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Observations & Conversations
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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
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