OBSERVATIONS & CONVERSATIONS
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One day changed us, to some extent we’ll never regain our innocence, but it is apparent to the world that we’re a nation of survivors. |
Last month was the most horrific time in modern
day America and we’re all feeling the blow psychologically and financially.
Jobless rates hit a nine year high. The stock market spiraled to 1998 levels.
Consumer confidence bottomed out. The nation was traumatized with constant
visuals of terror, fear of future attacks and a great uncertainty about our
future in every aspect of daily life. But most important, we all were saddened
at the loss of human life. One day changed us, to some extent we’ll never regain
our innocence, but it is apparent to the world that we’re a nation of survivors.
Survival will be foremost on peoples’ minds and businesses are trying to cope.
There are carpet baggers right and left blaming their troubles on September
11th, and many of these companies were in the dumps already by the end of
August. Since the tragedy, I’ve talked to dozens of developers and brokers about
their thoughts on where our industry is going. A vice president of a large REIT
explained that they’ll be dropping their rents for new tenants, expect rent
reduction requests from existing tenants and the credit worthiness of new
tenants for existing space is now irrelevant. A broker told me that “Kohl’s is
backing out of deals that have been in negotiations for months” and the tenants
he represents gave a mandate that they are negotiating harder on new deals and
to revisit all deals in negotiations and explain to the developer that the rent
has to drop or negotiations are over. A developer with several proposed centers
is panicking and concerned that he’ll never break ground. On the development and
brokerage side, no one is feeling cocky any more.
On the finance side, lenders are uptight, but there are companies still funding
especially if you’ve got single tenant deals. I was talking with Capital Lease
Funding (212-217-6300) and they’re lending, so money is still available. Talk
about people with true grit and genuinely nice folks... their office is near the
World Trade Center (luckily they’re fine and back in operation) and even though
they walk past rubble every day and were without phones for a while, they still
managed to attend the ICSC Philly show shortly after all hell broke loose. I
don’t know about you, but that’s the kind of lender I would want working with me
on any type of deal.
Retailers are being extremely selective about new store locations. Last month,
we polled 400 retailers before September 11th and 75% were actively looking for
new sites. We polled 650 additional retailers after September 11th and 60%
expect to open more stores in the next year or so. After tallying the numbers, I
felt more at ease (compared to being shaken to the bone) and less fearful that
the world was coming to an end. The retailers I spoke with that do have plans
for new stores now want creme de la creme locations at below market rents. The
types of retailers that are expanding was interesting to note. Lots of
automotive parts local and regional chains are looking - they think new car
sales will be down (even with interest free deals) and more people will be
repairing than replacing.
The apparel retailers with plans to open new stores for the most part are
popular price. A president of a national chain of popular price ladies apparel
stores thinks his business will do okay in this economy, but he’s negotiating
harder on rent for new deals. We talked about buying habits in the future and we
both agreed that lower end apparel will sell, but the high end merchants will
feel more pain in the next year. Interestingly, numerous analysts were
predicting months ago that consumer taste buds have changed from wanting high
end apparel to what one expert coined as “cheap chic.” The presence and growth
of H&M backs up this theory. If you’re not familiar with this chain, they are
based in Sweden and opened their first US store over a year ago in New York
City. Their merchandise is knock offs with extremely low price points (I don’t
recall seeing anything priced over fifty bucks). This summer, I had a chance to
visit their stores in The Netherlands and they dot the landscape there like you
can find a Gap store on every street corner here in the states. Stateside, they
pay attention to window dressing and fixtures, whereas their stores that I
visited in Europe had little personality and the fixturing is best described as
primitive. In fairness though, most of the chains in Europe that serve the
middle income customer pay little attention to ambience. H&M projected back in
July that they’ll open 75 stores of 10,000 sq.ft. to 30,000 sq.ft. by 2003 in
the US, so don’t think that this shifting trend in apparel buying habits is due
to the economy, much of it was in the consumer mind set well before September.
Supermarket chains are still in a growth mode and I talked to a developer that’s
break grounding shortly on a supermarket-anchored center in a resort town. The
grocery store will have 40 “dorms” for its employees built above the store,
because its employees can’t find affordable housing in the market. A president
of a supermarket chain told me that “people still gotta eat,” so the economy
won’t slow their growth, but they’ll be ruthless in negotiations. One thing that
I did notice about a lot of the supermarkets that are growing, they aren’t
selling gourmet, prepared or organic food as a draw since their customer profile
is more low to middle income.
Two retail segments that are growing by leaps and bounds are fast
food/restaurants and convenience stores. If you’ve got a pad site and zoning for
food or c-store, then you can find a tenant without canvassing too hard. Home
furnishing and improvement stores are also growing, despite numerous news
reports that the industry is in the doldrums. Just in the past four months,
we’ve talked to 350 home oriented chains that are looking for sites. Discount,
variety and dollar stores are still expanding.
Finding a video store, other than Blockbuster, to tenant your center is next to
impossible and in recessionary times, this is a use that has historically done
well, but I’m sure home pay-per-view has changed the face of this industry
forever. We are in the midst of contacting every video store chain with three or
more stores in the entire country and to stay the least, it’s been depressing
talking with the owners. One owner rightfully spouted off, “the FTC steps in
when supermarket chains and office supply stores want to acquire their
competition, but nobody stepped up to the plate when Blockbuster decimated our
industry.” The entertainment type tenants are slowing coming back into the fray.
By this I mean the small, regional theater operators are cleaning house taking
over the theaters that developers built for the “big boys” that went out of
business. Low end types of entertainment (cheap places to play) are looking for
sites again, you can now lease to laser tag, arcades and bowling centers if
you’ve got cheap rent.
So we’re not sitting pretty, but we’re a resilient industry. I’ve only lived
through two major downturns in my short 20 years in the business and I’m certain
that I’ll be around after this one, as will most of you. When the going gets
rough, we usually dig ourselves out. It won’t be easy road ahead, but we as an
industry and a nation will survive.