My Way

A Moment That Will Go Down in History...

I was Wrong

In the ICSC New York dealmaking issue, I stated there would be between 5000-5500 dealmakers at the New York Hilton; I was wrong, the show attracted only 4600, still making it the number two dealmaking event of the year but not the gangbanger I expected because of the date change and the fact that even though the word recession is being used a lot, business overall is still good. So, while it wasn’t as great as I expected, by any definition, it was a success. What was different this year over past Hilton shows is the crowds were never over whelming, and either through luck or skill, the ICSC had a good "mix" of exhibitors spread throughout the three floors, thereby providing decent traffic for everyone. I’m sure another reason for this even disbursement of the crowd is that the attendees have grown knowledgeable that there are exhibits on three levels. Anyway, traffic was good and spirits were high, even with everyone discussing which idiot would become the President or the continuing drop in the market or when the recession would really start.

About the only real negatives were 1) the price of staying, eating or parking at the Hilton (or anywhere in midtown) is insane but what do you expect for New York City in December and 2) the food at the Hilton sucks. Now I can live with the high costs, but how do you justify bad food in New York City? Oh well, no one goes to an ICSC show for the food.

What surprised me at this show was there were a large number of retailers really, really trying to make a deal. (Well, not really retailers, since the "real ones" were low in attendance, there was an extremely high percentage of brokers representing retailers. I guess corporate had trouble justifying $379 a night plus airfare, so they said "send in the brokers"). What I found cute was at least five retailers/brokers used the same story; "Even though there appears to be a recession on the horizon, my client/company still wants to expand aggressively HOWEVER rents will have to be more ‘realistic’ for the near future." Now I don’t know if this is true or not but it sounds great for trying to lower rents. Developers must be feeling some pressure, since several centers were re-offered to our clients at a much lower cost (not quite low enough yet but getting there) and that is from just two months ago and we had some decent space offered at excellent rental rates.

Another popular topic was surplus space, which for a while at least had ‘fallen’ out of grace as a hot niche. Now it appears more brokerage companies want to get a piece of the action (I guess with a recession possibly coming, surplus space can be a growth industry again). One leader in that niche industry pointed out the cost of entry and expectations have grown tremendously in the last few years. Five years ago, if you were a surplus space expert, you made up some brochures, perhaps placed some ads in the various trade publications and started calling, just as we do with regular leasing. Now, every client expects web pages, constant e-reports and perhaps some management of the vacant property. If it’s a chapter 11 situation, you should come up with some funding for the company. The local broker, who probably is the best suited to handle many of these locations is not sophisticated/rich enough to make a deal with the nationals, so often the assignment is given to large national brokerage accounts who don’t have the right personnel to handle the property. But that seems to be the case in conventional leasing too. Also discussed at great length was the wasted time most national retailers spend on doing a worthless LOI, which even if signed is never approved by committee "as is" and has to always be readjusted or killed. I guess I’ve said this before but it’s like the idiots who don’t return phone calls, no matter how many times you complain, it’s still irritating.

Also discussed was the trend by numerous national brokerage accounts "guaranteeing" their client something if they get the leasing/development assignment. Usually the guarantee consists of a great cap rate they will pay for developing the site as a broker, i.e.: I’ll find you an 11,000 sq.ft. site, build it and then sell it for you at an 8 1/2% cap rate. If we can’t sell it, we will eat the paper. Sounds great and keeps the local brokers out of the loop but man, I wouldn’t want to be holding $40 million of paper if the formerly triple A tenant turns weak or the economy hits a bump and some of these brokerage firms are holding a lot of paper on weak tenants.

Another "broker" discussion was about retail exclusives and how it’s hurting the business and not only from a dealmaking point of view but sometimes you can make a 60,000 sq.ft. deal and end up with a $10,000 commission because the "exclusive" tends to be split between so many people.

Almost everyone has had a great four to eight year run but based on what I can see, while the world isn’t coming to an end, the smart developers, brokers and retailers ( Is that an oxymoron?) will start to control their expenses better and do a better job of business planning in the coming years. The old farts in the industry remember the late ‘80’s and while I’m not saying it will be that bad again, but why take the chance. Get your house in order, NOW. The younger generation doesn’t know about those problems and they won’t believe anyone who tells ‘em about it, so like every generation, they will have to get their education from Hard Knocks U.

Now a couple of people at the show accused me of being a cynic, which is probably true but remember, a true cynic has quite a bit of social redeeming value, as they have earned their title by seeing and doing a lot over a long period of time. Well, I’m old and have been in this industry over 30 years, survived three or four recessions/depressions and numerous up cycles. I’ve seen and done a lot of stupid moves and while not claiming to being bright, I do catch on. With the economy becoming weaker, a lot of the over building or over expansion will be coming back to haunt us in the coming year which goes back to my comments on surplus property. I was talking to some Wall Street analysts and they claim (But I don’t believe it) that Wall Street is putting pressure on retailers to slow down their expansion, get their house in order and improve profits. Yeah, right. The first retailer that shows a drop in sales (even with an improved bottom line) will see their shares sink.

We sent six people to the New York show and one of their responsibilites was to pick up literature from every booth for future use in The Dealmakers. What was interesting is that while the vast majority of brochures were on projects we’ve reviewed many times over the last few years, there was a decent amount of new construction proposed, among the highest numbers we’ve seen in years, which is a good sign. The next largest group of literature was "buyers and sellers" that either have centers for sale or want to acquire. The problem facing this group is their substantial dollars apart on price but a mild recession should get them closer.

What I see as positive news is that we’ll probably see a growth of new retailers in the next few years as e-retailers learn they need the brick along with the click. One of the problems our industry has had for the last several years is a combination of mergers which have eliminated many retailers and the excitment of the Internet has caused many entreprenuers to invest in clicks, not bricks. While the Internet is doing better today than ever, the spackle for the moment is off and I think conventional retailing will become somewhat attractive again, in addition to click oriented retailers opening conventional stores. What’s interesting is our "sister" publication, @dealmakers.net did a survery recently and the results were quite different than I expected. Over 38% of the respondants had put up a commercial real estate web page within the last 12 months and over 55% had made sales on the net with 35% expecting leases because of their internet marketing. Over 25% pay for information, which is substantially higher than I would have thought. 62% use the net for sales and 53% for finding tenants. While dot.com companies may be having problems right now, the Internet for commercial real estate is here to stay.