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

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

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.