Main Story: New Directions
In late March, Retail Traffic Editor-in-Chief David Bodamer sat in on a meeting of the New York Developers, a group of local and national retail real estate companies headquartered in and around New York City. The gathered executives debated the state of the market, how it's affected operations and the outlook for the months ahead. What follows are some excerpts from that session. Video highlights of the event are also featured on the Traffic Court blog at www.retailtrafficmag.com. A lengthier transcript of the event is also available in the New York Developers Journal, which will be distributed at the ICSC RECon in Las Vegas.
Retail Traffic: Starting with the tough question first, are we in a slowdown or a recession? Does the distinction matter? And how is that affecting the way you're approaching your business right now?
Joshua Weinkranz, vice president, Kimco Realty Corp.: I think it's really key going forward to keep your eyes open to what's going on and try to remain flexible and not get stuck in thinking we're in an environment we were in six months ago. It's important to keep your eyes open and be aware of what's going on so you can continue to make deals and react.
Steven Ifshin, chairman, DLC Management: Clearly we see a lot of retailers in distress. They are taking the opportunity to close stores where they have the opportunity and even close stores where they have long-term lease obligations going forward because it's clearly more expensive to keep it open and pay the rent. We pay a lot of attention to micromanaging how we can keep retailers in place — potential rent reductions or other concessions to help retailers through this process.
Albert Jay Krull, director, Real Estate Equity Co.: The other thing I know we're tending to do besides the deal side of things is to keep our existing in-place tenants strong…. We want to be in a proactive situation whereas we're even going to the point of spot-marketing certain areas, or certain tenants, in a mall or a city we're in or town we're in to stabilize their advertising dollars. That way when we get calls — and I'm sure we'll all be getting the calls about rents and charges and everything else — we're trying to take a more proactive stance.
Mitch Salmon, senior vice president, Mall Properties Inc.: We deal with a lot of newly developed town center projects and enclosed malls where issues — you're talking about CAMs that are not profit centers per se, but they still go into the equation of costs to the tenants…. That's why in a lot of cases, we're getting into the all-in, CAM plus rent number and escalating from that. You still have the issue, but the focus on let's say CAM is this fixed number that can never go in any direction but up and then they say, “Reduce my rent.” Basically, we've started to go more toward all-in figures, especially in the town center projects where CAM is a real issue.… We've been getting some push back on it, but ultimately it helps them.… Obviously, there's some trade-off in that you can budget going forward. For people that have that budgetary concern, it works out very well.
RT: In talking with landlords and reviewing REIT results, we've seen reports of slowing rent growth, but haven't heard much talk about rents coming down. What's the outlook?
Ifshin: New deal flow hasn't really diminished a whole lot on the small levels, not the Targets or the Wal-Marts, but the intermediate tenants. Deal flow seems to be strong and rents are a function of location and where the center is and the level of the center. We haven't seen a whole lot of depreciation. It takes longer to close a deal. Retailers are taking a longer time to get deals done. We just finished a deal, as an example, with Ross Dress for Less and it took nine months to get the lease signed. It can be a whole different world in nine months! It just takes that long to get them done.
Michael Winters, vice president of acquisitions, Cedar Shopping Centers: If you look at the REITs, who publish increases in rents quarterly, it's all been positive.
Matthew Harding, COO, Levin Management: I think you may see in secondary types of properties a little decline in rents if the deal flow does slow down. It's going to be tougher to focus people on those secondary properties and in those types of properties later on in the year you may see some declines or it comes out in another way in terms of additional tenant improvement (TI) allowances.
Salmon: To Mike's point, while you can look at it in terms of a one-dimensional way of rents, that's one thing, but in terms of balance-sheet level you'll find a commensurate increase in TI. To a certain extent, TI, which landlords taught the tenants as much as anything, has been a source of relief. It pencils better in the public pro forma. But the bottom line, there are expenses associated that all companies have to be very conscious of. Keeping that from creeping to a point where it really impacts your returns is where it's at certainly for companies like ours and maybe not publicly traded ones quite as much.
RT: Are there categories of tenants that are doing better than others in this environment?
Winters: You see every grocery chain in the country expanding right now with monster expansion plans. Grocery stores do better in recessions historically and they are all growing right now. They are all expanding. We have a pipeline of $400 million in grocery-anchor developments and a lot of people in this room are doing similar.
Weinkranz: Same with a lot of the general discounters, the TJXs, the Dollar Trees and the people that are going to fare better in a down or slow economy. I haven't seen any of those guys slow down. They want to open up stores and I think we'll see a lot of activity from them in the next 12 months.
Ken Breslin, president of Breslin Realty: What I've learned recently the hard way is a lot of these companies have changed their growth schedules. For Starbucks, the new store plans are dramatically different than they were six months ago. But what they are doing is refocusing on their existing store base and really trying to squeeze the nickels, trying to make each and every store much more profitable. That's what they've told Wall Street…. And that's why the only new stores they are looking at are home-run stuff — stores where they can do a ton of business.
RT: What happens to the mom-and-pops?
Krull: It's funny what we are finding is we're not getting the calls from mom-and-pops as much as from mid-sized and marginal retailers. What we're trying to do — we had the discussion a few weeks ago — it's cheaper to help a tenant than replace a tenant. Then we took a very proactive stance in helping these mom-and-pops…. Spending several thousand dollars is cheaper than tens of thousands to replace them.… We're making the improvements. We're redesigning for them. They are going, “What are you doing?” We tell them what we're doing. But we've been doing it about nine months with very positive results.
Ifshin: Every dollar store that's an independent dollar store is virtually out of business. That's a difficult statement. But we've had no success with independent dollar stores in this market. They come in, they open up, bare-bones shelves, they never have the money to supply it.
Breslin: In the early 90s, I would look at the pipeline and see what was happening elsewhere in the country and see what kind of entrepreneurial retailers were growing. The problem today is you're not seeing anything down the pipeline…. I did a Paramus run and saw one guy that seemed interesting. It was called Chef Central. It's a knock-off of Bed, Bath & Beyond and he's trying to bring a little bit more professionalism to the kitchen market. He's got two stores, but his interest in doing any more stores was nil…. That's the kind of guy you'd like to see on a healthy basis and the kind of guy excited about me calling him back. But he said, “I'll call you,” and we all know what that means.
RT: The credit markets are affecting investment. Some people that were borrowing a lot and buying are out of the market. But that doesn't mean all deals are going. What are we going to see with that?
Winters: Cap rates have moved up 50 to 75 basis points across the board. We've found less of a fallback in New England, which has mature markets, dense population, lots of disposable income still available. Generally I think you will find they will get affected too. But, there is product out there. There are also a lot of developers who can't get the leverage they need on new construction loans coming in for joint venture partners.
Ifshin: I think it's an interesting market. I don't think the seller market has attuned itself to the credit market at all. I don't think the investment sales market have come to the understanding that they control the market. Until they start advising their sellers that there is a real rational reason to lower their pricing, I don't think the market has changed at all. If you think 50 basis points is a big move in cap rates — how about loans where basis points have moved 400 points on the swap spreads? The seller market is insane. Anyone that buys into this market and helps the seller market is doing a disservice to all of us guys that won't buy into that market.