Observations & Conversations
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Observations & Conversations


  There’s no sense in making a deal so one-sided that the tenant can’t afford the rent.

I just got back from the ICSC Puerto Rico Dealmaking and it was a good show. There were between 250 to 300 attendees, and what a dealmaking group. Everywhere I looked, leasing plans were laid out and people were hashing out numbers. Puerto Rico is definitely a growth market and I saw more new centers being leased at this show than at last year’s Vegas convention. If you’re a retailer looking for growth, you should spend a few days touring the island and I’d be more than happy to give you the names and numbers of the area’s top brokers and developers. A lot of the big names such as Home Depot, Wal*Mart, Bed Bath & Beyond, Pier One, One-Price, Charlotte Russe, Ann Taylor, BCBG, Walgreens, Gap, Sears, G&G, Costco, Marianne Shops, JCPenney, Marshalls, OfficeMax, Pep Boys and West Marine are already dotting the island. With 3.7 million residents, a solid tourist trade and projections of $4.4 billion in tourist expenditures for 2003, it’s a market worth investigating. Even if you don’t find any worthwhile sites, you can enjoy the sun, beaches, golfing, gambling, etc. So I’m sure the most jaded traveler won’t get bored. It was nice escaping the below freezing weather in the northeast for a few days.

Between a little business, hanging out with friends, eating too well, drinking heavily and laughing hard, I had a chance to shop in Old San Juan. If you’ve never been there, it’s best described as having old, architecturally-interesting store fronts of local shop keepers selling everything from $100,000 Harry Winston watches (no, Ted didn’t buy it for me, but it was fun looking) to knock offs. As you can imagine, most of the trade in this area is from tourists. I also managed to sit in on a few of the seminars at the ICSC show. One of the lecturers was Steve Richman who spoke on “Negotiating with the Power of Nice.” The main gist of the talk was on how everybody loses in the long run, except for the attorneys, when you negotiate with the intent of bleeding the tenant. I had dinner with Steve Richman and from the ICSC planning committee for Puerto Rico was Julie Silver of Sterling Consulting, MaryAnn Savarese of RD Management, and Pat Harrington from Wetzel’s Pretzel at Larry Campbell’s house, (Larry reps dozens of tenants on the island) and we got on the discussion of how landlords abuse tenants. I promised not to name names on who said what so my lips are sealed, but I heard about a landlord that was charging a book store, with less than 1,000 sq.ft., $16,000 a month in rent. After six months, the space was vacated and the tenant owed three months in back rent. That’s gouging and obviously gouging never pays. Of course, there’s no excuse for the stupidity of the retailer who signed the lease. Another story, a food tenant wanted 5,000 sq.ft. for a single concept and the landlord quoted $150,000 in rent. Then the tenant wanted to add another concept and the landlord said the rent would be $165,000. The tenant wanted to add a third concept so the rent went up to $175,000 and the tenant walked. The space eventually was leased to a 5,400 sq.ft. user with a single concept for $154,000 annually. It was interesting to hear everyone’s reaction from their own perspective with a retailer, broker, developer and a lawyer sitting around the dinner table. Of course no one agreed about who’s the best tenant and what’s a fair rent, but everyone did concur that there’s no sense in making a deal so one-sided that the tenant can’t afford the rent.

On the subject of rent, I’m not hearing much talk of retailers asking for rent reductions, but they sure are negotiating hard on new deals. Some of the more desperate landlords are offering loads of TI and I’ve also heard a few deals where the landlord is willing to give the retailer an equity stake in the center in exchange for a signed lease. I know of several deals where landlords of vacant Kmarts are putting up $1 million in TI for a non-credit tenant. I asked Ted if he wanted to start opening stores and the answer is yes, but only if he could get $1 million in TI for a store that doesn’t need any fit out, one that just requires buying fixtures and inventory, and no personal guarantee on the lease. It sounds like tenants are starting to gouge landlords. I guess those adages of “what goes around comes around” and “every dog has its day” are true and the retailers are saying it’s about time!

A number of apparel retailers that I’ve been talking to are barely hanging in there and struggling to figure out how to get the customer in and buying. Most of them are in the 2,000 sq.ft. to 8,000 sq.ft. size range and it doesn’t matter if they’re in a strip center or a major mall; business ain’t great. I think you’re going to see a few more bankruptcies like the recent filing of Mr. Rags and I heard that Clothestime filed again. Tommy Hilfiger is closing most of its stores. Britches is another apparel chain that’s closing stores. Today’s Man is going through some hard times, too. On a side note, I was at The Gap in the Philly airport and they had four ringers with clothes priced at below $14.99. How can they afford airport rent with so much floor space being used for such low price points? Maybe this is a contributing factor to the company’s plan to reduce square footage by 2% during 2003. Another use having a hard time are the music retailers. Wherehouse Music filed Chapter 11 and Musicland put its expansion plans on hold, while Tower Records is selling a number of its leases and closing stores. So not only are there going to be lots of Kmarts to lease, we’re going to have quite a few small shops sitting dark too.

As always, The Dealmakers is jam packed with leads to help you fill space. So if you’re a developer with vacancy or anticipating some soon, be sure to read us cover to cover. You might also want to send us info about your space for lease to include in the “Space Place” section of a future issue. You can email leasing packages to me at ann@dealmakers.net or fax it to 609-587-3511. Thousands of retailers and tenant reps read us weekly, so for little effort you can get your project in front of them.

We’ll be at the ICSC show in Chicago this month and in March at the Carolinas and Monterey shows, so stop by and see us. Until next month,

Ann O’Neal, Publisher