My Way
A Really Big Show, again
May 27, 2005 The DEALMAKERS www.dealmakers.net Unfortunately, because of circumstances beyond my control (my body didn't like me), I wasn't able to attend the Monterey, CA, Washington, D.C. and the One on One event in Orlando held in March and April, but I've been told that D.C. was OK and the One on One was OK, but on the weak side and Monterey was excellent. Overall, 95% of the past year's local ICSC dealmaking events have been either successful or extremely successful and if that's an indication of what's in store for us in Vegas, we're all in for a banner time. You can't ask for much more than that.
There’s no doubt that attendance records will once again be broken in Vegas with the vast majority of attendees leaving satisfied that their time was well spent. If you’re not one of the “happy troopers" you probably didn't "look" hard enough since there will be an abundance of opportunities at this three-day extravaganza. You just have to shake enough hands and give out enough business cards for people to know your name...Leasing 101, and it still works.
I've also been told that people started booking appointments earlier this year than last, again an indication business is good. Of course, most of the appointments won’t accomplish much; they’re just filling up dance cards, but large companies like to see their "agents" busy. If you’re smart, even with an abundance of appointments, you'll leave plenty of time to walk the floors and network. Otherwise, the main reason for being in Vegas is lost. Another indication the show will be busy is that invitations for parties and to "drop by our booth" came in earlier and more often this year than in the past. Everything is pointing in the right direction.
Ranting on about this upbeat show...I have to give the ICSC credit; they're trying to make “good” even better. They started a networking brunch this year on Sunday, a “first time” orientation event also on Sunday, some “super charged” speakers on Sunday (Brit Hume of Fox News and Jack Welch of GE), in addition to a 10 p.m. 'til midnight party for the Next Generation. They’re providing lots of reasons to show up on Sunday instead of Monday, improving the show's traffic for everyone. The only negative is that on Monday the "floor" will be a zoo, but hopefully worth the chaos.
We've been extremely lucky these past five years as retail real estate hasn't seen a slowdown compared to other forms of commercial real estate. In fact, the last five years are probably the best we’ve ever had and that’s while the rest of the economy was, or is, suffering. However, you can read in the trade publications daily that the real estate bubble might burst shortly, but no one is sure about the “if or when” or “how bad,” with most of the wiser heads in our industry believing there will be some sort of “adjustment.” They’re just not sure how severe or, again, "when." Most of the pros I spoke to believe it’s 18 months to three years off before the good times stop. But I’m not as optimistic; I think there will be an adjustment sooner, not later, but have no idea how "bad." Economic indications are no longer reliable, so one guess can be as good as another. But there's no doubt interest rates will be going up while retail sales appear to be slowing.
The Wall Street Journal, over the last few months, has carried numerous articles on the upcoming potential backslide of commercial real estate and had one article questioning the wisdom of firms acquiring retailers for their real estate (Toy’s “R” Us, Mervyn's, and Sears). My biggest concern is the restructuring of mortgages when cheap interest rates come due. In the next few years, it might not be uncommon to see Class "A" centers in default not because of vacancies, but because the center costs too much to acquire. With a 7.2% interest rate, there's negative cash flow, not the positive cash flow that existed when the original mortgage was at 5.5% and the Cap rate was 6.8%. "Our" salvation may be high inflation. Anyway, our front cover expresses our thoughts on the industry’s immediate future; "Be prepared for the ride of your life." For the next several years there will be plenty of "thrilling" and chaotic times ahead.
I also read in other trade publications' articles that confirmed beliefs I've had for years. First, one article reported that properties usually sold for a higher price when there was a co-broker involved than just the exclusive broker. In other words, the seller is better off when their agent works with other brokers than when they avoid co-brokerage, so they can keep all of the commission...duh, it makes a lot of sense, but many owners don’t seem to understand and are shortchanging themselves; when they don't insist their broker co-brokers, they lose money. While I didn’t read it anywhere, I’m willing to bet the same holds true for leasing; if another broker is used in addition to the exclusive, the owner usually gets more rent.
Speaking of rent, it was reported in the ICSC’s daily news update that Jos. A. Bank receives about 40% of its annual TI for new store openings from landlords, enabling the company to expand faster than if it used its own cash for all improvements. Hate to tell ‘em this, but what’s new? Milton Petrie of Petrie Stores, 30 years ago, was probably one of the first to get the landlord to put a lot of TI into his deals, with many of his leases being percentage-only and a turnkey. He was a desirable merchant and the landlord was willing to stretch to make the deal. Then retail got hotter than hot and owners were able, in most cases, to avoid committing TI. But as rents escalated, as an inducement to paying $20 psf instead of the $5 psf or $10 psf the retailers were used to paying, the landlord started providing more TI to justify the deal. And in today’s world, many, if not most, retailers are requiring and getting substantial TI. In a similar vain, the March issue of ICSC Today discussed how leases have become more flexible than in the past for retailers, with kickout clauses and other terms only benefiting the retailer. Again, nothing new, just becoming more common. Today's retailer wants TI and kickouts if the store doesn't work. And, in most cases, if they are desirable, they get it. I guess the partnership between landlord and tenant we've been talking about for 30 years has finally happened...they're sharing risk on store openings.
However, I'm told (I haven't personally encountered it yet) that on some really hot locations, developers are making deals, where they're not providing H.V.A.C., or bathrooms and are just stubbing in electric and plumbing. Great for the developer, but I don't think it's a trend. Also, these same owners are trying not to give options to the smaller tenants, but a retailer would have to be really stupid to lease a space for just five years; it doesn't work in the vast majority of cases. Retail has to stay really hot for a really long period for this new "vanilla box" description to take hold, and I don't think it will.
Anyway, leasing activity should be excellent during the show, with lots of urban and redevelopment projects available. There will be tons of lifestyle centers (of course, the definition of a lifestyle center keeps getting broader) being presented in addition to a decent amount of ground-up development. Centers in abundance will be available for acquisition, but the problem is that few make economic sense, but there are deals out there, you just have to dig hard to find 'em.
Oh, before I forget, a few issues back I wrote about some landlords taking advantage of poor, innocent brokers by getting them to do free appraisals, market studies, rent comparisons, etc. under the guise that they might get the listing for the sale of the property, which they don't. I had numerous landlords call protesting my statement, all contending that they had an excellent working relationship with brokers and would never abuse 'em. Yes, most owners don't abuse the broker, but even if this is true in the minority of cases, the absolute numbers are big and the practice is not uncommon. In fairness, for every SOB landlord shafting the broker, I'm sure there's a broker "beating" the owner, but that still doesn't make it "right."
Parting thoughts...I don't claim to be overly bright, but after 30 years of doing retail real estate, I think I have some idea of the fundamentals of our industry. Recently, I made a presentation to do the leasing of a "to be built" 400,000 sq.ft. center. We lost the account, but to make a long story short, the developer and I got into a debate over which comes first...small shop leasing or anchor space. I contended anchors; he contended small shops. The reason being is that he's gotten calls from dozens of locals wanting space and willing to pay top rent. I argued that we first had to know who the anchors would be and their needs, then we can undertake the locals. He's even negotiating to lease an outparcel in front of a proposed anchor space. I tried explaining why that doesn't make sense, but to no avail. The only thing I can say on his behalf is he's a successful developer who's worth millions, but as the saying goes "smart people sometimes do dumb things and dumb people sometimes do smart things.
" See you on the "floor."
P.S. Don’t forget to drop by 667 6th Avenue on Monday after 4 P.M. for the annual RD Management, Kin Properties and TKO Beer Blast. It’s our sixth year and it keeps getting better.