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.
posted by tedkraus at 7:33 AM 0 comments links to this post
Monday, October 30, 2006
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
posted by tedkraus at 12:21 PM 0 comments links to this post
Friday, October 06, 2006
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.
posted by tedkraus at 2:01 PM 0 comments links to this post
Monday, September 25, 2006
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.
posted by tedkraus at 6:10 AM 0 comments links to this post
Friday, September 01, 2006
Mickey Hits Another Home Run
Ann, Alyson, Terry and myself attended the Orlando ICSC dealmaking convention, which proved to be another home run. Lots of busy and happy dealmakers gathering for three days to wheel and deal, a task they were all equipped to do and do well.
The cocktail party on Sunday, while active, seemed (but I'm not sure) to have a little less in attendance than in the past, and I have two theories why (the third is I'm wrong) 1) Airfare and hotel costs have gone up, so some elected to come for one day less to save some expenses; 2) There was confusion on which day the cocktail party was, many thinking it was on Monday, not Sunday night. Either way, the show itself ended up with nearly 5,000 attending over last year's 4,300 and the cocktail party was a success with all attendees being in an upbeat mood. We can't ask for more than that.
The reoccurring complaint I heard was on the increasing costs of construction and insurance in the Florida market since last year's hurricanes. The details have been reported everywhere, but I'm told some insurance costs have gotten close to the $3 psf mark and construction costs are up 25% to 30%. Some claimed that it marks the beginning of the end of Florida's great retail market, but I doubt that. It will make dealmaking more difficult, as more secondary sites are rejected and greater "discussions" on acceptable rents than in the past occur. The great curse of life. May you live in interesting times.
Ann and Alyson attended the Ladies in the Biz cocktail party on Sunday and they seemed happy with the networking opportunity and the excellent turnout. From what I could see, the booths at the actual dealmaking show were sold out with just a few no-shows, so by every definition, Orlando was a winner, as has become tradition with this event. Every exhibitor I spoke to expressed satisfaction with the show, so even with some problems on the economic horizon, the Florida market is still hot. Of course, trying to figure out the economy is impossible; One day inflation is down, the next up. One day consumer spending is up, the next down. One week, unemployment figures are up, the next down. It's totally confusing, and anyone claiming to understand what's happening is a fool or a liar.
I'm writing this during the last week of August and, to say the least, business is slow, at least from the brokerage end; publishing is busy preparing for all the upcoming ICSC dealmaking events. Phone calls have slowed to a trickle, most people I call are on vacation or getting ready to go on one and 99% of the deals scheduled to open for this coming Xmas season are finalized, so no one is under pressure to do a deal; they want to enjoy what's left of the summer. Hopefully, as has been true in the past, this changes after Labor Day and business becomes hectic once again.
The hunt to find centers for sale is as strong as ever, with most of the brokers and buyers confused and frustrated on why CAP rates aren't going up as interest rates have (In theory, they have; in realty, they haven't). I guess the only logical answer is "If they can get their asking price, whether it makes sense or not, why not." The single largest complaint I constantly heard was where/how to acquire property that makes economic sense, and there is no answer. Where I'm really confused is all the reports that I've read contend there's a slowdown in leasing and retail sales, but in the majority of markets, rents are still increasing and a retailer has to be a real fool to pay higher rents on declining sales. I must be the exception to the rule because every property we're leasing I'm finding it harder to get decent rents and tenants are fighting harder on renewals. Of course, some of it is sticker shock, when after 10 years a tenant's rent goes from $7.50 psf gross to $18.25 psf net, it can be difficult to accept. Of course, the retailer's gross has increased substantially over the years and that they have no problem accepting higher sales volumes and the incoming profits.
Another change in the sale of properties is that, while CAP rates have not risen, it is taking longer to make a deal and I've noticed more deals are coming back onto the market after a LOI was signed. Deals seem to be dying more often; it now often takes several acceptable offers from different buyers before an actual deal is finalized. If the due diligence doesn't come through perfectly the buyer wants to renegotiate.
Switching subjects, Josh, as I mentioned attended the ICSC's University in Lansing, MI and they appear to have done a decent job of teaching him the basics and providing lots of networking opportunities, many of which will probably last him a lifetime. The reason I think they did a decent job is that he came back with lots of buzz words and sat down with Ann and myself and explained all the things we've done wrong over the last 30 years. God, I never realized how ignorant I've been. I guess that's what children are for, to point out all your mistakes. Forgetting the sarcasm for a moment, the University was well worth the time and money involved. Josh said the "teachers" were great and over the five days he had 10 or 11 teachers covering all aspects of leasing and management. It reminds me a little of talking to him after his first day of kindergarten; I was more excited than him.
On a different note, we're marketing a center for sale that, to say the least, is problemed and we're having trouble generating any interest. I called a few brokers I know who specialize in sales and said we should co-broker and then sent out a complete package. A week or two later one of the brokers called, saying very apologetically that one of his clients made an offer but he was ashamed to make the offer. I used a line from Lee Cherney of Kin Properties; "As long as you don't insult my kids or wife, I won't take it personally. So give me the offer." He was right, it was low ($10 psf to buy) and I promptly turned it down, BUT I did call the seller and tell him of the offer. The good news is that, even though he didn't accept the offer, he didn't get uptight and came back with a counter offer, which the buyer turned down, but at least I got him an offer. The other brokers reluctant to present a low-ball offer reminded me of a trend I've noticed over the last few years. The amount of real "horse traders" in our industry is declining. I'm not talking the typical deal between a landlord and tenant where the rent starts out at an asking price of $25 psf and ends up at $19 psf, but on marginal properties for lease or sale. It used to be that companies and individuals would make an offer on marginal centers IF the deal could be bought "right" (and there are still companies that only want marginal properties where they can get in cheap), but I guess that secondary centers are either too much of a risk or too much work for most of the "next generation" to be bothered with. Nickel and dime negotiations aren't popular anymore to many (not all) companies and too many people seem ashamed to make a low ball offer; a big mistake in my opinion.
posted by tedkraus at 8:19 AM 0 comments links to this post
Thursday, August 24, 2006
Another Josh Story...well almost
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.
posted by tedkraus at 7:49 AM 0 comments links to this post
Tuesday, August 08, 2006
The Slowdown Is Here...Now What?
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.