MY WAY |
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For a while I thought I died and went to hell but I finally realized I was just negioating a LOI with Old Navy
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Ann and I were having breakfast the other day at a diner (we’re from Jersey, where everything happens in a diner) and we began to make our predictions/guesses about what type of year 2001 would/could/will be. We started talking about the economy and retailing in particular and where our industry has been in the last 10 to 15 years and where we expect it to go in the next two. In the late ‘80s, business was great, syndication was strong and centers were being bought at CAP rates that made no sense, but I was told I didn’t understand, it’s the new economy and things are different now. Every idiot who wanted to build a center could get money thrown at ‘em no matter how weak the demographics or tenants were. We went from an industry of investor builders to merchant builders. The good times would go on forever and if you weren’t building or redeveloping, you were missing out on million$. There were outlet and "discount" centers being built at every corner along with power centers anchored by Pharmor, Hills, Discovery Zone, Caldors, Funco, Jamesway, Grand Union, Crazy Eddies, Bradlees, Roses, RxPlace, Home Base, Grossman Lumber and Montgomery Ward to name a few one-time greats.
Everyone was making money or at least appeared to be in the late ‘80’s. Then the banks went bust because their loans to developers went south. The government came in to help and the economy collapsed. For lack of cash flow, centers deteriorated, were given back to the banks, leasing, acquisition and development people were laid off and everyone thought the world was coming to an end as more retailers announced their bankruptcy on a daily basis. Getting money from banks was next to impossible, retailers made sweetheart deals because few were expanding and developers were desperate. Then, after a four to six-year period of pain, the economy started to change, REITs became hot and most REIT personnel spent more time wondering about the price of their stock options than making a deal with a retailer. Fortunately, that only lasted a short time, then the REITs went back to "creating value" instead of acquiring centers at a 7% CAP rate with no real upside except for what a "creative" bean counter came up with.
Whether because of computers, Clinton, the Internet, Greenspan or because it was just time, the economy not only improved but blossomed, producing the best six years any of us have ever seen. What was even more interesting is that, in most cases, the people who lost millions during this recession/depression period of the ‘80’s & early ‘90’s and who in many cases declared corporate and personal bankruptcy, made back all of their lost million$ PLUS SOME. Proving that those who can, make money and those who can’t, just watch. Now, if you noticed, a lot of the euphemisms of the '80’s real estate market held true for the dot.coms of the ‘90’s; their stocks hit a record high for a couple of years, then it was "discovered" there were no real profits (I wonder why it takes investors and institutions so long to "discover" the obvious) the banks moved in, people were laid off, they couldn’t raise capital and then their stocks went down to record lows. I’m confident that the dot.coms will do the same as real estate; struggle and lick their wounds for a couple of years, but then have a full recovery.
Now the really big and important question is how will real estate react for the next few years. Every sign indicates we’re having a slowdown, which in itself isn’t bad; it provides time for us to get our act together again, reduce costs and waste and concentrate on projects that will be really, really profitable. It’s a crash that frightens me. Unfortunately, 2001 is starting off with high interest rates, increasing bankruptcies, and higher defaults on loans. Not A Good Sign. We, as an industry and nation tend to overreact (but that appears to be the "human condition"). Knee-jerk reactions are part of our history - when an entertainment center does well, everyone builds one at every major intersection. A couple of outlet centers perform well, so the developers convert to REITs, raise lots of money and then overbuild the golden egg. Some theater chain builds a 10 plex, so their competition builds a 16 plex, then the next builds a 20 plex which is enlarged to a 24 plex and this continues ‘til they all go bad. The most common description I read about in the papers of the retail real estate industry is that retailing is overbuilt. That’s bull, we’re not over built, we have too many mediocre retailers and the same stores operating within a mile of each other. The only segment of retail that’s overbuilt is the movie theater part. Montgomery Ward and Bradlees went "seven" not because the economy was bad (it wasn’t) or there was too much competition; they went under because they stank in retailing 101. They had no idea what the public wanted, so the consumer stopped coming.
What I see as a more pressing problem is the mergers and acquisitions that not only went on the last five years but will continue for the next five. About 15-20% of chains with 10 or more stores have either gone out of business or have been acquired in the last five years alone. When TJ Maxx owns Marshalls instead of competing with ‘em, everyone loses. The public for a lack of good competition, the developer for a lack of choices in their tenant mix (I wonder how many developers even consider tenant mix in the last 5-10 years) and the stock holders of the acquiring companies lose because in the long run, the company will fail as they slip into mediocrity. FYI, I’m not picking on TJ, I’m just using them as an example.
There’s great opportunity "out there" for developers who have the foresight to look into a retailer’s operation, see which will do best in their center and make a deal, whether it be for new construction or redevelopment. There’s fantastic potential for developers who can really remerchandise a center, not just give Old Navy a million bucks to open a store. The retailer that can raise its standards and bring the consumer satisfaction will also prosper. For the rest of us who don’t have this gift of greatness, we’ll have to work harder, smarter and go back to the fundamentals. As I said, there appears to be a slowdown coming. In 1990 I thought we were going into a "soft landing" but it was a crash and I didn’t have a seat belt on. I definitely was injured. (For awhile I thought I died and went to Hell but I finally realized I was just negotiating a LOI with Old Navy).
Xmas wasn’t great for retailers this year but it wasn’t bad either. The retailers’ problem is they overexpanded with locations that an imbecile would not have taken (this goes back to the stock market pushing retailers to expand even without profits and retailers giving too much leeway to their exclusive brokers) and they allowed their costs to get out of hand. (You can bet on the excess-space industry having a couple of banner years as retailers attempt to rid themselves of their secondary and tertiary locations). Wall Street is not overly bright (don’t forget these are the people that told you Amazon.com would be at $400 within a year, Internet stocks won’t be affected by a downturn and brick & mortar retailers were doomed because of e-commerce) and they will overreact to the difficulties retailers are currently having and lower their stock value. When retailers cough, developers get pneumonia and there can be lots of casualties. Now the individual leaders in retailing and development are and will remain in good financial shape; they sold their corporate stock when it was at record highs (for the most part, they’re old farts like me-but rich-and lived through enough downturns that they made sure they were personally diversified and had plenty of cash no matter what happened to their stock or company). The 20 and 30 "something" generation didn’t realize they had to prepare for downturns, they’re still babes in the woods, so they have problems but they can live with ‘em. If you’re 28 years old and have been earning $80,000 a year with just two years experience, adjusting to a $50-60,000 salary is livable, just hard on the ego. The 40-something generation is at the awkward age, old enough as a rule to remember the bad times but still young enough to be foolishly optimistic and hope/believe there was one or two more good years left before the world goes under, so they didn’t prepare.
Now don’t get me wrong, I’m not saying the world is coming to an end, but we have a new administration in the White House that will stumble for a while until they get their act together (if they ever do), a Congress that lives with self hate and contempt toward one another, a Supreme Court that is ashamed of itself and a weakening world and national economy, so all I’m saying is be prepared. Remember, no matter if it’s a hard or soft landing, in just five years, the good times will roll again.