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

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

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

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

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

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

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

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.