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Retail, Real Estate Opportunities Seen at ICSC

International Council of Shopping Centers held its national conference and deal-making convention in New York on Monday morning.

NEW YORK — With the U.S. economy still sputtering, the global landscape in disarray and property values and interest rates at historically low levels, now is the time to invest in retail and real estate. That was the message delivered at the opening session of the International Council of Shopping Centers’ national conference and deal-making convention here Monday morning.

Jonathan Gray, global head of real estate for The Blackstone Group, said that while conventional wisdom may be urging caution, conventional wisdom is often wrong. He said retail rents are headed higher since the recession led to lower supply of shopping centers and building costs are low, so there’s a payoff in the future for those willing to take the plunge.

Richard Baker, governor and chairman of Hudson’s Bay Co., and chief executive officer of Lord & Taylor, agreed. He said over the next five years, his company will spend $1 billion reinvesting in its businesses to position them for growth.

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Baker said that when his real estate company, NRDC Equity Partners, purchased Hudson’s Bay and Lord & Taylor in 2008, he initially viewed it as a “real estate deal.” But once the growth prospects became visible, he realized it was “an operating company deal.”

HBC, which went public on the Toronto Stock Exchange last week, is the oldest retailer in the world, established in 1670, and has virtually no competition in the Canadian department store market, he said. However, the stores had posted flat to declining sales for more than 20 years before the NRDC acquisition. They were poorly merchandised and highly promotional and “not very exciting,” he said. But the new team revitalized the business by adding new brands and revamping the floors, and sales have risen 15 percent over the past three years.

He said the 90-plus Bay stores had not been updated since they were built and departments had not been “right-sized.” For instance, the store in Toronto’s Yorkdale Shopping Center had devoted 56,000 square feet to furniture, electronics and appliances, but the new team downsized those categories to 25,000 square feet and lost no volume. The extra space was devoted in part to women’s and men’s shoes and contemporary fashion and 14,000 square feet were given over to Topshop and Topman of the U.K. HBC is the exclusive retailer of that popular product in Canada. Since Topshop opened 14 months ago, sales increased to $750 a square foot from $200, he revealed. Two additional Topshop units opened after that, each one larger than Yorkdale, and sales volume is even higher, he said, without providing numbers.

“We’ve added tremendous volume to these buildings and we’re bringing in a younger customer who is also cross-shopping,” he said.

Another advantage is that the Bay stores are tweaked to appeal to the local market. For instance, units in Toronto and Vancouver offer The Room, a department Baker described as “Bergdorf’s meets Barneys,” that offer high-end designer brands including Ralph Lauren Purple Label, Christian Louboutin and Giorgio Armani.

At Lord & Taylor, by offering customers elevated service and presentation and a more edited assortment than its competitors, the business has seen a 25 percent growth rate over the past three years, he said. As a result, additional reinvestments are in the offing here as well and will include the completion of a significant renovation project at the chain’s Fifth Avenue flagship. “We’re seeing tremendous growth so we’re confident to reinvest,” he said.

In addition to enhancing the productivity of the company’s existing real estate, Baker said the Internet is also posting strong sales. “It’s on fire,” he said. “We will have over $80 million a year in volume increases in the Internet over the next five years,” he said.

In his presentation, Gray said his company has invested $46 billion in retail and real estate since the downturn and has had no trouble finding distressed assets that it could improve and then sell. “We’ve had the same strategy for 20-plus years,” he said. “Buy it, fix it and sell it.” Global credit issues have been “broad and deep,” and the economic growth has been quite weak both in the U.S. and internationally, he added, which created opportunity for a company like Blackstone.

This includes $16 billion the company invested in shopping centers, which are facing “big headwinds” as department stores continue to disappear and centers anchored by other types of retailers are also struggling. But the proverbial silver lining is that shopping center supply has contracted significantly so the centers that remain are facing a brighter future. He said that in 2006, there was 200 million square feet of new shopping center growth, a number that dropped to 8 million this year. “That’s a 96 percent decline in new space,” he said. So at properties such as those owned by General Growth Properties, in which Blackstone bought a 5 percent stake when it was emerging from bankruptcy, occupancy costs and rents have risen, making the investment increase in value.