The mood at this week’s annual International Council of Shopping Centers New York National Conference & Dealmaking was one of overwhelming caution. Overall, more than 6,000 retail real estate professionals attended the conference this year, down from last year’s record attendance of about 8,500.
Companies across the board are settling in for a prolonged and difficult recession. Many industry pros expressed bewilderment at the current economic conditions, which are unlike what most have ever experienced. The consensus is that this slowdown already overshadows what the industry went through during the short 2001 recession. It’s also looking worse than the recession in the early 1990s. Most companies are approaching the situation like the recessions of the 1970s and 1980s and hunkering down for a slow and painful turnaround.
As a result, many firms think that 2009 will be a very quiet year for the sector. Expect few projects in the pipeline to open next year. Many have been pushed to 2010 and beyond — or scrapped entirely. For example, Columbus, Ohio-based Stanbery Development will open two centers next year but has shelved work on four others. In some cases it’s driven by a lack of retailer interest in expansion right now. But it’s also a question of financing.
Instead of building ground-up, firms are taking the opportunity to queue up projects that will debut when economic conditions are brighter. Others are combing through existing portfolios and seeking opportunities to reposition and redevelop assets. On the investment side, firms with deep pockets and low leverage are waiting for prices to drop a bit more, but all indications are that they do expect to go bargain hunting sometime in the next 12 months.
The mood for the conference was set early during a panel discussion featuring Howard Davidowitz, chairman of Davidowitz & Associates Inc., a New York-based retail consulting and investment banking firm. He advised attendees to run their businesses “as if there is a depression.” He pointed to Sam Walton, who always ran Wal-Mart with that mindset. “The guy was a pretty rich guy. The family has got a net worth of, I don’t know, $100 billion. And I had to lend this guy money to buy a newspaper. I’m serious, we pulled into a gas station and he said, ‘Have you got 50 cents?’ I said, ‘OK Sam, here it is.’ The guy never had any money,” Davidowitz said. “In good times, he ran the business as if it was in a depression. I think that it’s a good lesson for all of us.”
Retail consultant Jeff Green of Jeff Green Partners in Mill Valley, Calif., flew into New York early to spend part of last weekend observing shopping patterns at major stores and malls in the New York area, an annual ritual for the veteran shopping center expert. According to his gauge — looking at traffic counts and eyeing the shopping bags consumers carried — Green predicts that total U.S. retail sales this holiday season may be 2% lower than last year.
“If they are shopping, they’re shopping the deals. If you see what’s going on at Saks, it’s just value shopping,” Green says. “Their profit numbers are going to be horrible; the sales might be OK. There are fewer international customers, and the Americans aren’t buying much.”
Retailers are also feeling the effects of the credit crunch in various ways. Some retailers that have had trouble lining up financing are running into problems with suppliers who are refusing to send goods without assurances of payment. Some owners talked of being shocked when visiting tenants and seeing nearly bare shelves at times. That also affects retailers’ abilities to open stores and seek out new locations.
As a result of the weak consumer environment, retailers are being extremely aggressive in pushing for concessions on new leases and renewals. That is a common refrain from owners and managers.
“For this past year and the next year, landlords are doing everything they can to keep tenants including offering free rent and more build-out dollars,” says David Solomon, president of NAI ReStore, a Narbeth, Pa.-based retail real estate services firm. “I think you will see more of that. You’re seeing that tenants now, even if they are healthy, will try to make [better deals and] renew their leases early.”
On the investment sales side, there is a trickle of activity. The show itself was quiet on that front, according to Rich Walter, president of Faris Lee Investments, an Irvine, Calif.-based real estate investment firm.
“Historically, you make deals here,” Walter said. “We’re not seeing a lot of deals being made. The developers are kind of stuck in the middle. If their occupancy is not up now, it’s probably not going to be up for a while, and if their debt is not a long-term position, it’s a [problem].”
But the paralysis in the debt markets continues to affect the industry. As 2009 progresses, most experts expect that owners coming up on refinancing will be forced to sell since they will not be able to afford harsher terms from lenders. Lenders are demanding higher loan-to-value ratios and many lenders are also lowering their valuation estimates on properties. As a result, owners that today have a loan with an 85% loan-to-value ratio on a property appraised at $10 million may find that upon renewal the lender will only go 65% and lower the appraisal to $8 million. Those sorts of adjustments will require owners to pump in more equity or find mezzanine financing if they want to keep the property. Many will be forced to sell.