Strolling the Agora for the February 9th, 2009 issue of SHOPPING CENTER DIGEST
Developers, Retailers Suggest How To Get This Industry Moving Again.
This is a time of paradoxes. You have dealmakers working harder than ever before, and relatively few leases being signed. According to one research maven: “There aren't that many retailers out there interested in expansion.” Says ICSC: About 105,000 to 110,000 new stores will probably open in the US this year.
You have new construction and expansions coming in under the original estimates, and yet fewer projects being built; in fact, more are being delayed or cancelled. You have a rising number of vacancies in shopping centers across the board, and yet landlords are cutting back on marketing them. Said one national retailer: “We need a realistic marketing partnership between retailers and developers to build stronger traffic generators.” He pointed out that some landlords have used these dollars “to promote their own ego… by thinking they are creating their name as a Brand – Simon, Macerich, Tanger, Westfield, etc. Do they really think they drive people into their malls because it has their name on it???”
We Created A Monster
You have retailers in all categories cutting the prices of merchandise to the bone, running door-buster sales, yet customers are refusing to open their wallets and purses. One national tenant said “we create a Monster of a Sales Event only to learn we created a Monster that needs to be fed a similar meal next season… customers are more knowledgeable regarding markups retailers charge after seeing almost everyone operate with deep, deep discounts… we need to get more realistic with fair market pricing.”
You have both landlords and tenants focusing on doing deals, yet the greater effort and time are spent on re-negotiating down lease and rental terms. One landlord took issue with retailers “making some ludicrous requests for unwarranted concessions” and warned it could seriously impact on future relationships. A national tenant conceded the point has some validity, but reasoned that with the severe cutbacks of budgets, personnel at all levels, increased operational costs, “there is immense pressure to produce savings that may force us to demand things we don't believe in. Maybe it's the mafia clichÃ©: 'It's nothing personal – just business.'”
Less Than Replacement Cost
The “value” of shopping centers is dropping as store vacancies increase, yet more companies are being financed and formed to acquire these troubled properties. One national dealmaker noted he had been speaking to several owners “who still want to get out of the center the dollars they had invested in it. But with a large amount of store vacancies, and increased number of properties becoming available, these projects have a market value less than their replacement cost in land, brick and mortar.”
Said another: “All sellers on the market now are distressed and need to raise cash so this is a brilliant time to buy; you just name your price.”
How to get this wounded shopping center/retail chain industry moving again? That's the bold mission that many of the leading dealmakers are now embarking on.
We've been speaking to a number of top dealmakers around the country and one thing they are in agreement on is that we have to begin a new, concerted effort to cooperate. “We need to go back to understanding that both groups [tenants and landlords] need to work together to get back to regain normalcy.” “We must all agree to establish a new consensus for our mutual benefit,” said another.
One national retailer emphasized “we need creative ways to manage expenses to establish a New Norm in terms of the levels of sales we are able to achieve and total occupancy costs that are in line with those sales.” As an industry, he continued, “we should reduce hours of operation, agree to open and close an hour or two later, and closing specific evenings and maybe Sundays. This would save everyone not only on operational cost but it could have a significant impact with energy savings (Think Green).”
Get Out Of Our Comfort Zone
One major owner-developer stressed the need to “get out of our comfort zone, go back to cold-calling, pounding on doors, cultivate new relationships and strengthen old ones.” He pointed out that his company was making a concerted effort to reach out to foreign retailers, to seek alternative tenants other than retailers such as schools, libraries, churches, municipal offices, medical and dental facilities.
Another major landlord agreed with this, but also “We should re-double our efforts to find new small operations, moms and pops if you will, who could be encouraged to expand into our malls, even if it means assisting in financing and discounting rents. One of the most heard criticisms we've been hearing for years is about the sameness of our centers. This type of effort would bring in a new vitality and freshness and help our centers to differentiate themselves.”
Now Is The Time To Deal
Several retail dealmakers expanded on these suggestions by stressing their own specialties and their view regarding these categories. From a national consultant to the restaurant industry: “Despite the doom and gloom, I haven't found anyone who has given up eating. So I believe that my segment of the market still has some hope… Is there anyone who does not believe that during the next decade we will enjoy years and years of prosperity? NOW is the time to lock in long-term deals.”
A broker with varied clients echoed this, pointing out that the increased vacancies, especially in markets with good demographics, offer “ideal expansion opportunities” for national retailers and restaurant/fast food chains, “even in malls that once had a long waiting list for potential tenants. The recession will not change these numbers.”
A real estate executive with a discount chain noted that the quality of apparel merchandise his company is now selling has improved because it has acquired overstock vendors could not sell to high-end merchants. “This is only one of the reasons we are now being courted by some fashion-oriented malls as a replacement for some of their vacant big-box stores or tenants specializing in designer labels.”
Uncertainty In Many Areas
The uncertainty in the marketplace is still impacting on much of the shopping center industry, especially in those locales suffering the strongest downturn in real estate values.
One small Florida developer has his eye on a location to be anchored by a specific big-boxer user. “Nothing [leasing and dealmaking] is happening now in the immediate area with so many homes going into foreclosure and driving down prices. I expect the area to recover by the end of the year or early 2010. The demographics on this site are ideal, but I can't market it to [the retailer] until I control the site. And then, there's competing against hundreds of proposals to be one of the handful of new stores it will commit to for expansion.”
Regarding new development and relationships, a leading tenant stressed the need for landlords to improve their knowledge of Retailers Arithmetic, i.e. cost of operation and how it relates to the rent and charges. “Not all retailers operate with High Gross Margins which permit them to recreate new higher levels of unrealistic rents, etc.”
We've Become Too Greedy
On the tenant side, he conceded, “we have all become too greedy with ROI's and Market Share Dominance. This will correct itself in the coming years with lower land cost and a more rational real estate expansion process by retailers… and gone will be the philosophy of a defensive real estate site selection methodology. Enter a more realistic expansion criteria that will not permit building stores 2 miles or 2 blocks from existing stores. Just ask Target and Wal Mart in Phoenix or Starbucks anywhere USA.”
The theme of this column, though, is not on the problems inherent in the industry caused by the recession, but on how we can begin to heal ourselves. Back, therefore, to the one point that everyone we've spoken with agrees strongly with: Cooperation.
As one leading landlord emphasized: “The road to success is never flat nor straight but has many turnings… many, many hills going up and down, sometimes drastically. We must maintain focus on understanding each other, knowing what makes us tick, and begin working together, for he who eats alone eventually starves.”
Strolling the Agora was a twice-monthly column discussing trends, issues of importance, and commentary on the leasing/development aspects of the shopping center/retail chain industry in the US and Canada. Called Strolling the Agora, it was a part of Shopping Center Digest, a newsletter founded in 1973 published until September 2010. The column provided expert insight into various retail focused topics. It was primarily authored by Murray Shor, Editor & Publisher as well as industry and veteran retail experts. A smattering of archived columns are presented here for your reading “pleasure”. It's an interesting “look back” at what were current hot topics at the time with regard to shopping center/retail industry focus, development and leasing expansions and processes, retail mix, opinions and more.
About Murray Shor:
Reporting and writing on the shopping center/retail industry since the late ’60s. Began as editor at Chain Store Age, founded Shopping Center World (now Retail Traffic), Shopping Center Digest “The Locations Newsletter” in 1973, and the Directory of Major Malls in 1979. Each issue of Shopping Center Digest contained a column called Strolling the Agora which provides commentary on trends, activity, issues of concern to development and leasing in the shopping center/retail industry.