I'm 60, so if your 55 or older you're part of my generation) is part used car salesmen, part entrepreneur and part deal junkie who is used to shaking hands and truly believing the deal is done. To hell with paperwork or ROI. The deal feels right and that's all that counts. After having a couple of glasses of wine, I thought about what she said and she's right. And I'm damned proud to be part of the generation that created billions of dollars of wealth for more people than we can count and is the backbone of our capitalist society. When I started in this industry some 35 years ago I was considered a kid and I looked with awe at some of the retail real estate industry's founding fathers. Now most of these founders are either retired or dead, with my generation now on the verge of retiring within the next few years, so we're the old farts. And while the current generation doesn't look at us with awe, they are helping push us out.

In the next five years, as this retirement trend continues at an increasing rate, we'll have a totally different (not better and I don't think worse) industry than we have today. One thing I'm pretty sure about is it won't be as much fun or exciting, but for the majority of players they'll be even better paid than we were (and most of us made more money than we ever thought was possible). It won't be as much fun because this generation has rules to follow. The industry was so new 35 years ago that we made up the rules as we went (we also made lots of mistakes but that's part of the game, but we were smart enough to learn from our multimillion dollar blunders). Today's generation will be given less authority because of the consolidation of the industry and the rise of the bean counter (we were "ruled" by builders who had dreams to answer to, not Wall Street). They will have less leeway on deals as the "bean counters" won't allow anything but proforma deals to be approved. In "my time" we could call up the VP of Real Estate for a chain, not go through his exclusive broker and make a deal that was actually done in 30 days, all on the phone or one visit to the site. Shaking hands and then starting construction on the store before a lease is signed today is considered insane, but that wasn't the case 20 years ago. In the future, approval for every deal will flow from the top down, causing even more delays than we have today (If that's possible). Ten, fifteen years ago, the head of real estate had the authority to do a deal on the spot. Making real estate decisions based on gut will be gone and demographic studies on each site will be considered the norm (for the record, while I'm a great believer in high tech, my generation didn't do that bad with our guts when it came to site selection).

Oh, I forgot to mention what brought up this topic is that our son Josh has decided to "come home" after he's done with school in May and work in the "family business." I tried to convince him to work for someone else for a few years (My thanks to Jon Kushner of Fameco who offered him a job, but he wants to work with "dad" and yes, I know that's a problem looking for a place to happen). Anyway, we were discussing what type of future Josh will have and that's when I was called a relic. The good news is that the ICSC's Next Generation is perfect for him to start to network with and the various schools they offer should help educate him on the facts of life of retail real estate. It was in this publication 21 years ago I announced the birth of my only begotten child and wished he live long and prosper. Then, four years ago, I talked here again of watching my baby drive off to school, the beginning of what I thought was the start of his independence, and now I get to discuss his return. God help us all (and me in particular).

Anyway, his retail real estate education should be easier, but not as much fun as mine was. My real start in the business was with Arlen Shopping Centers, where they hired me for $10,000 a year with minimum experience and then sent me to Chicago to develop four Korvette Centers by myself. A hell of a learning experience. Today's generation will never understand it. It's important from day one that Josh understands finance and present valuing a deal, something that I didn't even think about until 15 years ago or so, the good news is ICSC offers classes he can attend and learn while networking with his peers. Today it's essential he immediately understands more than I did at the beginning of my career. Because of the Next Generation and local dealmaking events, it should be easier for him to learn and the Internet will definitely help him out. But I also plan to teach him to canvass (several of my friends have been kind enough, on a nonexclusive basis, to let him work on the property to attract ma's and pa's). Anyway, I shouldn't be bored with leasing on a daily basis for the next year, but I just hope I can keep my cool. If you're the father of a 21-year-old, you understand.

Even though I'm a relic, I somehow forced my body to attend the DC and Charlotte, NC Dealmaking events and both were good. DC ended up with 2,000-2,100 attendees, up from 1,600 last year, a 25% increase that no one can complain about. The only complaint at either event was that the food sucked and that's going in with low expectations. But as an industry we can live with that. I did hear that in all probability picture badges won't be required for THIS year in Vegas, but they will eventually be required at all events. So while I personally disagree with the idea, since it's being implemented, I highly recommend you e-mail your picture to the ICSC instead of having it taken at the show, otherwise everyone will be bitching about all the time being consumed and waiting in line is something as an industry that we don't do well. Even though it's a small show, DC is a great market (I used to live there 35 years ago and the changes downtown and in the suburbs is mind-blowing). As is the case for the last few years, everyone was happy, but all saw a slowdown occurring which is hard to believe when looking at all the construction underway, but these deals started years ago. Both shows appeared to have more "real" retailers present than usual for these events and I don't know why but it was a pleasant surprise. Most of the deals being done today are based on centers approved two to three years ago, so 2006 will be a good year; it's 2007 everyone's worried about.

Oh, Newt Gingrich was the luncheon speaker in DC and, while I disagree with most of his political positions, I have to admit he's brilliant. As most of you know, Bill Clinton will be the keynote speaker in Vegas and while I'd love to hear him, there's no way I'll put up with the mob that's going to his speech. It will be SRO all the way. I guess the ICSC must have a couple of bucks in the bank to be able to pay for speakers like Newt and Bill. Jay Leno will also be speaking at Vegas but he's at a $500 a head event to raise funds for our education program; a worthy cause, but I'd rather pay $500 for a seat to hear Clinton.

The North Carolina show was as big as DC with 2,150 people attending this year compared to 2,000 last year and the members were also upbeat but aware of a slowdown. The "real south" (DC is part of the south but different than the rest of the world) has more small builders than any other region, with lots of developers building 30,000 sq.ft. to 40,000 sq.ft. centers in the shadow of Wal*Mart (Target hasn't gotten to most of these small cities yet) and they appear to be doing well. Unfortunately, or fortunately depending on your viewpoint, there are developers at these events and more brokers, a trend that will continue but it seems the ICSC hasn't noticed this major change as developers seem to be the group mostly catered to.

Also, at both shows, I heard big box retailers complaining about the lack of second generation space they could lease. The good news, even with an apparent slowdown underway, our industry appears to be in good enough shape to weather a slowdown; it's the possible recession that worries me.

They Said It Couldn't Get Worse But They Were Wrong, It Did

2006-03-07T06:04:00.000-08:00

I was speaking to a friend who's vice president of acquisitions for a decent sized shopping center company and his lead statement when we got on the phone was: "I didn't think the pricing of shopping centers could get worse than last year, but I was wrong." I'm hearing these identical comments more every day. A year ago, everyone complained about 7% CAPS, now they're being offered centers at an 8% CAP based ON PROJECTIONS. And, what makes matters worse, some investors are buying into projections that, to say the least, are overly optimistic. On the other hand, where it's really nuts, I read recently of the sale of one center at a 4.5% CAP; I'm getting that return on my savings account.

I don't know what the future holds for the sale of centers, but I do know that right now there's a slowdown in leasing, overall which in the long run has a major impact on the value of a property, so the income of centers is slowing down but the price of a center is going up. Doesn't make sense. There are too many "syndicators " who take 10% to 20% of a deal, then raise millions from eager/desperate investors to acquire a center at 8% to 9% PROJECTED returns based on one or two of the anchors NOT renewing their lease and then being able to lease out the property at three or four times the current rate. I saw one projection that shows leases in the future commanding rents $8 to $12 psf higher than the current center is getting. Whatever they're smoking, I'll buy two ounces. Reminds me of the dot.com "boom" when profits didn't count. Yeah, right.

"Flippers" are still very active in our industry even if they are dropping out of the residential market. I spoke to one person who bought a closed Kmart center for $9.6 million and flipped it three months after closing for $14.2 million, and that's without leasing one foot of space.. God bless America.

On a similar note, Loopnet (loopnet.com) just started a service that's basically says "Are you undervaluing your properties?" They're offering regional or national reports on what specific centers are selling for and their CAP rate. This service provides insight into recent sales of commercial and retail properties sold with a price of $5 million or more, including CAP rate, sales price, etc. It's not the gospel on the value of property, it's another tool to try and determine how high high really is. The 4.5% CAP I saw, in theory, has upside and that's why the CAP was paid. What's really important in evaluating a center are quality and future growth, the key factors, and IMHO few buyers really take that into account. The only "good" news for buyers of retail real estate is the stock market appears to becoming back to life again, so some of the investment dollars used to skyrocket shopping centers is going back into the market. Thereby, maybe, prices will stabilize. Some of the "better" centers are being offered with no asking price, they then get 10 or 20 bidders for the property in a "mini auction" and when they're down to two potential buyers, they nickel and dime both sides; great for the seller, but they buyer is a fool.

From a leasing aspect, not only do I see a slight slowdown but the competition from bankruptcy sales and excess space is having a bigger impact on leasing than ever before.

I had a deal almost completed with one "urban" chain that died because they are taking over leases from closed Toys "R" Us stores, bankrupt United Factory Outlets and some closed Kmart locations. All were acquired with rents for under $6 psf and candidly, was better real estate than my deals, so I don't blame 'em; they are taking advantage of opportunities. Another trend I've noticed is that a lot of the "bottom feeders" are not as aggressive as they were last year. The good news is that "urban" development is getting hotter than hot, with almost every major and minor city willing to use eminent domain and Tiff money to get retail and mixed-used developments started. We're slightly involved in one urban development project and Tiff money appears to be no object; we can practically throw it at the tenants. In fairness, tiff money is necessary to turn around some of the ghettos that are under consideration, otherwise no retailer with an IQ above 12 would be interested. Tiff SOMETIMES is good, but I hate to sound like a conservative, but use of public money for private developments should be limited. Some retailers are now even complaining that cities shouldn't be providing tiff money because it makes it unfair competition to the retailers that don't receive it and I agree.

While "urban" retailing is hot, so is upscale retailing, both in outlet and lifestyle centers. The more upscale the better. So while the high and low end are doing great, it's the middle class merchant that's having problems, and that also doesn't make sense; because it's the middle class that spends the most money. My only conclusion is most are rotten merchants and have no idea how to satisfy today's consumer.

Another "trend" I've noticed is that there's a lot of activity on the acquisition of closed Kmarts. Usually they are repositioned into a strip center of three to 10 retailers instead of big boxes, but in several of the cases I've seen the buyer is wanting the outparcels more than the building. On one property we're involved with, the buyer paid $3.5 million for a freestanding closed Kmart and then leased out three outparcels (which were not allowed when Kmart controlled the property) for $265,000 a year; so whatever they get for the closed Kmart is their profit.

Changing topics (but tied into the slowdown of leasing) is the slowdown of not only getting deals done, but also responses from anyone on anything. Compared to 10 to 15 years ago, the typical deal today probably takes twice as long to get done as it did in the "good old days" and I thought that was bad then. But since the beginning of the year, everything seems to be slowing down, which makes no sense. Why? The great unknown. It will take a month AFTER the tenant says that they want a site to get an offer and then another month for the owner to respond to the offer. Both, I assume, are hoping for something better to pop up. In many cases, after the tenant enters into a lease negotiation, they back out after a month and then come back in 90 days, saying they "missed you" and want to get together again. Yeah, or their other deal died.

Now from a positive point of view, while there's a slowdown going on in existing property, new development appears to be going as strong as ever. Almost every developer I speak to who's developing from scratch is a very happy trooper, with most of their centers 75% to 85% preleased. You can't ask for more than that. I think one of the reasons is in new development, most retailers can get a turnkey since the developer is doing 90% to 100% financing, and therefore there is less out of pocket expense for the tenant and that looks better on their books, especially if they're public; another reason a lot of the new developments are either "urban" or "high end" (usually lifestyle centers) and because that's the vanilla of the day most retailers want in.

Puerta Rico, Chicago, LA, or Bust ...Oh, Don't forget New Orleans

2006-02-21T10:19:00.000-08:00

t's been a busy month, starting with Ann and I attending the Puerto Rico dealmaking, not to get away from the cold (it was in the 50s in Jersey), but to do actual work, since one of our clients is looking for 50,000 sq.ft. to 75,000 sq.ft. locations on the island. The Puerto Rico show is small, in fact the smallest we go to, with maybe 250 to 275 people in attendance. But it's a close-knit group where everyone knows your name. The Island is undergoing major changes in ownership, with Kimco acquiring the RD Management portfolio, DDR acquiring a couple of million sq.ft. last year and Vornado and Thor Equities also being players in the market. Slowly but surely, developers from the United States are taking over. I also bumped into numerous "buyers" from the states who want to acquire centers (good luck), so while the CAP rate in the States is low, Puerto Rico's is even lower, which is hard to do and still have a positive cash flow. What makes matters worse, for all the retailers wanting to expand there, rent per sq.ft. is about 50% higher than in the states. However, in fairness, volumes are 50% or higher. I guess you get what you pay for.

This is my fourth visit to Puerto Rico during a "dealmaking" show and every year I talk to four or five stateside retailers that hope to enter the market. The good news is they all get excited about the market's potential, the bad news is most back off when hearing the rents. This year was no different. I had conversations with three retailers looking to enter the Island for the first time, but they all had problems accepting the rents they were being offered. I'm told consumer spending, as a percentage of personal income, is twice that of the United States. That's A BIG difference, which is why apparel does so well on the island and why retailers want to be there. Now if they could just get over their hangup on rent. Picky, picky, picky.

What really shocked me was when one developer quoted $18.50 psf for CAM on a 60,000 sq.ft. building (the rent was even more insane). One of us is nuts. Yes, rents are higher on the island, partially because it takes as long to get approvals from the government as it does in California. However, it is mostly because the developer can command it (the vacancy rate is real low). Where I heard the most complaints from retailers is the "newer" (meaning stateside owners) landlords are doubling CAM costs, making it into a profit center, which it shouldn't be. I'm told numerous tenants are on a rent strike because of CAM. Ripping off retailers on auxiliary charges has never made sense to me.

I have to thank Larry Campbell for an invitation to his party on the night before the PR show. He had the "who's who" in retail real estate in Puerto Rico. Of the 125 to 150 attending, probably half were retailers and half developers. It was a great crowd and networking at its best.

Oh, I just read an interesting article. If you "counted" the Internet as a single entity, then took all the sales for computers, cars, eBay, Amazon, airline tickets, etc. and counted all sales on the Internet, it would be the second largest retailer in the world. Who is number one? It's Wal*Mart of course. That's scary to think that they sell more every year than the entire Internet.

Changing subjects, I had a meeting with a potential client the other day who just acquired a center and wanted us to manage and lease the 40% vacant property. After a few minutes of looking at the site plan and individual sales for the tenants, I asked, "Did you buy it at an 11 or 12% CAP?" He answered, "Eleven percent, and it's a great deal, since there's positive cash flow without leasing the vacancies." I told him to look at the expiration period for the two largest tenants and it was in 18 months. He said that they would renew, and I asked why he felt they would, since sales are less than $75 psf for both. His answer: Their rent is cheap (wrong answer). I explained that he did a bad deal, the "anchors" will leave and he's screwed. Needless to say, he didn't like my response and I didn't get the assignment (Sidebar; when I'm trying to get an assignment, I'm usually asked why they should hire us over another management/leasing company. My answer is, "We'll tell you you're wrong and yell at you to get a deal done," something the competitors won't do. (I believe this answer helps the property in the long run, but it costs me lots of assignments).

Many "investors" in their desperation to find deals that make economic sense (which usually don't), but have little leasing experience, are jumping on deals with high CAP rates (10% to 14%) that after a two or three year period make no sense. You usually get what you pay for. I'm not saying that there are no great opportunities "out there." There are plenty, BUT most of these opportunities can only work for an experienced developer with deep pockets, especially now. The growth of real estate as a major investment segment has brought in players that have no right to be in the business. Especially if my observations are correct that there's not a huge but still significant slowdown in leasing (but not sales) making it even harder to lease a second tier center by an inexperienced developer. Most of the retailers I'm talking to, while still expanding, are slowing down their expansion program. And, of course, every day we hear of another chain closing 20 to 700 stores. 2006 will be an interesting year.

Speaking of "deals," I was talking to a fellow broker the other day who just sold a center to a REIT for a 6.5% CAP. Another deal that makes no sense. As our conversation continued, we discussed the subject of the Mills Corporation and its latest scandal and then Enron came up and we spoke about those crooks (hell, the head of Radio Shack couldn't provide an honest resume; big business like the government has problems telling the truth). Then I had a thought, which I'm not saying is true, but still a thought: What if a lot of the sales of centers that are being bought by REITs or by smaller companies are based on funny numbers? Then these ridiculous CAPS make sense. Just a thought, but the truth should be coming out in the next year or two.

Anyway, Alyson and I were on the road last week, with her traveling to the Los Angeles dealmaking and I to the Chicago show. Both are small events with 1,220 to 1,500 dealmakers in attendance, but with enough "dealmakers" to make 'em successful networking events.

According to Alyson, it was the first year the show was held at the LA Convention Center; and the overall reaction from the attendees was good. No one said great, but no one said slow either. There were 100 exhibitors, compared to about 70 in Chicago; overall both were decent events.

The Chicago show was combined with the Alliance Program, which is where cities exhibit their vacancies to retailers and brokers. The first day of the Chicago show was geared 100% towards the Alliance Program and the second towards seminars and dealmaking. The LA show had its mayor speak in the morning, and there was lots of urban development buzz throughout the show, which is currently the "vanilla" of the day for retail real estate. The Chicago show was upbeat and the majority of dealmakers came in on the second day for the Dealmaking event. Of course the night before was hectic with lots of bodies going out for dinner and partying.

I bumped into Joel Siebert of Mandees at the Chicago show. His company is in the process of opening its first three stores in the market and looking for more. Most of the retailers in attendance were the same group that have been expanding into the market for years, as Chicago is one of the nation's better retail markets and can still be profitable with decent sales even with the high rents Chicago commands.

The Chicago dealmaking overall was upbeat with retailers being more aggressive than in most regions. We didn't attend the New Orleans show, but a friend said the count was 654 and was a decent, but not a great, show. Since it's the first show since the hurricane, that reaction wasn't bad, but I was told by several attendees that if you left the downtown area, parts of the city looked like a third world nation that lost the war. I guess we can call New Orleans an "added value" city...lots of potential.

Micky bombed out for me

2006-01-18T06:39:00.000-08:00

Several months ago I mentioned that we (TKO) were going to exhibit at the Home Builders Show in Orlando, FL in January. The thinking behind this decision was that there would be over 100,000 professionals involved in the residential business attending, with many of them acquiring 100 to 200-acre sites that use the front 10 to 20 acres to develop retail and therefore might require our services. In theory, my thinking was brilliant. In reality it bombed. I was half right; there were 100,000 professionals in attendance and some "do" need our services. The problem came down to that there were too many people in attendance and only 1% or 2% were directly involved in retail real estate, a percentage way too small to reach with a 10 by 10 booth. We spent three days smiling as tons of people walked by. But less than one in 100 had any interest in us (should I take that personally?) I did learn a few things however. First, while never good, the food at an ICSC event is better than what we were served at the Home Builders event. Second, you get more bang for your buck at an ICSC show than at the builders' event and third, I think I'm going to try exhibiting at a local (northeast) Home Builders show instead of their national show, since it might be more productive. I "know" the concept is correct, it's the execution I'm having problems with. We did have 10 or 20 people drop by that are subscribers to Dealmakers and that was "rewarding," and a few dozen more who were members of our e-mail forums, so "some" of "our" people were there but I had no conversation at the show that showed promise to bring in business for the coming year.

I did have an interesting conversation with one builder who's looking to acquire dilapidated shopping centers or ones with surplus land so they could either demolish the center to build residential or build residential on the surplus property. For years, many retail developers bought land that was substantially more than they needed for their center and flipped or JV'd the rear portion of the property to a residential developer. Now the worm has turned and residential wants the commercial site to redevelop. Most of the home builders I spoke to said that business has slowed a little bit, but not much. The low-end homes ($150,000) were still going strong but the $400,000 and up housing was down 10 to 15%. I believe them more than newspaper reports, so residential is slowing, which is not a good sign. Several of the larger condo developers expressed concern that with higher interest rates and a slowdown appearing in residential, speculators might drop out of the market and they "guessed" that speculators account for 15 to 25% of sales, so they could really be hurt. While I don't believe speculators represent a large portion of our industry, I do believe we'll see a lot of "opportunists" dropping out this year.

If Ann buys everything she liked at the show (from a consumers point of view it was great, you got to see the latest gadgets, appliances and home improvements available), I may have to declare personal bankruptcy. But if I ever, in a moment of insanity, decide to build instead of buy a home, it did provide great ideas. The show, from a consumer viewpoint, was fantastic. The trip wasn't a total waste as Josh and his girlfriend Mindy joined us for the week and we did have an excellent family adventure.

Anyway, back to business. I'm writing this in the middle of January and, while business isn't poor, we (TKO) haven't experienced our normal rebound after the New Year. Hopefully this is just an aberration and not a trend for the year, but what does concern me is that retailing seems to be slowing down but development doesn't, which means there could be a lot more product available than companies needing space. That doesn't mean the world is coming to an end (if it does, what difference does retail real estate make) but it does mean we might have to hustle more to produce less. The true stars of leasing, sales and acquisitions will not be affected, since they always produce. But the second and third-string players could have a bad year or two coming up. Now even if the economy drops, it won't be a total tailspin. But because business has been relatively good for the last 10 to 15 years, the slowdown becomes a shock to our system whether it's a deep slowdown or not, and most don't know how to handle a slowdown since it's been over a decade that they had a problem like what I think is coming. This is the time to get your house in order; lower costs, improve personnel and do upgrading (but don't get carried away) at your centers.

Changing subjects, I keep hearing a lot about Sears and Kmart and their plans to improve sales. Well, if they don't get their act together this year, I'm willing to bet they will not be in business that much longer. Their asset, as we all know, is their real estate and that's going to be cherry picked by all the big box retailers. As I said before, Sears Essentials seems to be bombing, their traditional Sears store is going downhill and Kmart seems to want to mimic National Wholesale Liquidators in appearance but with lower sales. Their problem, as is the problem of most retailers today, is that they don't have merchants in charge, just bean counters. Here's a company with major problems.

I recently read that Kmart intends to lay off thousands of employees this year. My question is: "How, they don't have enough now to service the store." Yes, I understand they lack customers so they want to lower costs to reflect lower sales, but if they lay off that many people, who is going to open the door or work the cash register. I've been in convenience stores with more personnel than in Kmarts. Oh well, ranting on...while brick and mortar stores may see a slowdown this year, retailer's web sites are going strong. JCPenney just broke the BILLION dollar mark online and most of the web's retail business is going to conventional retailers with brick and mortar stores, not just an online presence. Just a few years ago, the fear was that online would kill offline business. It's hasn't done that yet, but the growth is tremendous and the stores that had name recognition as conventional stores are now attracting customers to their web site. Nearly 94% of our national and regional retailers have a web presence, making them a little less dependant on developers. I'm willing to bet that in 10 years, 50% of most larger chains' sales will come from online sales.

Here's a couple of observations I've noticed lately. In the January issue of Shopping Centers Today, the theme of the issue appeared to be about master developers and mixed-use projects abounding everywhere. Long story short, the buzz in the industry is about 100 to 500-acre sites combining residential, condos, office and retail or, on smaller scales, just office and retail with perhaps a touch of condos. James Rouse did that four decades ago with Columbia, MD, the Levittown complexes were built 60 years ago and, as I said at the beginning of this story, I went to the home builders show to find the residential developer that has surplus land for retail development; a group that's been combining retail with residential for 100 years. The only difference today is it's quite often built today by a single organization instead of specialists handling each segment. The costs of these projects can run into the billions, which means it's not a segment of the industry for the "little guy." Yes, there's more sophistication today than in the past, but the world is more sophisticated today than in the past. But it's only an old concept that's been updated; nothing new. I think these complexes have a place, but they are not the future of retail real estate, just another niche. I for one have no desire to live in a community with retail and offices next door. I try to live in areas which limit growth, not promote it (developers hate me). I read that currently 20% of all residential sales currently are in master/mixed-use complexes. I don't believe that trend will continue. Oh, in the same issue of Shopping Centers Today, it was reported that the Related Cos. was acquiring Equinox Holdings, operator of 25 fitness clubs. They intend to use Equinox gyms as an anchor in many of their mixed-use projects. IMHO, this is a disaster looking for a place to happen. If you're old like me, you'll remember Arlen (now CBL) acquiring Korvettes, Crown buying Hess, LJ Hooker buying a bunch of retailers or Bob Campeau, who bought and bankrupted Federated Department Stores. All these developers and their retailers went bankrupt because they (the developer) have no idea how to be a merchant. I'm not saying Related is going "11" but the past usually tells the future.

My last observation is on "creative" acquisitions. We're in the process of selling a center to a REIT. It took about a month to agree to the price and I thought the hard part was over but it wasn't. We're creatively lowering the management fee, reserves for roof and structure replacement so that the 6.5% CAP rate turns to a 7% (on paper) return based on these "inappropriate" numbers. What's the expression? Figures don't lie, but liars do figure? I guess it's a problem of being public. Everyone knows what you're doing.

It's Up; It's Down; It's Happy New Year

2006-01-04T08:09:00.000-08:00

Read the New Year's predictions and news for the last few weeks and it's extremely confusing. Inflation is up, inflation is tame, interest rates are going up, interest rates are stable, unemployment is going up, unemployment is going down. Consumer confidence is up, consumer confidence is down. Leasing activity is great, leasing activity is showing signs of slowing. About the only constant is that the sale of centers is booming. The record trade deficits will hurt the economy (Democrats are the ones saying this). The enormous budget deficits will not hurt the economy (Republication are saying this). High gas prices will hurt retailing, the high gas prices are having no impact on consumer spending. The world is upside down and no one knows where it's going and I'm not going to claim I'm smarter than the rest and make a prediction; the only thing I know for sure is that we live in interesting times. The good news is that almost every retailer I've spoken to had a decent to good Christmas, so retailers should continue to expand in 2006.

There's a good chance that the new fed chairman will stop raising interest rates and if that occurs, interest in real estate will continue, but I don't think lease rates will increase enough to justify the higher acquisition prices that centers are commanding, The higher prices of construction materials are also having a negative impact on developers' profitability and shortages will prevent construction schedules from being on time (and therefore over budget). Not a good sign for a profitable 2006. Only a small percentage of developers have the skill required to realistically do a budget/proforma that's accurate; the rest just guess and they usually screw up.

The popularity of acquiring centers is so high that it's keeping the inefficient and unknowledgeable developers alive. I recently was hired to review the acquisition of three centers being acquired by one developer from a builder. All three centers will be completed within the next six months and all are over budget by millions, with slightly lower income than originally projected (a winning combination). The builder is a relative newbie and screwed up enough times that in a normal time period he would have either lost the projects or, if lucky, broke even. But when new projects can command 6% to 7% CAP rates, he'll make lots of money. Hopefully for his sake (but I doubt it) he'll stop building right before CAP rates start their climb.

Besides all these confusing reports on the state of the economy, brokerage, at least for us, has been rather slow for the last few weeks. But that's normal for the period between Thanksgiving and New Year's. Hopefully we'll get back to status quo by the middle of January. Everyone I speak to had a banner or record year so even if the market is down, the retail real estate industry is optimistic about its future.

One thing I'm sure of is that there will be an abundance of announcements on store closings from all sorts of retailers over the next few months as retailers start closing their underperforming locations. While it won't compensate for the closures and addition of vacant space to the retail real estate world, what will help out somewhat is the announcements on new concepts opening as merchants try and determine what the consumer really wants (see Ann's editorial). Of course, in my humble opinion, it's primarily service that the consumer wants from the merchant, something most retailers have no grasp of, which is why the Internet is doing so well. Your computer is a lot smarter and more polite than the clerk that usually waits on you.

I recently received a phone call from a friend telling me to read the blog on deadmalls.com, which I did and it made me feel real old. Not the blog aspect of the site but they list all the "dead malls" of America and when I went through the list I realized I worked on a high percentage of the centers mentioned, a scary thought. Now if I look at this with the understanding that I worked on 'em over a 30-year period it isn't that bad. We (TKO) specialize in turnarounds, so of course we have experienced a higher level of duds than most, but "seeing" all my losers in print still hurt the ego. I admit, when we started to work on the malls, they already had one foot in the grave, but I really believe, in most cases, that the center could have "worked" (never a success but could have been made to have a positive cash flow for the long run IF we had a knowledgeable client who understood the process and was willing to put cash into the deal; most wouldn't). Unfortunately, deadmalls.com will be adding more malls this year.

As I was rereading deadmalls.com, it dawned on me how much hasn't changed over the last 10 years. The vast majority of these dead malls have been sold over the last ten years and, in most cases, to inexperienced buyers who looked at the replacement cost ($100 psf to $200 psf) and their low acquisition cost ($10 psf to $25 psf) and also saw a positive cash flow and decided that they had a home run that no one else was intelligent enough to spot (yeah, right. If it's too good to be true, it usually is). Today's buyers of some strip centers are repeating the same mistake. They see high replacement costs, low acquisition costs and positive cash flow. Remember, when someone sells a center they've decided it's the highest price the property can command and the buyer always sees an upside. Yes, the center you're acquiring at a 10% to 13% CAP rate has positive cash flow, BUT for how long? Usually we find it for a one-year period or, at most, a two-year period; then it goes negative. The reason, in most cases, is the regional and national tenants who signed a lease eight or nine years ago and are doing poorly are just waiting for the lease to expire. The locals stay alive by paying rent every other month, it's a discount the tenant takes without the landlord's approval. Once the "big boy's" lease expires and they leave, traffic dries up and the locals only pay rent every third or fourth month. The new landlord figured the center could be turned around in a year or less, so they never contacted the nationals to see if there was anything he could do to keep 'em past their lease term. And it's only as they start to move out that he attempts to start a conversation to keep 'em, which by that time is too late. They usually believe that lowering rent a few bucks is all that's required to change the retailer's position. If they had started conversations a year or two earlier, they might have had a chance, but once the decision is made there's no going back.

Parting thoughts...In the last few weeks, I must have gotten a dozen phone calls from owners wanting us to sell their property. In all cases it was at insane CAPs that make no sense to me. Now I have to decide if it pays to try and market a "C" center at a "B+" price. I'm hesitating because I don't want to waste my time or theirs trying to sell an unsellable product. The only reason I might is because I've seen too many centers sell that have no upside, so maybe I'll be able to find that greater fool. Leasing is taking a change in direction; I'm talking locations with more low-end/urban retailers today on potential sites than any other period I can think of. Some of the dollar stores and blue collar chains were hurt in 2005, but I think their problems were more with over expansion than the actual concept. Anyway, we have 12 months to see how 2006 will be. Here's wishing you a healthy New Year.

P.S. I spent a few hours over the weekend going over all of the deals we leased in 2005. What I found interesting is how we leased 'em. What I mean by that is we market via phone, direct mail, the Internet, ads in trade publications, faxing, attending trade shows and leasing signs on the property. The number one lead generate was the old-fashioned leasing sign by 2 to 1. Sometimes the old ways are the best ways.

2005-12-09T10:30:00.000-08:00

Why Many Enclosed Mall Turnarounds Fail

Recently we (TKO) received a call requesting a proposal for leasing a "turnaround" for a mall of a million sq.ft. that is 65% vacant. Turnarounds like this are extremely difficult, and often the buyers of these centers have no idea what they are doing, but because they acquired the project for $10 psf or less, they think they're getting a bargain (which they never are). So before going into our services and costs, I asked some questions on what its owner thought could be done, what type of money he had for TI, how long the owner anticipated waiting before seeing results, etc. (why waste both of our time if we can't do the job) The good news was that the new owner recently did a Steve&Barry's deal, which in my opinion makes sense, since they're so unique that they'll draw from a larger radius than a typical JCPenneys, Sears, Wal*Mart, etc. So our conversation started off on the right track. (Oh, the center can't be demalled).

The owner also built into his proforma a substantial TI budget; is prepared to do "sweetheart" deals and wait 18 months before seeing any real results. A rare and knowledgeable buyer of distressed enclosed malls compared to most I meet. Our conversations went well, but there were two areas I disagreed with him on. First, when we take over a center of this size with problems we want to also manage it, not for the money (you never make real money off managing) but because it provides us with the degree of control we need to make a turnaround work. The owner felt that currently the amount of tenants in the center is small enough where he could manage it until the project begins to lease. Yes, he's right, it's small enough for him to manage as a one-man show BUT you have to treat a turnaround not only as a leasing situation but also have to "turn" the marketing and management around at the same time so not only are new tenants being solicited but the few existing retailers are kept somewhat happy. And keeping existing tenants happy and getting new ones interested means that there has to be traffic in the center and centers with this low of vacancy usually have no traffic to speak of, which is why the center is in trouble (Which came first, the chicken or the egg?).

I've written this before but I'll say it again, traditional advertising doesn't work for a "C" or lower center. You have to do "event marketing" in order to have an impact. Event marketing means having traffic-generating events that bring people in for that specific show but then hopefully they shop the rest of the center. In traditional advertising, you promote the center, the consumer comes, but if the center has few retailers, the shopper is disappointed because of the lack of merchants and they never return (you only have one chance to make a first impression). We've promoted gun shows, arcade auctions, book events, etc, sometimes bringing in as many as 25,000 consumers over a weekend. We gave space for free to hold comedy clubs on alternate Fridays and allowed Yoga teachers use of stores during the week to help increase traffic. All our food and many of the other stores benefit from this increased traffic. They did enough volume to keep the existing retailer's spirits "up." That's why marketing goes hand in hand with leasing.

We also want to have enough control that we can minimize the number of retailers closing every month, and in a problem center there's always a high turnaround. I'm a great believer in temporary tenants, but they have an extremely high failure rate since most are startups with limited capital and with no walk-bye traffic, they usually fail. Therefore, you have to be extremely selective on who/what you put into the center. Also, we've learned that we have to keep cash flow as high as possible or at least keep the losses low, which means working hard on lowering CAM costs. Anyway, that's why we "need" the management.

The next point I disagreed on is that the buyer put together an elaborate and well-documented report on every mall-oriented retailer operating within 20 miles of his project. You could tell there was a lot of time and effort researching this info, BUT I'm not sure how useful it is. The center itself is over 20 years old and there's no doubt in my mind that 99% of all the mall-oriented retailers within 50 miles knows of the project and has a negative view of the center's future. Yes, there are many mall-oriented retailers I'd love to have and some of 'em might be willing to be "bought" in order to entice them in, but besides requiring lot's of TI money and kickouts I don't think they would have an immediate impact on traffic because they are in every mall.(there are three competing malls within 15 miles). Anyway, the new buyer asked that I put together a proposal and list of tenants I'd go after and that got me thinking of my "dream team of mall tenants" and guess what, most are not mall-oriented. I want tenants that build traffic and draw on their own, not needing their neighbors traffic to survive, at least at the beginning. Rent considerations were secondary, since the center was bought "right," so we could make it work.

So here's the type of retailers I'd want to start a turnaround with: (not in any order of importance) Five Below (if I couldn't get them, then Dollar Tree), MJM Shoes or DSW would be excellent draws; While I'd love a Barnes & Noble or Borders, realistically I can probably do a Book Warehouse or Books-A-Million deal. Stein Mart would also be an excellent draw, as would Guitar City. Add to the list Children's Place, Ann Taylor Loft, Radio Shack, Causal Male, Dress Barn, Fashion Barn, Mandees, HomeGoods, Sleepy's, Verizon and in a rear, outside location, the Post Office (a great draw from 9-to-5), Hancock Fabrics/JoAnn's, David's Bridal, Cato Fashion, Deb Shops, K&G Men's Center, Hobby Lobby, Party City, Shoe Carnival, Famous Brand Shoes, Petland, Wood Workers Warehouse, Sally Beauty, Dot's, Eastern Mountain Sports and I could go on and on. As far as food, I'd want a 10,000 sq.ft. Chinese restaurant or Old Time Buffet, they'll cater to my immediate customers and are in the right price points. I can afford to do a deal with the Chinese restaurant, but can't afford a "Friday's" deal. I'd also want a large and well merchandised nursery somewhere on the outside of the property.

What I chose are both strip and mall tenants (in today's world, most retailers are bi-center...(the political correct way of saying it. Ann corrected me; they go either way) and few of the retailers I mentioned are high rent payers. I picked the retailer based on tenant mix and their ability to draw customers into the center on their own. Neither JoAnn Fabrics nor Hancock are high-volume retailers, but they are "unique," not usually found at every street corner and command a high degree of loyalty from their customers. All are destination-oriented tenants, which in the long run will strengthen the entire center. Few of these retailers are considered "trophy" tenants, but they can all do a lot of good for the right center.

Non-category killers, such as a Petland, are good traffic builders for a center. Parents bring in their children to show the "mini-zoo" to their children and animal lovers of all types can't resist the cute rabbits in the front window. The buzz word of our industry today is Lifestyle Centers, but isn't a pet shop part of a "lifestyle," as is a fabric store or hobby shop or a "Guitar City," a well-merchandised nursery definitely adds to my center's "lifestyle" and we've dont it on the "cheap." Maybe they're not all high end merchants but they bring in a dedicated customer willing to spend time and money.

Now in all probability, we won't get the account since I'm taking an unorthodox approach, and all owners would rather hear that we're going after the Limited instead of Dots. And in the perfect world I agree, but we don't live in a perfect world. First, the Limited builds-out costs a fortune and second they are already in every mall within 10 miles. So, while we are making it more convenient for some customers to come to "our" center, the drawing power is probably limited to three miles, while a "Guitar City" will draw customers from a larger radius. Problem centers can't compete with their successful neighbors, they have to complement and that's why leasing and marketing have to take a non-traditional approach.

--

NYC ICSC Dealmaking Show

2005-12-08T13:23:00.000-08:00

Ann, Alyson, Laurie, Rich, Joe and myself just returned from the ICSC Dealmaking in NYC and the deadline for this issue going to press is in a few hours, so I'll keep this short. Ann and I went to the Barry Davis Memorial Dinner on Sunday night and it was great. Besides honoring and remembering a good friend, there were 150 of the industry's "Who's Who" in attendance, so we started the show off at an excellent dealmaking/networking event. If you didn't attend this year, I highly suggest you do next.

As far as the actual dealmaking was concerned, it was an overwhelming success with the only real concern being on Monday night when reports of a possible blizzard that could have canceled and delayed flights for many of the attendees, therefore affecting attendance. Fortunately, the brunt of the storm missed New York and 7,000 to 7,100 of our closest friends managed to show up to wheel and deal for two days. Monday wasn't that busy, but all the four-star restaurants in New York were packed with dealmakers, as was the case on Tuesday with parties and cocktails being the norm. The closed bar on Monday at the Hilton (makes no sense why it was closed, there were lots of potential customers wanting a drink) was a great place to meet and deal, as all the tables had open site plans and computers. I'm not sure why and can't think of a logical reason, but starting next year, the ICSC is putting the picture of the attendees on all badges (so smile while they're taking yours). It will take a year or two to be completely implemented. However, for the record, I won't feel any safer by having everyone's picture on their badges. But, then again, I don't feel safer flying now than I did on September 10th. The cocktail party on Monday was jammed with everyone in an upbeat mood, with many attendees claiming that 2005 is the best year ever for 'em. While I've always said that no one comes to an ICSC event because of the food, I was impressed with the selection of appetizers at the cocktail party. Of course, to make up for the abundance of food on Monday night, we got a box lunch on Wednesday, which was "blah." After the cocktail party, most of the attendees fled to make their dinner reservations and do more networking. On Tuesday, the start of the Dealmaking, the large crowds started to appear. Fortunately, even with record attendance, registration went well mostly because the badges were mailed ahead of time (an excellent idea).

Numerous attendees complained about the show being held at the Hilton. The show, especially with 7,000 attendees, is extremely crowded to say the least. However, I disagree, since the only alternative is the Javits Center and we don't want it there; it's out of the way, no hotels nearby and too big of a facility. With "only" 7,000 attendees we'd be lost and it would cost double to exhibit. The advantage of having the show at the Hilton is the "togetherness." There's an excitement generated by having so many people in such close proximity to one another (and I don't mean sexual). The herd of people and the noise they generate, at least in my mind, generates an upbeat excitement. As I said, most were upbeat, and because of the holiday season, even the pessimists were somewhat happy. The acquisition of shopping centers is still intense, and while all complained, CAP rates at 6% to 7.5% seem to be accepted as the norm, at least for now. Several buyers said they were able to find centers at 8% to 10%, but they claim the only way to find these deals is not through brokers or even contacting the sellers direct, but to solicit the owner of older centers before they decide to put the property on the market. Every third visitor to our booth wanted to finance a center for us and rates are still low, which is why Cap rates stink.

While it still represents a small percentage of the developers, I heard more people complain about smaller tenants wanting a rent reduction at this show than the last three combined, so unfortunately it's a growing trend. Leasing still appears to be going strong but more and more tenants are requesting (and getting) higher TI money and kickouts. One developer was bitching that he "had to" give a non-credit, 8,000 sq.ft. retailer a vanilla box and $20 per sq.ft.

The reason he "had to" was the space had been vacant for four years and he was getting desperate. His approach was "if the tenant makes it two years, I break even," the right attitude in my opinion. Yes, parting with money, especially for non-credit tenants, is not "fun" but it's becoming more common than not. Most of the chains I spoke to say that, while they are still expanding, they are not expanding as aggressively as they have in the past.

What's scary is the amount of newbies that are starting to buy retail because the market is so hot. I must have spoken to a dozen owners, who in the last year entered the retail real estate industry with absolutely no experience, and now own between 250,000 and one million square feet. When you attempt to provide 'em with some insight, they basically say "you're stupid." That's the "old way" of thinking and they know better. It reminds me during the dot.com boom when people argued that profits don't matter. Yeah, right. When the next recession comes, they're the first to exit the industry.

Even more frustrating is when I spoke to experienced leasing people who complained that their company was acquiring unleasable centers. They're buying centers at a 9% to12% CAP without bringing leasing in (the reason the CAP rate is so good is the center is so bad). Then, once the project is acquired, they hand it over to leasing and saying get it done NOW. One VP of leasing I spoke to bitched that his company brought him in during the due diligence period; he said NOT to buy but they did anyway and are now on his case because he can't lease the center, which he told them up front. Dumb, de, dumb, dumb, dumb.

The percentage of actual retailers at the show, while higher than most events, was still low but there were tons of exclusive reps everywhere trying to hustle up some deals. There weren't that many new developments being promoted/announced and some of the vacancies being promoted have been around for years. I spoke to several retailers who recently filed for Chapter 11 and they complained about the new bankruptcy law, which requires them to quickly make decisions on which stores to dump and which to keep. The law appears to be accomplishing what its goals were. Of course, the negative for the landlord is that because they have to make quick decisions, they often close stores that they MIGHT have kept in the past. But it's rare you can have it both ways. The landlord now gets a fast answer, but the problem is that it might not be the answer he wanted. All the Chapter 11 retailers said that once they filed petition, the landlords that wouldn't return their calls are now talking to them about new locations.

I can't remember the exact number, but ICSC membership is now something like 54,000. That's the great news. The bad news is that the substantial increase doesn't include new retailers, meaning they still have the same number of companies as they did five years ago. The increase is in support personnel (finance, construction, etc. Oh, Google even exhibited in New York, representing their mapping service) and lots of newbie owners. We (the ICSC) has to figure out a way to get more "girls" (retailers) to our parties. If they do it right, we can all expect to take one home with us. Anyway, have a healthy New Year and a great holiday.

Location, Location, Location-Retail Real Estate

2005-12-03T07:25:00.000-08:00

Location, Location, Location
Boring, Boring, Boring

I've been leasing and managing over 20 million sqft of retail space in
36 states for RD management for over 27 years and have gained
substantial experience when it comes to being a real estate
asset manager, so I felt comfortable when the publishers of the Caribbean
Business ask that I write a article, feeling I could use my past's
insight to provide useful information for their readers. However, when
they gave me the topic of Location, Location, Location, I was
bewildered. What can be said about the topic that hasn't been said a
thousand times before and it's such an common topic, that there's
nothing exciting to say, but I'll give it a try.

Everyone knows the expression.: What's the three most important things
in real estate ... Location, Location, Location is the answer.
So what makes a location -+good?

A good location is an location where the consumer will shop more then
another location., it's that simple. But the requirements for a good
location are different if it's urban, suburban, rural or nitch. An
outlet center can be in a secondary location but if it has the right
tenant mix, will draw from a substantial trading area and therefore the
location becomes extremely desirable, even if the physical location is
not. The grouping of excellent retailers made the location work.

Besides different categories having different needs in determing what
makes a great location work, an individual retailer can make a location
"work" for a specialty tenant even if the location is not prime
If there's a "hot" restaurant located on a side block, with limited
traffic except for the restaurant's customers, that
by most definition is a poor location BUT the restaurant might be a
strong enough pull to make the street the food operator is located on an
excellent location for a bakery or dessert operation. The restaurant becomes the anchor/draw for the location.

You can be located in the highest grossing shopping center on the
island, a center that literally draws from every part of the island and
still not have a location that is suitable to your type of business. You
can be in the best shopping center but in a secondary location and not
be able to generate the traffic you need to substantiate your operating
costs. You also have to make sure the consumer traffic is your type
of customer. You can be located between Banana Republic and Ann Taylor
and still not be able to sell your merchandise because the consumer
traffic generated by Banana Republic and Ann Taylor is not the
customer base that your merchandise would draw from. If you are selling
discounted merchandise you want to make sure that the are you are
located in is drawing the customer looking for the discounted
merchandise.

Finding the low hanging great locations is easy; everyone know where the
"hot spots" in retailing are and if you don't know, ask any competent
broker or retailer operating in the market and they'll tell you. It's
not a secret.
The problems to great real estate locations are two fold however; first,
even if you know where the great locations are, that doesn't mean you'll
find an available spot and if you do, will the rent be at a number you
can afford? Sometimes, a secondary location can be more profitable then
a primary. The bakery located near the "hot" restaurant can do excellent
volume, because of the traffic drawn to the restaurant, the same or more
volume then a location in a prime area but that doesn't mean two
bakeries could 'work" on the street even through several bakeries can
survive and prosper in a tradional great location, so the determination
of great real estate can vary by the individual tenant needs. A BTB
retailer has a totally different set of criteria then a consumer
oriented one. Prime locations for a BTB retailer could be in an
industrial park, yet tradional retailers would fail in the same location
The business oriented buyer is willing to drive further or go to more difficult locations because they carry merchandise not available elsewhere, therefore location is not quite as important. Determining what's right for your business is the hard part. If your at
the corner of main and main, there's less pressure on your business to
spend quite as much on advertising and usually it's easier to attract
personal. The larger chains, as a rule of thumb have to take better real
estate because the caliber of their managers are not as strong as the
local merchant, where the owner is directly involved. The better real
estate makes the chain less dependant on the manager but more dependant
on the location. There's an expression in retailing; it's easier to change managers then locations
Local tenants are more dependant on it's ownership for survival.

Through outstanding marketing/advertising, having a better selection of
merchandise and knowledgeable personal, a local retailer can take a
secondary location and make it first class. The savings on rent per sq.
Ft. Can run $10-15 psf or more and in the secondary location, the
merchant can demand and receive better lease terms then that in a prime
location, important items such as term, options and tenant improvements.

Location, Location, Location, a simple concept with a difficult answer on where and what it is

Philly-MyWay

2005-11-29T10:07:00.000-08:00

Ann, Laurie, Alyson and I attended the ICSC Orlando show and, as has become tradition, it was a homerun, with attendance up 15% (if this trend continues, the New York show will be a zoo, with the possibility that there will be over 7,000 dealmakers in attendance, making it a MUST, MUST event no matter how much you hate crowds or New York City). The night before the actual dealmaking event was "party" night and our industry excelled at eating, drinking and being merry. Tons of dealmakers got back to the hotel between 10 p.m. and 2 a.m. and had a 6 a.m. wake-up call. You know they weren't very productive that morning, but somehow I'm sure most made deals.

I didn't attend, but was told the Women in Real Estate event was extremely well attended and active, as was the Next Generation party. HOWEVER, numerous people complained about the attendance at the actual cocktail party (it was low) and the quality/quantity of food available (don't go to these shows to eat).

The halls of the show were filled with the sound of dealmakers everywhere, laptops open and site plans on display from the exhibit hall to the corridors. Anywhere there was seating available there were deals being done or at least trying to be done. The highlight of the show is always the Retail Networking Session event, which was jammed from the opening bell 'til 5 p.m. I've said it before and I'll say it again, this type of retail event should be held at all the dealmaking shows; it's extremely popular and, in a way, even more needed than the actual dealmaking. It's like going to a bar and having 50 gorgeous women wanting someone to buy 'em a drink.

I heard a number of retailers complain that rents and CAM costs were skyrocketing and that was particularly true for mall-oriented tenants. The "in" thing for mall tenants is fixed price CAM costs, and at least a dozen tenants complained they were being gouged. They also complained that the major mall owners (and there are few of 'em left) are "forcing" them to renew leases in their less desirable centers by refusing to renew in the "good" center. This isn't a "new" tactic, but it appears it's becoming more common. There are only two types of malls in today's world; good ones and the rest, which is why so many mall-oriented tenants are trying lifestyle centers. It's often a similar tenant mix, except there are no traditional anchors, at lower costs and no enclosed mall fees to pay.

I bumped into Jeff Doppelt at the show and IMHO Jeff is the best broker I've ever dealt with. He sold his company to Trammel Crow several years ago and tried retiring, but almost went crazy with all his free time, so he's now semi-retired and his main involvement in retail real estate is the development of 10,000 sq.ft. to 20,000 sq.ft. centers east of Chicago. A nice retirement program, which more and more "retirees" seem to be doing.

I had an interesting discussion with a "retailer," or actually a company that buys retail chains requiring a turnaround. The company buys the chain and then usually closes 25% of its stores in their drive to increase cash flow from under-producing units. His biggest problem at the moment was that he's responsible for sub-leasing over 400 stores, mostly mall-oriented. His other "problem" is that the economy is too good, so they're having trouble acquiring chains at a 12-14% CAP. So like the companies wanting to acquire centers, they're quietly hoping for a recession, thereby bringing "reasonable deals" to the table. Anyway, if you look at the excess properties of many retailers, probably 15%-to-20% of their potential bottom line money is tied up in closed stores. (Wal*Mart probably spends more on paying rent, CAM and taxes on closed stores than most retailers gross). It's a major problem that's getting worse and no one has the real answer.

On a totally different topic, I just read a disturbing article that reports the number of home foreclosures increased 4.7% for July, the most new foreclosures reported in any month, year-to-date. New foreclosures have jumped more than 12% in the last two months, pushing the nation's foreclosure rate to one foreclosure for every 1,465 households. Yes, it's not commercial, which is still relatively low, but it's a bad indication of what's coming. When the consumer hurts, either from high gas costs or foreclosures, we're in trouble and the consumer is hurting.

Oh, I forgot, I also got into a discussion with someone from a hedge fund and another with an insurance company while in Florida. Both are looking for developers with a track record and have numerous projects anticipated for the near term. They want to do JV's where they put up all the money and they split 50-50 after they get 5%-to-6.5 % return on their cash. Not a bad deal for the developer. America is truly a wonderful country. Long live capitalism.

I also read three interesting articles last week; two were in ICSC's Shopping Centers Today and the other was in The Wall Street Journal. One of the ICSC articles was about developers (both mall and strip) doing "everything" in their power to attract "upscale" retailers (Gucci, Gocci, Gicci) so they can differentiate themselves from other centers and produce higher sales per square foot. The Wall Street Journal article was about Sav-A-Lot opening stores in cities and poorer markets, offering prices below Wal*Mart. Two different ends of the spectrum.

There's nothing wrong with trying to attract higher end retailers; they serve a need and a market but higher end to me represents "MAYBE" 15%-to-20% of the population, which means 80% are not going to shop/buy at these retailers. Sav-A-Lot probably caters to the bottom 15%-to-20% of the population and the two shall never meet. BUT (that infamous but) high-end retailers as a rule do not attract the masses, so when a mid-priced tenant goes out and are replaced by a higher end merchant, traffic usually drops. The outlet industry, years ago, in order to have higher sales per square foot, replaced many of their popular priced retailers with high-end retailers. The good news was they accomplished their goal and sales per foot increased. The problem, since foot traffic dropped, is that the other tenants in the center saw a decrease in their walk-in traffic and therefore sales dropped for many of their tenants. And, in case you haven't heard, outlet centers are in trouble. The same will happen in traditional strips or malls if developers "push" too hard for upscale tenants. If less people shop in Gucci than Dollar Tree, then less people will eat in the pizza parlor or shop at Payless Shoes and the "pizza man" can contribute more to the owner's bottom line than Gucci. Sometimes we don't want what we wish for.

The third article was also in ICSC's "Today" and it dealt with Ace Hardware planning to add 180 new stores/franchisees during the next year. That's nearly five million sq.ft. by one retailer that the "media/industry" does not consider sexy. There are hundreds of other retailers similar to Ace who'll "fly" below the radar that are franchised or licensed which add millions of square footage to shopping centers every year that get little publicity or respect, but would be a decent to great tenant in most centers. Few leasing pros follow up with this segment of retail real estate; they wait for the tenant to call them, not the best way to make a quick deal and franchising/licensing is doing better today than ever before. It's a market we're overlooking.

MYWAY on Retail Real Estate

2005-11-29T10:05:00.000-08:00

We all saw the images of Hurricane Katrina's destruction and the resulting humanitarian crisis it brought. One million people were displaced from Louisiana and Mississippi to Alabama.

As the shock wears off, the business of business starts to take the lead of just some of the problems the region is beginning to address. In the next few months and coming years, how Katrina impacts retail real estate and the law will be a billion dollar debate and I'm willing to bet that some of the laws as we understand 'em will be changed. Questions such as what amount of damage/destruction frees a tenant from paying rent? What if the center survived, but the customers left, is the tenant still responsible to pay rent? If there's a net leased building in the disaster area, is the tenant obligated to pay rent even if the building has been destroyed? Who's responsible for toxic waste now on the property?

What happens to commission agreements that were earned but not payable yet? Is there anyway an owner can avoid paying their mortgage? These are just some of the questions that face the industry and region for the next few years and I doubt if there will be easy solutions. However, if I had money, I believe investing in New Orleans for the long term makes sense and there should be great opportunities caused by this disaster. It's the famous silver lining in the cloud.

Unfortunately, the impact of high gas prices that started before the disaster is now worse and is just beginning to have an impact on our economy and I believe its long-term impact will be a substantially slower economy even as the cost of gas decreases. Retail sales only grew 1% last month and that number might drop in the coming months. I have a Ford 150 pickup and it now costs me $75 to fill it up, that's $150 a week I'm now spending on gas. If I'm having trouble adjusting to this insanity, what's the average "guy" who's earning $48,000 going to do? And that's before we take into account higher heating costs this winter. Also, I don't care what our beloved government says, inflation is higher than being reported and that's having a negative impact on retail spending. We live in "interesting" times.

Before changing subjects, I have to commend Wal*Mart on their contribution to the survivors of the hurricane. Unlike our government, they knew the hurricane season was coming and prepared for it. They're getting and deserve great press for their assistance and I have to admit I'm not a Wal*Mart fan, they can be EXTREMELY difficult to deal with, but I think they get a lot of bad press and raps just because of their size not because of their management philosophy. They don't pay their people less than Target, Kohl's, McDonald's or Kmart nor do they give fewer benefits. However, they are being constantly being blamed for the problems of the world. Down deep, I'm a Libertarian and believe in capitalism; no one is forced to work at Wal*Mart. If "you" believe you deserve more pay, either "fight" with your manager for a raise or get another job.

Talking about legal issues, ICSC's Shopping Centers Today ran an article on "Lease Land Mines" which dealt with two main issues. First is that sloppy lease languages can kill deals or create major headaches. That's a major issue in our industry that appears to be getting worse. Often the problem being the company writing the lease wants to "save" money, so they hire an in-house attorney who works for a lot less than outside counsel. That's the good news. The problem is the major reason for the cost difference between the in-house lawyer and outside counsel; the in-house lawyer is less experienced and in many instances doesn't know what they are talking/writing about. The other major reason is the in-house counsel is overworked and because they are not billing a client or wanting to be a partner and won't work until 10 p.m. every night to keep their head above water. Instead, they will just write quick and further complicating matters, either the leasing department doesn't want to or isn't allowed to review documents. Over the years, I've provided feedback to clients on leases being prepared and many times was told to mind my own business and in most cases not too politely; yet years later these provisions became problems for the owner. It appears no one reviews documents except for the lawyers and in most cases and that's the problem. The VP or president just scans the document and then signs, thereby prolonging the headaches.

The majority of the remainder of the article addressed exclusives, stating that exclusives can create problem later on or prevent certain uses from opening in the center. Duh!!! Yes, the article is 100% correct and in a perfect world "we" should never provide exclusives or restrictions but unfortunately we don't live in a perfect world.

Unless you have a grade "A" site with six anchors wanting in, Kohl's isn't going to allow restaurants, billiard parlors or schools near its store. Bed Bath & Beyond will not allow Linens 'n Things into the same center it's in and Giant Supermarkets won't allow the sale of off-site food consumption or beauty /health supplies. I want to meet the developer who says no to these tenants and walks away from the deal. Let me restate that. I want to meet the SUCCESSFUL developer who lets them walk because of these restrictions.

Changing topics, last week I met with a potential client to lease and manage a 500,000 sq.ft. center that he was in the process of acquiring. One of the three anchors, a 100,000 sq.ft. "big box" owns their store and is vacating the premises in three months for a bigger unit a mile away. The vacating tenant is located "dead center" and has the most prominent spot in the project. I recommended he call the anchor before finalizing the acquisition and buy their store, so he controls his own destiny, not the retailer. He complained it made no sense to lay out $4 to $5 million and wait up to two years to start getting an income; there was no return in it for him. I tried desperately to explain a vacant store representing 20% of the center will hurt leasing and the flow of customers to the existing tenants, which ends up hurting him. The "big box" retailer by its very nature will be slow to lease/sell the space and under their REO can lease to any use they want. It's a disaster waiting to happen. He's prepared to buy the property for $35 million, and in reality isn't in control of the center's future. Needless to say, he didn't like my attitude nor did he feel that I was the right company to handle the management.

On a different note, I'm doing a 1031 exchange search for one of our clients and I've been "eyeing" hundreds or possibly thousands of properties available for exchange at a CAP rate of 5% to 9%, with such tenants as Walgreens, Wal*Mart, CVS, FedEx, etc. In addition to these credit worthy tenants there were dozens of tenants available at 7% to 9% CAP rates that IMHO, are an hour to an hour and a half away from bankruptcy. How can someone pay such an outrageous price for a weak tenant? I'd rather put my money in a totally safe CD at 4 ½% than get 7 1/4% for a tenant that probably will be out of business in a year. Pricing in our industry is totally insane, whether it's for a center or 1031, the numbers don't work for the long run and most of us are in it for the long run, so we have problems coming down the road SOON.

Last complaint of the day. Banks are DUMB. I was talking to a friend who borrows $50 to $75 million a year to acquire centers. He was bragging that he never puts more than 5% into any deal, the bank puts up 95% of non-recourse of the money. "How?" I asked and was told, "It's simple. I LIE." Add fictitious numbers, i.e. commission paid, TI, etc. and show, on paper at least, that "you're" putting 20% into the property. The banks never check, they just provide the cash. You know when the next recession comes, and it is, that property will be going back to the bank. Dumb, de, dumb, de, dumb.

2005-11-29T10:03:00.000-08:00

Texas-Retail Real Estate

2005-11-28T07:42:00.000-08:00

Ann and I came back a few weeks ago from the San Antonio show and it's two weeks to go until New York (the end of the year is near). If 2005 ends as it's been running for the past eleven months, New York will be great, as the Texas show was, but on a substantially larger scale. New York is no longer a regional event (not that it ever was); it's our mid year national convention. The 2004 New York dealmaking had 6,100 attendees and 7,000 are expected this year. If you're not coming, you're missing a lot and making a mistake. While the Texas dealmaking was small compared to other shows (a little under 2,000 attended), its growth over the last few years has been substantially larger than the rest. The Texas dealmaking is also "purer," in that less "outsiders" attend. It's really Texas only-oriented; other shows attract from a larger region not just a state, but then Texas is "big." Approximately 90% of those in attendance appeared to be happy with current business, even the ones that feel there's a slowdown/recession on the way looked at it as an opportunity to buy properties at a price that might make sense. Like Atlanta, the majority of developers were "MA&PAs" who owned 10 to 20 centers and, if need be, could finance a 150,000 sq.ft. center out of their own cash flow. Why they would do it is alien to them but they could. They were all bragging about new developments they had going with few mixed-use or lifestyle centers discussed (Texans are bread and potato people), but hundreds of millions of dollars are being spent on new projects and redevelopment in the state, not sexy projects, but excellent workhorses. Percentage-wise, there were fewer "real" retailers than were in Atlanta or Chicago, but there were vast numbers of brokers available to do deals.

About the only negative I had was the layout of their Retailers Runway, which used a seating arrangement around a table instead of the standard walk-up, which I prefer. Ann and I couldn't make the cocktail party but were told it was "so-so." On Wednesday there were several interesting seminars and people spent the day dealmaking or learning. Then, on Thursday the actual deal doing event began, which was active all day. While attendance was up, as was the enthusiasm of the attendees, you could tell there's concern on many of the more mature attendees (old farts), who have seen slowdowns start in manners similar to what we're encountering now (one of the few advantages of age is, if you're lucky, you also gain experience/insight).

Changing back to the New York show, if it wasn't as good as it's been and I know it will be, I could never justify the current hotel rates that we're being gouged with (but in fairness they're not picking on the ICSC, the hotels are ripping everyone off). I assume the hotel business is good, so they want to make hay while they can. The type of year 2006 will be is still a mystery, the economic indications are still too confusing. The stock market is up Monday, Wednesday and Friday and on Tuesday, Thursday and Sunday it's down. REITs are up, down, hot and cold. And that's just on Tuesday. They say there's a real estate bubble, then they come back saying there will just be a slowdown but not a recession. Some say Christmas will be good, some say no. I'm not smart enough to know the answer. I do know, however, that if Christmas is good 2006 should be decent. If it isn't, our "turnaround" division will be busy in the new year. Either way, I don't expect 2006 to be as good as 2005.

On a different note, people are either lazy, stupid or at minimum don't want to go the extra mile to make a deal. An owner offered me a site that I reviewed but turned down for a retailer. When I explained it was too close to an existing store and didn't have enough draw to the area, he disagreed with me and explained I was wrong. When I replied "how am I wrong?" I was told "because you are," not a valid reason to change my mind. I suggested he do a trade map of the area, with different demographics, traffic counts and show all the competing centers in the immediate area, plus demographics on the population half way between their location and our store, something I often ask for when the landlord doesn't like my opinion. Well, this one, as does six out of 10, said "If you want it, you do it." I tried to explain that I didn't want it, that I didn't think the site was for us BUT that I'm willing to review my decision IF they supply the info. He couldn't understand why I didn't want to invest six to 12 hours on a site I don't like to begin with. Needless to say, the deal was not done. The good news is that four out of 10 will provide the requested package even if it isn't part of their standard leasing brochure. Sure, if you have great real estate you don't have to work as hard to lease it, but most properties are in the "C" category and therefore harder work is required. Unfortunately, only 40% are willing to.

Changing topics...because of an operation, I recently spent a week working out of the house. On numerous occasions I needed someone's phone number, and instead of constantly bothering my office, I "googled" for the information. When the company was public, I had no problems getting a phone, fax or e-mail address. But in the majority of the cases, if they were a smaller retailer/developer/broker, I couldn't find 'em or it was extremely difficult. Makes no sense. Even IF you have a web site, that doesn't mean you're indexed by the search engines (that means it's easier for people to find you) and even if you're "brick & mortar-oriented," people should be able to reach you on the net without knowing your URL. The Net and having a search engine strategy should be playing a major role in your leasing/development marketing strategy. If it isn't, you're making a mistake.

If you're a developer, there should be a web site describing not only your main business but every center you have over 100,000 sq.ft., providing information both for the shopping public and potential tenants (If the consumer can find your tenant on the net, the retailer does higher volume, meaning you'll get higher rent). The name of all the top executives and leasing people should be prominently listed. If you're a broker, provide information not only on your services but individual web sites for every center you're leasing. Plus a link to every clients' home page and, if you're a retailer have a "tag line" telling what and where your stores are about both for the consumer and interested landlords. I'm not going to bore you with terms like optimized web site, SRO, PPC, etc...but I do recommend you check into better indexing your homepage, you'll lease more space and that's the name of the game.

Parting thoughts...on a nonpolitical but social note that relates to retail real estate. I was talking to a friend (a retailer that caters to the middle class) and he pointed out that there are monumental negative changes occurring in our nation right now and it's not just the fight between the red and blue states but the rich and poor. The rich are getting richer and the poor are destitute (which is a problem for the retail real estate industry). When Big Lots has to close 170 stores, dollar stores are having a hard time and most importantly, Wal*Mart calling for a higher federal minimum wage, you have to know we're in trouble. A substantial portion of consumers have no money. I don't have the answers to the problem, only the questions (in theory our politicians do, but in reality they just waste time and money). Besides poverty being morally wrong it affects consumer spending and that hurts our industry drastically. Besides the ethical problem of 13% of the population living below poverty (the blue collar worker is desperate and the middle class is broke), having no medical insurance or upward mobility, the poor can't shop at the centers we're building. Sure, Nordstrom is doing great right now, as are most upscale retailers, but only 10 percent of the nation's population makes over $100,000 and there aren't enough of them to support our industry if we only build for the upscale consumer. We need the middle class and blue collar worker if "we" are to grow. It's to our benefit to help the lower income groups. I'm not saying give 'em money. I'm saying help them get a decent job and an education and then they'll be giving us back profits.

Anyway, have a healthy New Year's and a great holiday.

P.S. First, there's still time to attend the Barry Davis Dinner on December 4, call the ICSC at 646-728-3800 for details It's a great networking event and don't forget to stop by our booth at Rhinelander 151 in New York to say Hi.

Brokers & Retail Real Estate

2005-11-28T07:41:00.000-08:00

I think half the brokers involved in commercial real estate are either peddling or acquiring 1031 exchanges (which is a polite way of saying "the property is overpriced." But it's better to overpay for the property than give it to the government. Saying your client is looking for a 1031 is code for "I'm willing to overpay"). This type of product has become super hot in the last few years and, based on the "Kraus theory of commercial real estate," if everyone is buying, then SELL. The difficulty is finding that optimum moment to take the money and run, which requires either skill or luck (I'd rather be lucky than skilled). The 1031 industry has had a great run for the last few years, and if you're thinking of selling why not take the profits NOW and don't be greedy. I personally don't think prices will be higher next year, but it's your money so take the risk if you want.
For whatever it's worth, the three best markets (in my opinion) to make a "deal" in (if there are any left) are: Pennsylvania, Texas and Florida. The problems in Florida and Texas are that both markets are overbuilt, especially when it comes to small shop spaces, so leasing can be more difficult than many of the other states. These markets have higher vacancies and more defaults than most larger regions. Florida and Texas' specialty stores also have more Ma&Pa-oriented stores than in California or New Jersey. Oh, I was just offered a "tax payer" in midtown Manhattan at a 3.5% CAP and a drug store in Los Angeles for 4.25% and both brokers had a straight face when making the quotes.
While I'm giving opinions, let me ask if you've seen the new Sears Essential stores converted from Kmarts yet? They don't work, at least that's what I'm hearing. I must have spoken to at least six or eight former Kmart landlords who were initially excited about the switch and, in fact, were able to lease up space at higher rents just on the promise that Sears was coming. The problems began once they opened. In many cases, their traffic is lower as a Sears than it was as a Kmart and no one was happy with the Kmart's volumes. Hopefully they get their act together soon since it would be a shame to see another bankruptcy.
I also forgot to mention in the last MyWay that I had lunch with four "developers" who, combined, own 65 centers in the northeast. We were all throwing the bull about the state of the industry and having a good old time until the topic of rent reductions came up and than EVERYONE became serious and intent (rent reduction is a very serious subject to owners). All present at the lunch had, during the last six months, recently-opened tenants calling asking for rent relief on stores opened less than a year. All the stores involved, except one, were under 4,000 sq.ft. What was really interesting was in 90% of the requests the tenant was a franchisee, which is where a LOT of specialty stores come from.
The best "educated" guess we came up with on why the newbie tenants were failing was these tenants were overly optimistic on what their volume would be, agreed to a ridiculous rent and then got into trouble. Unfortunately, the franchisor was more interested in selling a franchise than protecting the tenant and agreed that their franchisee could afford the rent which they couldn't. All the franchisors had a provision in the lease that they had the right to take over the lease if the franchisee defaults, and none did.
Landlords might think it's great that these tenants paid above market rents, but when you get more rent than the tenant can afford, they're first late in making payments, then just plain stop. And nine times out of 10, they get so far behind they just do a "midnight move," owing you three to six months rent; you then have to sue (and get nowhere) and then pay another brokerage commission after the space has been vacant for six months. So your true "net" rent from the deceased tenant is probably what they could have afforded in the first place, and then they wouldn't have left you.
On the other hand, I got a call the other day from a "Ma&Pa" tenant who wanted to lease space we had in a center's "armpit;" that is it had no visibility and limited frontage. Perfect for a service-oriented tenant, but not a conventional retailer. I asked what type of store they wanted to open and was told it was a deli. When I explained it was a poor location for a deli, they got mad at me and yelled "it's not your right to make a decision on where I could open" and hung up. So sometimes you can't win for losing.
On a more nostalgic topic, in my old age I've been doing lots of reflection on where I've been and where I'm going. The retail real estate industry plays a major role in my life and I've been thinking back to my 33 years of experience. Besides enjoying the travel and opportunity to do deals, one of my favorite aspects of going to the regional dealmaking shows is I get to play Alan Alda in "Same Time Next Year." This industry has provided me an opportunity to make a decent income, have more fun than frustrations and get to meet some really great people (some a*holes also, but that's for another issue). Some have become personal friends and many great business buddies. Because I've been traveling the country for 33 years, I've met people in every area. And the regional dealmaking shows provide an opportunity for us to see each other, if not often, at least on a regular basis. Now I'm beginning to realize that in many cases, we've grown old together. Yes, we only meet once or twice a year for 15 minutes to two hours but we condense a year of living into that time frame. I heard about, but never met, children a week after they were born, kept abreast of my colleague's child's college life, marriage and birth of grandchildren. Unfortunately, we've also shared illness and deaths together, but that's part of sharing our lives. We've bonded over these 30 some odd years and for that I'm grateful. This isn't a swan song or anything like one, it's just that in the last three shows I've been to retirement has become one of the most popular topics I've heard (all from old farts like me). Everyone wants to become a "consultant" when they retire, both to supplement their income and keep active. Hate to be killjoy, but there's few real consulting jobs "out there." That's where you get paid for your opinion no matter what the results. What will be available is brokerage, exactly what our industry needs; more brokers. Five years from now, this industry will have a totally different "personality" as the young replace all those leaving. These times are a changing.
Next, I just read two disturbing articles. One was in the Wall Street Journal saying the era of cheap interest rates are over. Then I read Ann's "HerWay," which is also in this issue discussing store closings and concerns about Christmas. And, combined with higher interest rates (notice I said higher, not high. I remember interest rates of 18-20%, so 7% or 8% is baby's play), there's no doubt at this moment that the Fed will continue to raise rates and, combined with high gas prices, mounting casualties in Iraq, Asian bird flu (now that's one to be REALLY scared of) and terrorists knocking at our door has the American consumer depressed. Making matters worse, they don't have a big financial cushion to fall back on when things go wrong, which appears to be the norm for the moment; so retail sales are, and will be, affected. We're not saying the sky is falling, but this is a time for intelligent caution.
Oh, I was talking to a fellow broker the other day about some litigation he's involved in. He's a tenant rep and signed a commission agreement saying he would be paid a "market" commission if a lease was executed between the owner and his client. The good news is that the deal was signed. The problem began with a debate over what "market" commission is. He contended it was 5% and the landlord said 3%. He expected me to be sympathetic since we're both brokers, but I explained to him he was stupid. First, I have no idea what "market" is. I've done deals at 1% and some at 6%. The more money involved, the lower my commission. I don't care if $100,000 represents 1% or 5%, it's $100,000 and that's a lot of money to me. Yes, I try like crazy to get paid the most I can but I'm really only concerned about the cash, not the percentage. Also, while I'm no lawyer, nor do I play one on TV, requiring a "market" commission may be illegal under the FTC's restraint of trade. But even more important, why make the agreement vague? Resolve the number up front and then there's no dispute. Yes, it will cause more friction from the start, but sooner or later if a deal is done it has to be resolved and landlords are more generous before they know they have to pay a commission.

ICSC =Atlanta Real Estate

2005-11-28T07:40:00.000-08:00

I attended the Atlanta dealmaking show and Rich (our editor) and I went to Chicago for its event (Ann was busy working on the New York show) and, in both cases, attendance was up but not quite as much as most shows have experienced in the last few years. In fairness, the slowdown in growth may be due to some people not being able to get to either show because of the hurricane in Florida and that the two shows were back to back, making some of us old farts say it was too much and only attended one of the two. I think, but I'm not positive, that Atlanta was slightly larger than Chicago, but both were worth attending. The reason, I'm told, for the shows overlapping were because of the Jewish holidays and the desire/need not to have an event on any of the holidays. Next year, Chicago will be in September and Atlanta in October, making 'em a non-competitive event and, IMHO, that's good. Ann and I are leaving today for the Texas show, then New York in December before it all ends for the year. Happy New Year!

The only two widespread complaints were minor. The cocktail party in Atlanta, which was well attended, had long lines at the bar and food tables (not enough set ups) and in Chicago, if you tried to get your badge between 8:45 and 10:30 am, you had up to a 45-minute wait. According to Phyllis Peterson, who runs all the major shows, this was caused by an extremely high amount of people showing up at the same time, a problem promised to be corrected next year. The ICSC is learning; they know New York will be a nightmare on 42nd Street and is mailing out badges to advance registrants to avoid delays (smart decision).

Both shows were busy the day before the actual dealmaking, with suites set up throughout the hotels, "dealmakers" at every vacant table and busy restaurants the night before. I wasn't able to attend the Harold Eisenberg dinner the night before the Chicago show started because I arrived there at 10 p.m. from Atlanta but was told it was a sellout with over 550 in attendance. But I still have to thank Jim Shutter for the invitation (Oh, don't forget to come to the Barry Davis Memorial Dinner on Sunday, Dec 6th. in NYC. Not only are you supporting a great cause but it's a really outstanding networking event. It's the East Coast's Harold Eisenberg Dinner, you don't want to miss it. Call the ICSC at 646-728-3800).

Chicago seemed to appeal to companies from a wider region than Atlanta, in that I got into conversations with people from California, New York and all places in between. Atlanta drew more from a 200-mile radius. The New York show will be a national event. And, with some luck, another record will be set (actually no luck is needed. Short of a blizzard, another record is coming).

Both Atlanta and Chicago also seem to attract "small" developers who cater to middle markets, a difference from the Philly, Palm Springs and the Florida events. At both shows and in other trade publications, all you hear about is mixed-use, lifestyle centers. Based on all the press they receive, you'd think that the only type of center being built in America today is a 400,000 sq.ft., $75 million project which few of the "little guys" can afford (my definition of little guy means they have a personal net worth of $5 to $25 million but their average project usually costs under $10 million and there are LOTS of centers still being built that fit this definition). There were numerous conversations about mixed-use and lifestyle centers with several retailers talking about "failed" lifestyle centers they were in (so much going wrong so soon after they've become so "hot"). One retailer compared the hype over mixed-use and lifestyle centers as being similar to all the talk about outlet and off-price centers being the cure for all problem properties, which they weren't. Several retailers contended that the only common ground that many lifestyle centers have was that they had a bookstore either announced or proposed after that they could contain a Pizza Hut and Kmart, but the developer contended it was a lifestyle. The one common comment I heard was that the lifestyle/mixed-use center did best when located across from a regional mall (makes sense). Some said they were being offered centers located in blue collar areas that are "close" to the upscale markets (which doesn't work).

While 80% to 85% of the attendees at both shows were upbeat, 15% to 20% were apprehensive of the industry's immediate future. Several developers were complaining about the number of bankruptcies and store closings they were encountering and were not optimistic about Christmas. They also saw more resistance from retailers on doing deals. Several retailers I spoke to said they were slowing down openings and holding off on determining the number of openings for 2006 until after Christmas. If we have a poor Christmas, business will suck next year. What was interesting was I spoke to several retailers who are operating in Chapter 11 and they were all upbeat about their future. Of course what choice do they have?

What was "scary" was I had conversations with some "bottom fishers" (I say this in the most complimentary way) and they contend both shows were excellent for them, a bad sign for the industry. On the other hand, I spoke to numerous "opportunist buyers" who "claimed they got great deals," such as buying a center for $5 psf. The good news is there are still deals like that available, the bad news is you usually get what you pay for. I was offered the opportunity to manage/lease two of these projects and, in both cases, I felt they were beyond our ability to "cure." IMHO, they are beyond recovery and are on a death watch. Neither buyer was that sophisticated or experienced and made their decision purely based on price, which is trouble looking for a place to happen.

Oh, good news on retailers for a change. Bon-Ton just announced they are acquiring SAKS northern division of 142 stores, combined with their past acquisition of Elder-Beerman makes them a major Midwest player. Why do I mention this since it's just an acquisition? Well, it isn't like Federated is acquiring some great local names and making 'em into a Macy's and taking away a local identity. Here, Bon-Ton, a former candidate for bankruptcy, is now alive and well and becoming a major player themselves. The demise of SAKS was a given, so this acquisition makes a local player more competitive and aids our industry in competition. I think Federated's acquisitions will, and does, hurt the mall industry.

Macy's is an excellent department store, BUT variety is the spice of life. Malls are becoming boring when it comes to tenant mix. Yes, mall developers (the few that there are) are spending billions upgrading the centers, adding entertainment, condo, five-star restaurants and more, BUT the major reason you go to a mall is the retailers and retailing today is become so "me-too" that you often can't tell the store you're in until you're at checkout and they tell you who to make the check payable to.

Oh well, on with my parting thoughts: Most retailers that either file for chapter 11 or close huge amounts of stores are either stupid or have top executives that are stupid and "forced" the real estate department to open more stores than they properly could and still keep costs down. I recently received an email from DJM Asset Management promoting the excess space of OshKosh B'Gosh, which is closing 15 locations. Their locations run the gamut of CA, CO, GA, MO, OH, OR, TN, TX, VA, VT and WI. Their square footage runs from 3,000 sq.ft. to 9,900 sq.ft. The locations, square footage and rents provide a decent overview of their operations and philosophy and insight into what they are. After reviewing their "excess locations," I understand why they're having problems; they pay too much rent, which runs from $23 to $38.50 per foot. A lot of their real estate is excellent, sharing space with the likes of Ann Taylor, Bath & Body Works and Gap, but I think in most cases they were more concerned about image than mundane things such as profitability. They could do the same volume for less rent if they "worked" on finding locations. In the mail I also received a flyer from DJM marketing 58 locations of the Good Guys. An analysis of these locations proved the same insight. Too high of a rent payer.

The advantage of the Internet age and the proliferation of companies marketing the excess space of retailers is we can get a glimpse into the type of deals retailers did and I'm sure every retailer and tenant rep gets a dozen or more submissions a month of the surplus locations of one retailer or another. Hopefully, they can learn from the retailer's mistakes and not do their own. Yes, buying a lease of a tenant in bankruptcy makes sense if its an older lease at low rent, but newer deals rarely make sense. Oh, I think too many people are watching the TV program "Flip This House" and are trying to do it with shopping centers. In the last few weeks I've had four people call wanting to know if any of our clients would be interested in purchasing their contract for centers, which they signed a week ago. The ink isn't dry and they want to flip.

If You're Leasing Great Real Estate, don't bother reading this article!!!!!!!!!!!

2005-11-27T06:50:00.000-08:00

If You're Leasing Great Real Estate, don't bother reading this article!!!!!!!!!!!

In case you haven't noticed, the economy and retail real estate are doing well, thank you very much and candidly, you don't have to be a great leasing professional to make fantastic deals in this market; all you need is a good location

However, for the rest of us not blessed with leasing great real estate, we have to "try harder" even
in a booming market

Even if you're leasing a "B" center, the harder you try, the better the deal. But for "C's" and less, the following "tips" make the difference between long or short term vacancies.
The same is true, even in this "hot" market if you're looking to sell.
The concept behind improving your leasing and sales results is simple; marketing.
If you can attract 4 tenants instead of one, to look at your space, not only are you more likely to close but will end up with higher rents. But besides "sweat" be prepared to spend some money to "spruce up" the center, even if you can't put the costs into CAM. Like the home owner wanting to sell their residence, a fresh pain job (at least in the more viable areas) will go a long way. Make sure the vacancy(s) is broom clean, no broken glass, dead birds or being used as a storage shed by maintance. Have the electric on in all the vacancies, going in with a flashlight is not the way to go. During spring and summer, spend a little more on foliage, sweep an extra day a week and in the winter, make sure the snow is removed quick. Management 101 but it works. Show the center off and it leases quicker and at higher rates. Marketing is the name of the game and here are a few tips to save you money and make your marketing efforts a lot more productive

First. Let's state the obvious; make sure you have the largest possible leasing sign up on the property and have signs up in every vacant store, stating the square footage available and the name of the leasing agent. Have a real live contacts. Place leasing flyers by the vacancies, showing a leasing plan, vacancies and phone and contact name to call
Placing "For Lease" signs on the pylon produces.. If you have a closed restaurant, advertise the vacancy in the local newspaper as a "Business Opportunity" since the space is already fitted out for that use. The same holds true for a hair salon, pet shop, etc.
Have a Home Page listing the center details and promote it's address everywhere. It pays to pay to be listed with Yahoo's and Google's local directories under retail real estate available for lease or sale

You should also do either an e-mail or broadcast fax blast or hardcopy mass mailing to all the local brokers and retailers. It doesn't have to be fancy, a jumbo, double sided postcard telling the pertinent information on the center and a small leasing plan is adequate, it reminds them to call you. You can gather their address either from the local yellow pages or buy a list from a mailing house. There's companies like *.* that will even handle the entire production process for you. You should always be building your own internal database of addresses and e-mails by collecting business cards from local brokers and retailers. Promote, promote, promote

Don't forget whenever a tenant signs a lease, opens or some other quasi-newsworthy event occurs to send press releases to the national and regional publications such as the New England Real Estate Journal and the local newspapers. It's free and more effective then paid advertising.
Of course, advertising in both the trade and consumer publications work but the local newspaper ads will bring you more brokers inquiries then actual retailers but that's part of the game

The laws have made it more difficult to do fax and mass e-mail mailing but if you follow all the rules, you can still do mass faxing to retailers.
If you're a member of the ICSC, you can use their membership directory to obtain fax and e-mail addresses of retailers and brokers.
There are numerous sites on the Internet such as this publication, LoopNet, CO-Star and Dealmakers.net that provide either free or paid listing areas for your press releases and listings of vacancies. Most of the responders to these listing services are also brokers but a deal is a deal.

MyWay-On Retail Real Estate

2005-11-25T10:37:00.000-08:00

Ann, Joe, Laurie, Rich, Alyson and myself attended the Philly Dealmaking last month and, as has been the norm for most shows recently, attendance was up 10% to 2100/2200 dealmakers who wined, dined and did deals for two days. Philly is never a great show, it's a workhorse, living in the shadow of DC and NYC but still a relevant event. The "negative" of this show over the 80 or so shows I've been to in the last four years is that this is the first conference where I heard a number of people complain or express concern that either business is not good or is slowing down.
It's been a long time since I've heard these complaints. In fairness, this is happening right after two hurricanes and gas going to $3 per gallon, so of course everyone is depressed. Anyway, all in attendance were happy with business and their income for the last year, with brokers continuing to make a decent buck for another year as their commissions get paid for "commissions earned but not due." It's their future income that people expressed concern over, with the largest group of paranoids being brokers. Over dinner several developers complained that they've been receiving calls from retailers who opened within the last year asking for concessions because their sales volume can't justify the rent. Numerous brokers complained this is the first show in years that they had no new product to promote. Not good signs for the future.
Ann and I also attended the Palm Springs dealmaking and, again, attendance was up about 10% to 4200/4300 dealmakers; this is always an excellent show, with my major complaint being I can't take the heat of Palm Springs after 10 in the morning. It's HOT. How people live there year round I find amazing. My concerns grew again with this show as I again heard discontent about present and future business.
That's two shows in a row with "concerns," and Californians are usually oblivious/optimistic about any part of the world except their own market. (In fairness, California is equivalent to the size of Maine to Virginia; no wonder it's always a great turnout and they look at the world from colored glasses). Anyway, we're on our way to the Atlanta and Chicago shows and if there's anxiety there, we as an industry have problems. The good news is that I'm willing to bet dollars to donuts that Atlanta, Chicago and New York will all have record attendance. Let's hope there's no bad news to report. My personal suggestion is if you're planning on selling a center, SELL NOW, since I believe it's all downhill from here.
The same is true for leasing. Don't fight for the last quarter, close now before the retailer experiences Christmas. Getting back to the show's attendance, the cocktail parties both for Philly and Palm Springs were good with the Palm Spring's event being jammed. No one could complain about attendance or networking opportunities.
What makes California different than any other market (besides great weather and earthquakes) is that the retail real estate industry is controlled almost completely by brokers. In fact, the Palm Springs show has a higher percentage of brokers in attendance compared to retailers than any other show I attend. On the other hand, the Philly show seemed to have a higher percentage of "real" retailers than most shows. Anyway, back to brokers. Over the last decade, brokers have become an important aspect of retail dealmaking nationwide but no other area has embraced brokers as much as Californians do. In most cases that's not a problem, but numerous retailers complained not only about the high rents (blame that on a state that takes forever to approve a site) but that when they are offered a site and presented with a rent and if they make a counter offer, the offering broker contends that they are insulted by such a "low" counteroffer number no matter what it is.
That I don't understand. I may not accept a retailer's counteroffer, but I'm never insulted when someone offers to pay me rent. I have problems with the "guy" who won't make an offer and I deal with lots of them. Another "unusual" aspect of the California show was the number of "newbie" developers I encountered. I must have talked to a dozen "first time" developers who had absolutely no idea what was required to develop a shopping center, but have millions of dollars used to either acquire or tie up property for long periods of time. One group I bumped into is developing 1.2 million sq.ft. of retail and 300,000 sq.ft. of mixed use and they never developed before in their life. I recommended they JV with an established developer and they said they tried; they met with Simon, General Growth, etc. but after they explained the type of JV they were offered, I recommended they keep on trying to find a "better" partner, because the JV proposals they were offered screws them and that's being polite.
I also talked to several brokers who specialize in 1031 exchanges and they "claim" that some of their Walgreen deals are selling at a 4 1/2-4 3/4% CAP; you can say whatever you want about the quality of the tenant or location but that's plain insane. The end is near. To clarify this, I have to say that these CAPS were for property in California, which uses different math than the rest of the country.
Over dinner I had some interesting debates over which retailers were going bankrupt next. The two most popular names were Blockbuster and Levitz. Other names came up but those two were far ahead of the crowd. Two other names came up a lot but in a more favorable light; they were Kimco and Inland, two companies trying their best to buy all the shopping centers in America. At the same dinner, three developers complained about the securitized loans they made. All three claim they'll never do these types of loans again. While they provide a higher "payout" to the borrower, after the loan is made it takes forever to get necessary approvals and no matter what they need from the lender, they have to pay a fee. They all complained they were being nickeled and dimed to death.
An "interesting" story I heard was that Rite-Aid, in order to keep their employees safe and productive during the hurricane in New Orleans set up temporary housing, provided food, services and gas for all their effected employees. Got to give them credit for that.
Also, both in Palm Springs and Philly, I encountered more retailers than usual looking for temporary space for 30 to 120 days. They sell everything from apparel, videos to electronics. I guess it's a trend in retailing that continues to do well even with a softening economy.
Hope to see you soon in Atlanta, Chicago or New York,

P.S. Don't forget to plan on attending the Barry Davis Memorial Next Generation Scholarship Dinner on December 4th, 2005 at the Pershing Square restaurant right before the start of the NY Dealmaking show. You should attend even if you didn't know Barry (which is a great loss) because this is not only an excellent cause to support but a great networking event. For complete details, call the ICSC at 646-728-3800.

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I attended the Atlanta dealmaking show and Rich (our editor) and I went to Chicago for its event (Ann was busy working on the New York show) and, in both cases, attendance was up but not quite as much as most shows have experienced in the last few years. In fairness, the slowdown in growth may be due to some people not being able to get to either show because of the hurricane in Florida and that the two shows were back to back, making some of us old farts say it was too much and only attended one of the two. I think, but I’m not positive, that Atlanta was slightly larger than Chicago, but both were worth attending. The reason, I'm told, for the shows overlapping were because of the Jewish holidays and the desire/need not to have an event on any of the holidays. Next year, Chicago will be in September and Atlanta in October, making ‘em a non-competitive event and, IMHO, that’s good. Ann and I are leaving today for the Texas show, then New York in December before it all ends for the year. Happy New Year!
The only two widespread complaints were minor. The cocktail party in Atlanta, which was well attended, had long lines at the bar and food tables (not enough set ups) and in Chicago, if you tried to get your badge between 8:45 and 10:30 am, you had up to a 45-minute wait. According to Phyllis Peterson, who runs all the major shows, this was caused by an extremely high amount of people showing up at the same time, a problem promised to be corrected next year. The ICSC is learning; they know New York will be a nightmare on 42nd Street and is mailing out badges to advance registrants to avoid delays (smart decision).
Both shows were busy the day before the actual dealmaking, with suites set up throughout the hotels, “dealmakers” at every vacant table and busy restaurants the night before. I wasn’t able to attend the Harold Eisenberg dinner the night before the Chicago show started because I arrived there at 10 p.m. from Atlanta but was told it was a sellout with over 550 in attendance. But I still have to thank Jim Shutter for the invitation (Oh, don’t forget to come to the Barry Davis Memorial Dinner on Sunday, Dec 6th. in NYC. Not only are you supporting a great cause but it’s a really outstanding networking event. It’s the East Coast’s Harold Eisenberg Dinner, you don’t want to miss it. Call the ICSC at 646-728-3800).
Chicago seemed to appeal to companies from a wider region than Atlanta, in that I got into conversations with people from California, New York and all places in between. Atlanta drew more from a 200-mile radius. The New York show will be a national event. And, with some luck, another record will be set (actually no luck is needed. Short of a blizzard, another record is coming).
Both Atlanta and Chicago also seem to attract “small” developers who cater to middle markets, a difference from the Philly, Palm Springs and the Florida events. At both shows and in other trade publications, all you hear about is mixed-use, lifestyle centers. Based on all the press they receive, you’d think that the only type of center being built in America today is a 400,000 sq.ft., $75 million project which few of the “little guys” can afford (my definition of little guy means they have a personal net worth of $5 to $25 million but their average project usually costs under $10 million and there are LOTS of centers still being built that fit this definition). There were numerous conversations about mixed-use and lifestyle centers with several retailers talking about “failed” lifestyle centers they were in (so much going wrong so soon after they've become so "hot"). One retailer compared the hype over mixed-use and lifestyle centers as being similar to all the talk about outlet and off-price centers being the cure for all problem properties, which they weren’t. Several retailers contended that the only common ground that many lifestyle centers have was that they had a bookstore either announced or proposed after that they could contain a Pizza Hut and Kmart, but the developer contended it was a lifestyle. The one common comment I heard was that the lifestyle/mixed-use center did best when located across from a regional mall (makes sense). Some said they were being offered centers located in blue collar areas that are “close” to the upscale markets (which doesn’t work).
While 80% to 85% of the attendees at both shows were upbeat, 15% to 20% were apprehensive of the industry’s immediate future. Several developers were complaining about the number of bankruptcies and store closings they were encountering and were not optimistic about Christmas. They also saw more resistance from retailers on doing deals. Several retailers I spoke to said they were slowing down openings and holding off on determining the number of openings for 2006 until after Christmas. If we have a poor Christmas, business will suck next year. What was interesting was I spoke to several retailers who are operating in Chapter 11 and they were all upbeat about their future. Of course what choice do they have?
What was “scary” was I had conversations with some “bottom fishers” (I say this in the most complimentary way) and they contend both shows were excellent for them, a bad sign for the industry. On the other hand, I spoke to numerous “opportunist buyers” who “claimed they got great deals,” such as buying a center for $5 psf. The good news is there are still deals like that available, the bad news is you usually get what you pay for. I was offered the opportunity to manage/lease two of these projects and, in both cases, I felt they were beyond our ability to “cure.” IMHO, they are beyond recovery and are on a death watch. Neither buyer was that sophisticated or experienced and made their decision purely based on price, which is trouble looking for a place to happen.
Oh, good news on retailers for a change. Bon-Ton just announced they are acquiring SAKS northern division of 142 stores, combined with their past acquisition of Elder-Beerman makes them a major Midwest player. Why do I mention this since it’s just an acquisition? Well, it isn’t like Federated is acquiring some great local names and making ‘em into a Macy’s and taking away a local identity. Here, Bon-Ton, a former candidate for bankruptcy, is now alive and well and becoming a major player themselves. The demise of SAKS was a given, so this acquisition makes a local player more competitive and aids our industry in competition. I think Federated’s acquisitions will, and does, hurt the mall industry.
Macy's is an excellent department store, BUT variety is the spice of life. Malls are becoming boring when it comes to tenant mix. Yes, mall developers (the few that there are) are spending billions upgrading the centers, adding entertainment, condo, five-star restaurants and more, BUT the major reason you go to a mall is the retailers and retailing today is become so “me-too” that you often can’t tell the store you’re in until you’re at checkout and they tell you who to make the check payable to.
Oh well, on with my parting thoughts: Most retailers that either file for chapter 11 or close huge amounts of stores are either stupid or have top executives that are stupid and “forced” the real estate department to open more stores than they properly could and still keep costs down. I recently received an email from DJM Asset Management promoting the excess space of OshKosh B’Gosh, which is closing 15 locations. Their locations run the gamut of CA, CO, GA, MO, OH, OR, TN, TX, VA, VT and WI. Their square footage runs from 3,000 sq.ft. to 9,900 sq.ft. The locations, square footage and rents provide a decent overview of their operations and philosophy and insight into what they are. After reviewing their "excess locations," I understand why they’re having problems; they pay too much rent, which runs from $23 to $38.50 per foot. A lot of their real estate is excellent, sharing space with the likes of Ann Taylor, Bath & Body Works and Gap, but I think in most cases they were more concerned about image than mundane things such as profitability. They could do the same volume for less rent if they "worked" on finding locations. In the mail I also received a flyer from DJM marketing 58 locations of the Good Guys. An analysis of these locations proved the same insight. Too high of a rent payer.
The advantage of the Internet age and the proliferation of companies marketing the excess space of retailers is we can get a glimpse into the type of deals retailers did and I’m sure every retailer and tenant rep gets a dozen or more submissions a month of the surplus locations of one retailer or another. Hopefully, they can learn from the retailer's mistakes and not do their own. Yes, buying a lease of a tenant in bankruptcy makes sense if its an older lease at low rent, but newer deals rarely make sense. Oh, I think too many people are watching the TV program “Flip This House" and are trying to do it with shopping centers. In the last few weeks I’ve had four people call wanting to know if any of our clients would be interested in purchasing their contract for centers, which they signed a week ago. The ink isn't dry and they want to flip.

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Ann and I came back a few weeks ago from the San Antonio show and it’s two weeks to go until New York (the end of the year is near). If 2005 ends as it’s been running for the past eleven months, New York will be great, as the Texas show was, but on a substantially larger scale. New York is no longer a regional event (not that it ever was); it’s our mid year national convention. The 2004 New York dealmaking had 6,100 attendees and 7,000 are expected this year. If you're not coming, you're missing a lot and making a mistake. While the Texas dealmaking was small compared to other shows (a little under 2,000 attended), its growth over the last few years has been substantially larger than the rest. The Texas dealmaking is also “purer,” in that less “outsiders” attend. It’s really Texas only-oriented; other shows attract from a larger region not just a state, but then Texas is "big." Approximately 90% of those in attendance appeared to be happy with current business, even the ones that feel there’s a slowdown/recession on the way looked at it as an opportunity to buy properties at a price that might make sense. Like Atlanta, the majority of developers were “MA&PAs” who owned 10 to 20 centers and, if need be, could finance a 150,000 sq.ft. center out of their own cash flow. Why they would do it is alien to them but they could. They were all bragging about new developments they had going with few mixed-use or lifestyle centers discussed (Texans are bread and potato people), but hundreds of millions of dollars are being spent on new projects and redevelopment in the state, not sexy projects, but excellent workhorses. Percentage-wise, there were fewer “real” retailers than were in Atlanta or Chicago, but there were vast numbers of brokers available to do deals.
About the only negative I had was the layout of their Retailers Runway, which used a seating arrangement around a table instead of the standard walk-up, which I prefer. Ann and I couldn't make the cocktail party but were told it was "so-so." On Wednesday there were several interesting seminars and people spent the day dealmaking or learning. Then, on Thursday the actual deal doing event began, which was active all day. While attendance was up, as was the enthusiasm of the attendees, you could tell there’s concern on many of the more mature attendees (old farts), who have seen slowdowns start in manners similar to what we’re encountering now (one of the few advantages of age is, if you’re lucky, you also gain experience/insight).
Changing back to the New York show, if it wasn’t as good as it’s been and I know it will be, I could never justify the current hotel rates that we’re being gouged with (but in fairness they're not picking on the ICSC, the hotels are ripping everyone off). I assume the hotel business is good, so they want to make hay while they can. The type of year 2006 will be is still a mystery, the economic indications are still too confusing. The stock market is up Monday, Wednesday and Friday and on Tuesday, Thursday and Sunday it’s down. REITs are up, down, hot and cold. And that’s just on Tuesday. They say there’s a real estate bubble, then they come back saying there will just be a slowdown but not a recession. Some say Christmas will be good, some say no. I’m not smart enough to know the answer. I do know, however, that if Christmas is good 2006 should be decent. If it isn’t, our “turnaround” division will be busy in the new year. Either way, I don't expect 2006 to be as good as 2005.
On a different note, people are either lazy, stupid or at minimum don’t want to go the extra mile to make a deal. An owner offered me a site that I reviewed but turned down for a retailer. When I explained it was too close to an existing store and didn’t have enough draw to the area, he disagreed with me and explained I was wrong. When I replied “how am I wrong?” I was told “because you are,” not a valid reason to change my mind. I suggested he do a trade map of the area, with different demographics, traffic counts and show all the competing centers in the immediate area, plus demographics on the population half way between their location and our store, something I often ask for when the landlord doesn’t like my opinion. Well, this one, as does six out of 10, said “If you want it, you do it.” I tried to explain that I didn’t want it, that I didn’t think the site was for us BUT that I’m willing to review my decision IF they supply the info. He couldn’t understand why I didn’t want to invest six to 12 hours on a site I don’t like to begin with. Needless to say, the deal was not done. The good news is that four out of 10 will provide the requested package even if it isn’t part of their standard leasing brochure. Sure, if you have great real estate you don’t have to work as hard to lease it, but most properties are in the “C” category and therefore harder work is required. Unfortunately, only 40% are willing to.
Changing topics...because of an operation, I recently spent a week working out of the house. On numerous occasions I needed someone’s phone number, and instead of constantly bothering my office, I “googled” for the information. When the company was public, I had no problems getting a phone, fax or e-mail address. But in the majority of the cases, if they were a smaller retailer/developer/broker, I couldn’t find ‘em or it was extremely difficult. Makes no sense. Even IF you have a web site, that doesn’t mean you’re indexed by the search engines (that means it's easier for people to find you) and even if you’re “brick & mortar-oriented,” people should be able to reach you on the net without knowing your URL. The Net and having a search engine strategy should be playing a major role in your leasing/development marketing strategy. If it isn't, you're making a mistake.
If you’re a developer, there should be a web site describing not only your main business but every center you have over 100,000 sq.ft., providing information both for the shopping public and potential tenants (If the consumer can find your tenant on the net, the retailer does higher volume, meaning you'll get higher rent). The name of all the top executives and leasing people should be prominently listed. If you’re a broker, provide information not only on your services but individual web sites for every center you’re leasing. Plus a link to every clients' home page and, if you’re a retailer have a “tag line” telling what and where your stores are about both for the consumer and interested landlords. I’m not going to bore you with terms like optimized web site, SRO, PPC, etc…but I do recommend you check into better indexing your homepage, you’ll lease more space and that's the name of the game.
Parting thoughts...on a nonpolitical but social note that relates to retail real estate. I was talking to a friend (a retailer that caters to the middle class) and he pointed out that there are monumental negative changes occurring in our nation right now and it’s not just the fight between the red and blue states but the rich and poor. The rich are getting richer and the poor are destitute (which is a problem for the retail real estate industry). When Big Lots has to close 170 stores, dollar stores are having a hard time and most importantly, Wal*Mart calling for a higher federal minimum wage, you have to know we’re in trouble. A substantial portion of consumers have no money. I don’t have the answers to the problem, only the questions (in theory our politicians do, but in reality they just waste time and money). Besides poverty being morally wrong it affects consumer spending and that hurts our industry drastically. Besides the ethical problem of 13% of the population living below poverty (the blue collar worker is desperate and the middle class is broke), having no medical insurance or upward mobility, the poor can't shop at the centers we're building. Sure, Nordstrom is doing great right now, as are most upscale retailers, but only 10 percent of the nation's population makes over $100,000 and there aren't enough of them to support our industry if we only build for the upscale consumer. We need the middle class and blue collar worker if "we" are to grow. It's to our benefit to help the lower income groups. I'm not saying give 'em money. I'm saying help them get a decent job and an education and then they'll be giving us back profits.
Anyway, have a healthy New Year's and a great holiday.
P.S. First, there’s still time to attend the Barry Davis Dinner on December 4, call the ICSC at 646-728-3800 for details It’s a great networking event and don’t forget to stop by our booth at Rhinelander 151 in New York to say Hi.

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I think half the brokers involved in commercial real estate are either peddling or acquiring 1031 exchanges (which is a polite way of saying “the property is overpriced.” But it’s better to overpay for the property than give it to the government. Saying your client is looking for a 1031 is code for “I’m willing to overpay”). This type of product has become super hot in the last few years and, based on the "Kraus theory of commercial real estate," if everyone is buying, then SELL. The difficulty is finding that optimum moment to take the money and run, which requires either skill or luck (I’d rather be lucky than skilled). The 1031 industry has had a great run for the last few years, and if you’re thinking of selling why not take the profits NOW and don't be greedy. I personally don’t think prices will be higher next year, but it’s your money so take the risk if you want.
For whatever it’s worth, the three best markets (in my opinion) to make a “deal” in (if there are any left) are: Pennsylvania, Texas and Florida. The problems in Florida and Texas are that both markets are overbuilt, especially when it comes to small shop spaces, so leasing can be more difficult than many of the other states. These markets have higher vacancies and more defaults than most larger regions. Florida and Texas’ specialty stores also have more Ma&Pa-oriented stores than in California or New Jersey. Oh, I was just offered a “tax payer” in midtown Manhattan at a 3.5% CAP and a drug store in Los Angeles for 4.25% and both brokers had a straight face when making the quotes.
While I’m giving opinions, let me ask if you've seen the new Sears Essential stores converted from Kmarts yet? They don’t work, at least that’s what I’m hearing. I must have spoken to at least six or eight former Kmart landlords who were initially excited about the switch and, in fact, were able to lease up space at higher rents just on the promise that Sears was coming. The problems began once they opened. In many cases, their traffic is lower as a Sears than it was as a Kmart and no one was happy with the Kmart’s volumes. Hopefully they get their act together soon since it would be a shame to see another bankruptcy.
I also forgot to mention in the last MyWay that I had lunch with four “developers” who, combined, own 65 centers in the northeast. We were all throwing the bull about the state of the industry and having a good old time until the topic of rent reductions came up and than EVERYONE became serious and intent (rent reduction is a very serious subject to owners). All present at the lunch had, during the last six months, recently-opened tenants calling asking for rent relief on stores opened less than a year. All the stores involved, except one, were under 4,000 sq.ft. What was really interesting was in 90% of the requests the tenant was a franchisee, which is where a LOT of specialty stores come from.
The best “educated” guess we came up with on why the newbie tenants were failing was these tenants were overly optimistic on what their volume would be, agreed to a ridiculous rent and then got into trouble. Unfortunately, the franchisor was more interested in selling a franchise than protecting the tenant and agreed that their franchisee could afford the rent which they couldn’t. All the franchisors had a provision in the lease that they had the right to take over the lease if the franchisee defaults, and none did.
Landlords might think it’s great that these tenants paid above market rents, but when you get more rent than the tenant can afford, they're first late in making payments, then just plain stop. And nine times out of 10, they get so far behind they just do a “midnight move,” owing you three to six months rent; you then have to sue (and get nowhere) and then pay another brokerage commission after the space has been vacant for six months. So your true “net” rent from the deceased tenant is probably what they could have afforded in the first place, and then they wouldn’t have left you.
On the other hand, I got a call the other day from a "Ma&Pa" tenant who wanted to lease space we had in a center's "armpit;" that is it had no visibility and limited frontage. Perfect for a service-oriented tenant, but not a conventional retailer. I asked what type of store they wanted to open and was told it was a deli. When I explained it was a poor location for a deli, they got mad at me and yelled "it's not your right to make a decision on where I could open" and hung up. So sometimes you can't win for losing.
On a more nostalgic topic, in my old age I’ve been doing lots of reflection on where I’ve been and where I’m going. The retail real estate industry plays a major role in my life and I’ve been thinking back to my 33 years of experience. Besides enjoying the travel and opportunity to do deals, one of my favorite aspects of going to the regional dealmaking shows is I get to play Alan Alda in “Same Time Next Year.” This industry has provided me an opportunity to make a decent income, have more fun than frustrations and get to meet some really great people (some a*holes also, but that’s for another issue). Some have become personal friends and many great business buddies. Because I’ve been traveling the country for 33 years, I’ve met people in every area. And the regional dealmaking shows provide an opportunity for us to see each other, if not often, at least on a regular basis. Now I’m beginning to realize that in many cases, we’ve grown old together. Yes, we only meet once or twice a year for 15 minutes to two hours but we condense a year of living into that time frame. I heard about, but never met, children a week after they were born, kept abreast of my colleague’s child’s college life, marriage and birth of grandchildren. Unfortunately, we’ve also shared illness and deaths together, but that’s part of sharing our lives. We’ve bonded over these 30 some odd years and for that I’m grateful. This isn’t a swan song or anything like one, it’s just that in the last three shows I’ve been to retirement has become one of the most popular topics I’ve heard (all from old farts like me). Everyone wants to become a “consultant” when they retire, both to supplement their income and keep active. Hate to be killjoy, but there’s few real consulting jobs “out there.” That’s where you get paid for your opinion no matter what the results. What will be available is brokerage, exactly what our industry needs; more brokers. Five years from now, this industry will have a totally different “personality” as the young replace all those leaving. These times are a changing.
Next, I just read two disturbing articles. One was in the Wall Street Journal saying the era of cheap interest rates are over. Then I read Ann’s “HerWay,” which is also in this issue discussing store closings and concerns about Christmas. And, combined with higher interest rates (notice I said higher, not high. I remember interest rates of 18-20%, so 7% or 8% is baby’s play), there’s no doubt at this moment that the Fed will continue to raise rates and, combined with high gas prices, mounting casualties in Iraq, Asian bird flu (now that’s one to be REALLY scared of) and terrorists knocking at our door has the American consumer depressed. Making matters worse, they don’t have a big financial cushion to fall back on when things go wrong, which appears to be the norm for the moment; so retail sales are, and will be, affected. We’re not saying the sky is falling, but this is a time for intelligent caution.
Oh, I was talking to a fellow broker the other day about some litigation he’s involved in. He’s a tenant rep and signed a commission agreement saying he would be paid a “market” commission if a lease was executed between the owner and his client. The good news is that the deal was signed. The problem began with a debate over what “market” commission is. He contended it was 5% and the landlord said 3%. He expected me to be sympathetic since we’re both brokers, but I explained to him he was stupid. First, I have no idea what “market” is. I’ve done deals at 1% and some at 6%. The more money involved, the lower my commission. I don’t care if $100,000 represents 1% or 5%, it’s $100,000 and that’s a lot of money to me. Yes, I try like crazy to get paid the most I can but I’m really only concerned about the cash, not the percentage. Also, while I’m no lawyer, nor do I play one on TV, requiring a “market” commission may be illegal under the FTC’s restraint of trade. But even more important, why make the agreement vague? Resolve the number up front and then there’s no dispute. Yes, it will cause more friction from the start, but sooner or later if a deal is done it has to be resolved and landlords are more generous before they know they have to pay a commission.

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We all saw the images of Hurricane Katrina’s destruction and the resulting humanitarian crisis it brought. One million people were displaced from Louisiana and Mississippi to Alabama.
As the shock wears off, the business of business starts to take the lead of just some of the problems the region is beginning to address. In the next few months and coming years, how Katrina impacts retail real estate and the law will be a billion dollar debate and I’m willing to bet that some of the laws as we understand ‘em will be changed. Questions such as what amount of damage/destruction frees a tenant from paying rent? What if the center survived, but the customers left, is the tenant still responsible to pay rent? If there’s a net leased building in the disaster area, is the tenant obligated to pay rent even if the building has been destroyed? Who’s responsible for toxic waste now on the property?
What happens to commission agreements that were earned but not payable yet? Is there anyway an owner can avoid paying their mortgage? These are just some of the questions that face the industry and region for the next few years and I doubt if there will be easy solutions. However, if I had money, I believe investing in New Orleans for the long term makes sense and there should be great opportunities caused by this disaster. It’s the famous silver lining in the cloud.
Unfortunately, the impact of high gas prices that started before the disaster is now worse and is just beginning to have an impact on our economy and I believe its long-term impact will be a substantially slower economy even as the cost of gas decreases. Retail sales only grew 1% last month and that number might drop in the coming months. I have a Ford 150 pickup and it now costs me $75 to fill it up, that’s $150 a week I’m now spending on gas. If I’m having trouble adjusting to this insanity, what’s the average “guy” who’s earning $48,000 going to do? And that’s before we take into account higher heating costs this winter. Also, I don’t care what our beloved government says, inflation is higher than being reported and that’s having a negative impact on retail spending. We live in "interesting" times.
Before changing subjects, I have to commend Wal*Mart on their contribution to the survivors of the hurricane. Unlike our government, they knew the hurricane season was coming and prepared for it. They're getting and deserve great press for their assistance and I have to admit I’m not a Wal*Mart fan, they can be EXTREMELY difficult to deal with, but I think they get a lot of bad press and raps just because of their size not because of their management philosophy. They don't pay their people less than Target, Kohl’s, McDonald's or Kmart nor do they give fewer benefits. However, they are being constantly being blamed for the problems of the world. Down deep, I’m a Libertarian and believe in capitalism; no one is forced to work at Wal*Mart. If “you” believe you deserve more pay, either “fight” with your manager for a raise or get another job.
Talking about legal issues, ICSC’s Shopping Centers Today ran an article on “Lease Land Mines” which dealt with two main issues. First is that sloppy lease languages can kill deals or create major headaches. That’s a major issue in our industry that appears to be getting worse. Often the problem being the company writing the lease wants to “save” money, so they hire an in-house attorney who works for a lot less than outside counsel. That's the good news. The problem is the major reason for the cost difference between the in-house lawyer and outside counsel; the in-house lawyer is less experienced and in many instances doesn’t know what they are talking/writing about. The other major reason is the in-house counsel is overworked and because they are not billing a client or wanting to be a partner and won’t work until 10 p.m. every night to keep their head above water. Instead, they will just write quick and further complicating matters, either the leasing department doesn’t want to or isn’t allowed to review documents. Over the years, I’ve provided feedback to clients on leases being prepared and many times was told to mind my own business and in most cases not too politely; yet years later these provisions became problems for the owner. It appears no one reviews documents except for the lawyers and in most cases and that's the problem. The VP or president just scans the document and then signs, thereby prolonging the headaches.
The majority of the remainder of the article addressed exclusives, stating that exclusives can create problem later on or prevent certain uses from opening in the center. Duh!!! Yes, the article is 100% correct and in a perfect world “we” should never provide exclusives or restrictions but unfortunately we don’t live in a perfect world.
Unless you have a grade “A” site with six anchors wanting in, Kohl’s isn’t going to allow restaurants, billiard parlors or schools near its store. Bed Bath & Beyond will not allow Linens 'n Things into the same center it’s in and Giant Supermarkets won’t allow the sale of off-site food consumption or beauty /health supplies. I want to meet the developer who says no to these tenants and walks away from the deal. Let me restate that. I want to meet the SUCCESSFUL developer who lets them walk because of these restrictions.
Changing topics, last week I met with a potential client to lease and manage a 500,000 sq.ft. center that he was in the process of acquiring. One of the three anchors, a 100,000 sq.ft. "big box" owns their store and is vacating the premises in three months for a bigger unit a mile away. The vacating tenant is located "dead center" and has the most prominent spot in the project. I recommended he call the anchor before finalizing the acquisition and buy their store, so he controls his own destiny, not the retailer. He complained it made no sense to lay out $4 to $5 million and wait up to two years to start getting an income; there was no return in it for him. I tried desperately to explain a vacant store representing 20% of the center will hurt leasing and the flow of customers to the existing tenants, which ends up hurting him. The "big box" retailer by its very nature will be slow to lease/sell the space and under their REO can lease to any use they want. It's a disaster waiting to happen. He's prepared to buy the property for $35 million, and in reality isn't in control of the center's future. Needless to say, he didn't like my attitude nor did he feel that I was the right company to handle the management.
On a different note, I’m doing a 1031 exchange search for one of our clients and I’ve been “eyeing” hundreds or possibly thousands of properties available for exchange at a CAP rate of 5% to 9%, with such tenants as Walgreens, Wal*Mart, CVS, FedEx, etc. In addition to these credit worthy tenants there were dozens of tenants available at 7% to 9% CAP rates that IMHO, are an hour to an hour and a half away from bankruptcy. How can someone pay such an outrageous price for a weak tenant? I’d rather put my money in a totally safe CD at 4 ½% than get 7 1/4% for a tenant that probably will be out of business in a year. Pricing in our industry is totally insane, whether it’s for a center or 1031, the numbers don’t work for the long run and most of us are in it for the long run, so we have problems coming down the road SOON.
Last complaint of the day. Banks are DUMB. I was talking to a friend who borrows $50 to $75 million a year to acquire centers. He was bragging that he never puts more than 5% into any deal, the bank puts up 95% of non-recourse of the money. “How?” I asked and was told, “It’s simple. I LIE.” Add fictitious numbers, i.e. commission paid, TI, etc. and show, on paper at least, that “you’re” putting 20% into the property. The banks never check, they just provide the cash. You know when the next recession comes, and it is, that property will be going back to the bank. Dumb, de, dumb, de, dumb.

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Ann, Laurie, Alyson and I attended the ICSC Orlando show and, as has become tradition, it was a homerun, with attendance up 15% (if this trend continues, the New York show will be a zoo, with the possibility that there will be over 7,000 dealmakers in attendance, making it a MUST, MUST event no matter how much you hate crowds or New York City). The night before the actual dealmaking event was “party” night and our industry excelled at eating, drinking and being merry. Tons of dealmakers got back to the hotel between 10 p.m. and 2 a.m. and had a 6 a.m. wake-up call. You know they weren't very productive that morning, but somehow I'm sure most made deals.
I didn’t attend, but was told the Women in Real Estate event was extremely well attended and active, as was the Next Generation party. HOWEVER, numerous people complained about the attendance at the actual cocktail party (it was low) and the quality/quantity of food available (don't go to these shows to eat).
The halls of the show were filled with the sound of dealmakers everywhere, laptops open and site plans on display from the exhibit hall to the corridors. Anywhere there was seating available there were deals being done or at least trying to be done. The highlight of the show is always the Retail Networking Session event, which was jammed from the opening bell ‘til 5 p.m. I’ve said it before and I’ll say it again, this type of retail event should be held at all the dealmaking shows; it’s extremely popular and, in a way, even more needed than the actual dealmaking. It's like going to a bar and having 50 gorgeous women wanting someone to buy 'em a drink.
I heard a number of retailers complain that rents and CAM costs were skyrocketing and that was particularly true for mall-oriented tenants. The “in” thing for mall tenants is fixed price CAM costs, and at least a dozen tenants complained they were being gouged. They also complained that the major mall owners (and there are few of ‘em left) are "forcing" them to renew leases in their less desirable centers by refusing to renew in the "good" center. This isn't a "new" tactic, but it appears it's becoming more common. There are only two types of malls in today's world; good ones and the rest, which is why so many mall-oriented tenants are trying lifestyle centers. It’s often a similar tenant mix, except there are no traditional anchors, at lower costs and no enclosed mall fees to pay.
I bumped into Jeff Doppelt at the show and IMHO Jeff is the best broker I’ve ever dealt with. He sold his company to Trammel Crow several years ago and tried retiring, but almost went crazy with all his free time, so he’s now semi-retired and his main involvement in retail real estate is the development of 10,000 sq.ft. to 20,000 sq.ft. centers east of Chicago. A nice retirement program, which more and more "retirees" seem to be doing.
I had an interesting discussion with a “retailer,” or actually a company that buys retail chains requiring a turnaround. The company buys the chain and then usually closes 25% of its stores in their drive to increase cash flow from under-producing units. His biggest problem at the moment was that he’s responsible for sub-leasing over 400 stores, mostly mall-oriented. His other “problem” is that the economy is too good, so they’re having trouble acquiring chains at a 12-14% CAP. So like the companies wanting to acquire centers, they’re quietly hoping for a recession, thereby bringing "reasonable deals" to the table. Anyway, if you look at the excess properties of many retailers, probably 15%-to-20% of their potential bottom line money is tied up in closed stores. (Wal*Mart probably spends more on paying rent, CAM and taxes on closed stores than most retailers gross). It's a major problem that's getting worse and no one has the real answer.
On a totally different topic, I just read a disturbing article that reports the number of home foreclosures increased 4.7% for July, the most new foreclosures reported in any month, year-to-date. New foreclosures have jumped more than 12% in the last two months, pushing the nation’s foreclosure rate to one foreclosure for every 1,465 households. Yes, it’s not commercial, which is still relatively low, but it’s a bad indication of what’s coming. When the consumer hurts, either from high gas costs or foreclosures, we’re in trouble and the consumer is hurting.
Oh, I forgot, I also got into a discussion with someone from a hedge fund and another with an insurance company while in Florida. Both are looking for developers with a track record and have numerous projects anticipated for the near term. They want to do JV’s where they put up all the money and they split 50-50 after they get 5%-to-6.5 % return on their cash. Not a bad deal for the developer. America is truly a wonderful country. Long live capitalism.
I also read three interesting articles last week; two were in ICSC’s Shopping Centers Today and the other was in The Wall Street Journal. One of the ICSC articles was about developers (both mall and strip) doing “everything” in their power to attract “upscale” retailers (Gucci, Gocci, Gicci) so they can differentiate themselves from other centers and produce higher sales per square foot. The Wall Street Journal article was about Sav-A-Lot opening stores in cities and poorer markets, offering prices below Wal*Mart. Two different ends of the spectrum.
There's nothing wrong with trying to attract higher end retailers; they serve a need and a market but higher end to me represents “MAYBE” 15%-to-20% of the population, which means 80% are not going to shop/buy at these retailers. Sav-A-Lot probably caters to the bottom 15%-to-20% of the population and the two shall never meet. BUT (that infamous but) high-end retailers as a rule do not attract the masses, so when a mid-priced tenant goes out and are replaced by a higher end merchant, traffic usually drops. The outlet industry, years ago, in order to have higher sales per square foot, replaced many of their popular priced retailers with high-end retailers. The good news was they accomplished their goal and sales per foot increased. The problem, since foot traffic dropped, is that the other tenants in the center saw a decrease in their walk-in traffic and therefore sales dropped for many of their tenants. And, in case you haven't heard, outlet centers are in trouble. The same will happen in traditional strips or malls if developers "push" too hard for upscale tenants. If less people shop in Gucci than Dollar Tree, then less people will eat in the pizza parlor or shop at Payless Shoes and the "pizza man" can contribute more to the owner's bottom line than Gucci. Sometimes we don't want what we wish for.
The third article was also in ICSC's "Today" and it dealt with Ace Hardware planning to add 180 new stores/franchisees during the next year. That's nearly five million sq.ft. by one retailer that the "media/industry" does not consider sexy. There are hundreds of other retailers similar to Ace who'll "fly" below the radar that are franchised or licensed which add millions of square footage to shopping centers every year that get little publicity or respect, but would be a decent to great tenant in most centers. Few leasing pros follow up with this segment of retail real estate; they wait for the tenant to call them, not the best way to make a quick deal and franchising/licensing is doing better today than ever before. It's a market we're overlooking.

SAME TIME NEXT YEAR

I think half the brokers involved in commercial real estate are either peddling or acquiring 1031 exchanges (which is a polite way of saying "the property is overpriced.” But it's better to overpay for the property than give it to the government. Saying your client is looking for a 1031 is code for "I'm willing to overpay"). This type of product has become super hot in the last few years and, based on the Kraus theory of commercial real estate, if everyone is buying, then SELL. The difficulty is finding that optimum moment to sell, which requires either skill or luck (I’d rather be lucky than skilled). The 1031 industry has had a great run for the last few years, and if you're thinking of selling why not take the profits NOW and run. I personally don't think prices will be higher next year, but it's your money so take the risk if you want.

For whatever it's worth, the three best markets (in my opinion) to make a "deal" in (if there are any left) are: Pennsylvania, Texas and Florida. The problems in Florida and Texas are that both markets are overbuilt, especially when it comes to small space shops. These markets have higher vacancies and more defaults than most of the larger markets. Florida and Texas’ specialty stores also have more "MA&PAs" than a California or New Jersey does. Oh, I was just offered a "tax payer" in midtown Manhattan at a 3.5% CAP and a drug store in Los Angeles for 4.25% and both brokers had a straight face when making the quotes.

While I'm giving opinions, let me ask:. Have you seen the new Sears format converted from Kmarts yet? They don't work, at least that's what I'm hearing. I must have spoken to at least six or eight former Kmart landlords who were initially excited about the switch and, in fact, were able to lease up space at higher rents just on the promise that Sears was coming. The problems began once they opened. In many cases, their traffic is lower as a Sears than it was as a Kmart and no one was happy with the Kmart’s volumes. Hopefully they get their act together. It would be a shame to see another bankruptcy.

I also forgot to mention in the last MyWay that I had lunch with four "developers" who, combined, own 65 centers in the northeast. We were all throwing the bull about the state of the industry and having a good old time until the topic of rent reductions came up and than EVERYONE became serious and intent. All present at the lunch had, during the last six months, new tenants calling asking for rent relief on stores opened less then a year. All the stores involved, except one, were under 4,000 sq.ft. What was really interesting was in 90% of the requests the tenant was a franchisee, which is where a LOT of specialty stores come.

The best "educated" guess we came up with is that the newbie tenants were overly optimistic on what their volume would be, agreed to a ridiculous rent and then got into trouble. Unfortunately, the franchiser was more interested in selling a franchise than protecting the tenant and agreed that their franchisee could afford the rent which they couldn't. All the franchisers had a provision in the lease that they had the right to take over the lease if the franchisee defaults, and none did.

Owners might think it's great that these tenants paid above market rents, but when you get more rent than the tenant can afford, they first are late in making payments, then just plain stop. And nine times out of 10, they get so far behind they just do a "midnight move," owing you three to six months rent; you then have to sue (and get nowhere) and then pay another brokerage commission after the space has been vacant for six months. So your true "net” rent from the deceased tenant is probably what they could have afforded in the first place, and then they wouldn't have left you.

On a more nostalgic topic, in my old age I've been doing lots of reflection on where I've been and where I'm going. The retail real estate industry plays a major role in my life and I've been thinking back to my 33 years of experience. Besides enjoying the travel and opportunity to do deals, one of my favorite aspects of going to the regional dealmaking shows is I get to play Alan ??? in "Same Time Next Year." This industry has provided me an opportunity to make a decent income, have more fun than frustrations and get to meet some really great people (some a*holes also, but that's for another issue). Some have become personal friends and many great business buddies. Because I've been traveling the country for 33 years, I've met and like people in every area. And the regional dealmaking shows provide an opportunity for us to see each other, if not often, at least on a regular basis. Now I'm beginning to realize that in many cases, we've grown old together. Yes, we only meet once or twice a year for 15 minutes to two hours but we condense a year of living into that time frame. I heard about, but never met, children a week after they were born, kept abreast of my colleague's child's college life, marriage and birth of grandchildren. Unfortunately, we've also shared illness and deaths together, but that's part of sharing our lives. We've bonded over these 30 some odd years and for that I'm grateful. This isn't a swan song or anything like one, it's just that in the last three shows I've been to retirement has become one of the most popular topics I've heard (all from old farts like me). Everyone wants to become a "consultant" when they retire, both to supplement their income and keep active. Hate to be killjoy, but there's few real consulting jobs “out there." That's where you get paid for your opinion no matter what the results. What will be available is brokerage, exactly what our industry needs; more brokers. In five years from now, this industry will have a totally different "personality" as the young replace all those leaving.

Next, I just read two disturbing articles. One was in the Wall Street Journal saying the era

of cheap interest rates are over. Then I read Ann's “HerWay," which is also in this issue discussing store closings and concerns about Christmas. And, combined with higher interest rates (notice I said higher, not high. I remember interest rates of 18-20%, so 7% or 8% is baby's play), there's no doubt at this moment that the Fed will continue to raise rates and gas prices, and we’ll see mounting casualties in Iraq, Asian bird flu (now that's one to be REALLY scared of) and terrorists knocking at our door. These issues have the American consumer scared and they don't have a big financial cushion for when things go wrong, which appears to be the norm for the moment; so retail sales are, and will be, effected. We're not saying the sky is falling, but this is a time for intelligent caution.

Oh, I was talking to a fellow broker the other day about some litigation he's involved in. He's a tenant rep and signed a commission agreement saying he would be paid a "market" commission if a lease was executed between the owner and his client. The good news is that the deal was signed. The problem began with a debate over what "market" commission is. He contended it was 5% and the landlord said 3%. He expected me to be sympathetic since we're both brokers, but I explained to him he was stupid. First, I have no idea what "market" is. I've done deals at 1% and some at 6%. The more money involved, the lower my commission. I don't care if $100,000 represents 1% of 5%, it's $100,000 and that's a lot of money to me. Yes, I try like crazy to get paid the most I can but I'm really only concerned about the cash, not the percentage. Also, while I'm no lawyer, nor do I play one on TV, requiring a "market" commission may be illegal under the FTC’s restraint of trade, and violators can go to jail. But even more important, why make the agreement vague? Resolve the number up front and then there's no dispute. Yes, it will cause more friction up front, but sooner or later if a deal is done it has to be resolved.

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2005-11-25T10:22:00.000-08:00

My Way by Ted Kraus

In my former life, I was a leasing agent for Arlen Shopping Centers, (the second cousin, on its mothers side, to CBL & Associates) who, at the time, was the world's largest shopping center developer. "We" (actually Arthur Cohen, the Chairman) were great when it came to financing and leasing, but "we" left a lot to be desired when it came to construction, management and long term planning. Arlen's real estate overall was excellent, but because of their decision to purchase Korvettes and Atlantic Department Stores (these were the great grand daddies in discounting to Kmart and Wal*Mart for all you youngsters out there), being so alien to shopping center development, it finally lead to the company's demise. After realizing they weren't retailers and never would be, Arlen decided to close numerous stores. The good/bad news was we did not liquidate the chains (in those days, there was no one to liquidate to anyway, and since the developer owned the retailer, what good would it be to go bankrupt and disavow the leases). We became pioneers in developing the concept of "converting" these "big boxes" into alternate uses. The better properties, of course, remained retail and were leased to Kmart (who was the super star of retailing at the time), WoolCo and Grant City (man am I old), but like the current state of chain liquidation, getting rid of the good stuff was never a problem (the top executives handled these leases), but the poorer locations were a pain to lease, so the lower echelon of leasing agents were given these assignments (that's where I came in).

Anyway, one thing I will give Arlen credit for was having some of the brightest people in retail real estate working for them (of course, since the shopping center industry was in its infancy at the time, they really didn't really know what they were doing, there were no "rules" to go by, but they were great at guessing and proved to be right more times than not). Top management in charge of the conversion program knew that some of the centers could never be leased as retail and alternate uses were the only way to go.

Since conversion/alternate uses was a brand new concept 20 years ago, they had renderings drawn up for prospective tenants on what could be done with the property; i.e. convert a vacant Spartan Atlantic store into a shopping center/mini mall, school, motel, etc. A picture/rendering is worth 1000 words and they wanted to expedite the program and make the properties easier to understand for prospective tenants.

All of the above brings me to why I'm writing. I received a call from Steve Felix, an old, old friend (almost as old as MaryAnn) telling me that while cleaning up his office recently he came across 16 or so of the original renderings depicting what Arlen had proposed. Steve had them because he used to be involved in "turn around" management and found Arlen's ideas useful when marketing his property.

I asked for a copy to be sent, since I hadn't seen 'em in two decades. Making a long story longer, I just received the package and they are as relevant today as they were 20 years ago (if you want us to fax you a few for review, fax us a note at 609-587-3511 along with your fax number). I think I'm going to have our art department update them and include them in our Alternate Use Program.

I guess the moral of the story is, if you want to know how to cure today's problems, just look at the past. It's been nearly 20 years and the need to convert poorly planned retail to alternate uses is still relevant; guess we never learn.

On a different subject, retailers are beginning to learn all the benefits of just saying no (but I bet most did inhale when they were younger). A friend of mine represents a retail chain and when we use to talk about his expansion program, he semi bragged about his great deals at $14-17 per ft., and what a great negotiator he was. Well, for various reasons, they won't be expanding as much this year, so he's saying "no" to developers more often. We just had lunch together and he was amazed at how much more TI, options and other "extras" were available if he would just say "yes" instead of "no." His "deals" have improved by 25%. The minimum rents are basically the same (developers have mortgage payments to meet), but the overall deal is a lot sweeter. If you're a retailer, give it a try. What do you have to lose?

I receive dozens of calls a week from developers wanting to know if I know of a tenant that might be interested in their vacancies. Most of the time they just want help and don't want me to play broker (which is fine) and I provide some ideas and phone numbers. Other times they say: "Why don't you earn a commission and make the deal?" To understand where I "come" from, most of the deals I work on are problemed properties, so we charge a retainer against a commission because we have to work twice as hard to produce half the rent/commission. In a few rare cases, if I think I can lease the property in a short period of time, I'm willing to play traditional broker, but that's the exception, not the rule. Anyway, a few days ago someone called wanting to know if I'd be interested in leasing their property. I did a little checking around, thought I had a fighting chance of producing a tenant, and sent our standard contract (which is very negotiable) that gives us a one year exclusive with the right for the client to cancel if we're not in active negotiation with a tenant within six months (which I think is fair.) I waited a few days after I sent the contract and followed up with a phone call.

I asked the potential client "what they wanted to do" and they said, "Why do we need a contract?, we'll pay you if you bring us a tenant. Can't we operate on trust?" This is the most common response when I send a contract to someone who wants me to lease their property. While I try to be somewhat diplomatic, my answer, is always "no." Unless I know someone extremely well, trust is not part of our relationship. I find the client to be much more untrustworthy than me. If they are not willing to sign a contract, the odds of them paying is really low and I'm only in this for the money.

Over the last few years, I find I'm being much more selective on which centers I work on. I may not be as busy, but I'm making more money and that's just fine. However, I can't understand the broker that's willing to work on leasing a property based solely on trust. That was great 10 years ago, but not in today's world. I speak to a dozen brokers a week who spent six months working on "trust" and then somehow get the shaft.

On an "interesting note," 30 developers in New Jersey are sponsoring legislation that would require brokers to disclose who they represent (are they representing a retailer/tenant or are they representing the best interests of the developer). If they represent the tenant, then that's who pays them, not the developer. If it's passed and then catches on with the rest of the nation, it will have a radical effect on our industry. In my humble opinion, the concept is good, but I am opposed to giving the "Evil Empire" anymore regulating authority, they'll just abuse it. If this law is passed however, we should pass another one that reads "if you don't pay the broker the full commission, on time, then you'll be flogged." I highly recommend you keep an eye on this situation.

FYI: In the last My Way, I talked about the Internet and how most of the "surfers" are brokers & developers, not retailers. Well, some retailers are learning to surf the Net to do deals. Payless Shoes is using the net, both by posting to the various user groups and having a Home Page (http://www.paylesshoesource.com) to market their surplus properties, so the Net is changing and growing rapidly. I suggest, highly you get on board, it's the future.