As I write this "My Way" the Wall Street Journal is talking of the strong possibility that Kmart will go bankrupt and there’s also "hints" from analysts (not that they really know anything) that Gap may join ‘em soon. By the time you read this, the outcome of Kmart should be known but I expect to be reading in the next few months of several other national retailers going "11" (the "suspense" about Kmart is putting a hold on one of my deals as the anchor I’m dealing with wants to wait and see if they can take over some Kmarts, which they’d rather have than my deal). So Kmart might be big news, but more will be joining ‘em.

Now most retail bankruptcies are out of the control of developers, so we can’t blame them for the retailers problems. Kmart once had great credit, was a good draw and the economics of the deal usually made sense, so who wouldn’t want to be a Kmart developer. I’d do a Kmart deal up to recently without blinking an eye, so I’m not blaming anyone but Kmart for being incompetent.

But (and there’s always a "but") when it come to tenants like the Gap (if they go under), Disney, HomePlace, Jeepers, Museum Company, Old Navy or whoever files in the next few weeks before you receive this issue, I place the blame on the developer as much as the tenant’s inability to attract customers. Developers for the last 10 to 15 years have been acting like 18-year-old teenage boys in a bar, begging the girl to let ‘em buy ‘em drinks with the hope they’ll get lucky. Most developers come to a meeting with LOTS of TI in hand hoping to use it to make a deal and get higher rents. I’ve talked to dozens of retailers that say Simon and other major REIT’s "fight" with retailers to take more TI money so they can charge higher rents and therefore make their income look better to Wall Street, even if in most cases the risk doesn’t justify the reward.

While our industry hasn’t been as guilty as the dot.com world, we’ve been foolish in our judgement on how to best spend money. Millions were poured into Jeepers without really understanding the concept or it’s ability to justify the high rents the developer demanded for the TI. The same is true for HomePlace (why Waccamaw bought ‘em is still a mystery to me) and again, the same was true for most movie theater deals. While it’s unlikely that Disney will go under, they were not the draw everyone thought and their closed units will not benefit the mall. Like the dot.com industry, we’ve been pouring money into expansion for expansions sake, not for any realistic return or long-term benefit.

Are there times when putting a lot of TI at risk makes sense? Sure, when doing a turnaround, lots of money is required (and the risk should be with the developers, not the tenant) or if you can get a REALLY UNIQUE retailer into your center, it serves a purpose. But what good was a Disney or Gap as the draw for your center if they are in another project three miles south and another four miles north? They became a commodity, similar to Radio Shack, a decent tenant (hard to make a deal with, but on the other hand, Radio Shack TI requirements are not outrageous) but nothing really, really unique. In fact, Radio Shack is more of a unique tenant then many of the retailers going under and they rarely get respect.

What always amazed me with these retailers that require a lot of TI is that they were like hookers; they had to be bought, which sometimes you could justify, but unlike most hookers, they were arrogant even after you agreed to pay ‘em and they rarely provided satisfaction. But like a hooker, after they have your money, they leave. How would you like to be a landlord who put $1 million of TI into a 6,000 sq.ft. tenant who then goes under and vacates. Not only can’t you get the $23 psf rent the bankrupt tenant was paying you because of the high TI, but you’ll have to come up with new TI for probably less rent.

On a different note, I sometimes wonder about the intelligence of retailers (however, they weren’t the dumb one when getting the developer to put up $). I’ve been trying to finalize a deal with a tenant for more than six months. They keep saying "yes, we’re going to do the deal," but I never get an executed lease and its fully negotiated. Anyway, there’s another site we’re leasing that they really want, as do several other retailers; so for a change I have a choice of tenants. A different rep handles this location than the deal that’s been going on forever. Every time the rep calls, trying to make a new proposal, I keep asking for help on the other site, mostly a request to either execute the lease or kill the deal, which I think is reasonable. The rep keeps saying: "Yeah, I’ll get you an answer" and never does, but a week or two later calls to see if we are willing to do his deal. I ask what happening on my other deal, he says he isn’t sure, so I respond I’m not sure about his deal (this rep is not swift in taking hints). This is ridiculous and a waste of everyone’s time. Why can’t a retailer either say, "NO, I don’t want the deal" or "here’s the executed lease." These are not difficult concepts to follow. This is a small industry and we all have long memories, its to everyone’s benefit not to play games because what goes around comes around.

Ranting on, from a business viewpoint, most brokers and developers I speak to are active, but not jammed with deals. Business appears to be decent and few developers or brokerage companies are in trouble. They all report higher vacancies in their area but there is definite interest on behalf of retailers in leasing space and a lot of interest from smaller chains. Their biggest concern is the possible bankruptcy of either their anchor or mini-anchors, as replacement tenants in those size categories are harder to find. The Schottensteins of the world must be having a ball right now!! With all the vacancies, most of the larger retailers I know are re-evaluating their existing stores and repositioning their weaker units. It makes sense. The smaller, non-public chains are renegotiating with their landlords to cut rent, get TI to upgrade stores or "better" their lease with the threat that: "Yes, we’re on the hook for the next three years for the rent but we’ll leave for a sweetheart deal across the street and you have no one to replace our dark store, so your center will be a weaker draw" and from all indications, that strategy is working. We live in interesting times.