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WWD ICSC Preview issue 05/04/2009

There is no such thing as a free lunch. Tea and scones, however, can be another matter at the Somerset Collection, a luxury mall in Troy, Mich.

This story first appeared in the May 4, 2009 issue of WWD. Subscribe Today.

Eileen Fisher partnered with tea shop Teavana for a “tea and treats” private trunk show March 19, previewing the spring collection for 65 guests from a mailing list of about 250. The tea and scones were served on china and Eileen Fisher had a big day, between $50,000 and $60,000 in sales. For every $200 spent, customers received a $25 Teavana gift card.

Somerset set a much different tone when it hosted a mass pep rally for the Michigan State basketball team, which lost in the final game of the NCAA tournament. The mall was never so packed.

“In tough times, you have to do things to drive traffic. You’ve got to be creative,” said Nathan Forbes, managing partner, The Forbes Company, based in Southfield, Mich., and developer of Somerset. “We’ve been reassuring tenants that we are doing things to help them drive sales.”

Forbes is just one of many developers demonstrating a cooperative spirit toward retail tenants in these times of retail and real estate bankruptcies, refinancings and consolidations, and that new mood will be evident at the International Council of Shopping Centers’ convention, called ReCon, in Las Vegas from May 17 to 20. Forbes said he’s been partnering more with retailers on marketing and special events geared to draw more traffic, though other developers are also exhibiting flexibility over lease rates, kick-out clauses and construction costs. It’s all an outgrowth of concerns over thinning consumer traffic in the malls and store closings over the past year. The convention, usually a teeming, back-slapping, festive affair is expected to be decidedly low-key, less attended and more brass tacks this year. 

“Last year, I got 30 invitations to cocktail receptions. This year, I have gotten five,” said Forbes.

Simon Property Group Inc. and Westfield Group have decided to save money by abandoning the leasing floor of the Las Vegas Convention Center. Instead, they plan to hold meetings with retailers in hotels on the Strip, adding an element of inconvenience to retailers. The booths were among the largest and most impressive, though ICSC said they represented just 1 percent of the leasing space on the convention floor, or 20,000 square feet, and that the space has been reassigned to CB Richard Ellis Group Inc., Jones Lang LaSalle, Inland Real Estate Corp., Centro Properties Group and some other firms seeking greater visibility and more prominent space.

Several developers and retailers are sending reduced contingents, with many saying the teams are 20 to 25 percent smaller. And those who are coming in many cases have decided to leave early, with a two- or three-day stay instead of three or four days. Anticipating things will wind down sooner than past years, ICSC has decided to conclude the convention at 1 p.m. on May 20, instead of 5 p.m.

Paid registration is tracking about 15 to 20 percent below 2008, according to Michael P. Kercheval, ICSC president and chief executive officer. “I think it’s safe to say we will have around 30,000 attending, making it comparable with 2005 and 2006 turnouts. The last two years were extraordinarily large” with around 50,000 showing up. It’s a group that includes retailers, developers, brokers, consultants, bankers, architects and interior designers.

“The good news is the reduction in attendance seems to be from leasing mall staff, banks and other financial companies” and not so much “decision-makers,” Kercheval contended. “Developers have determined they don’t need to bring out entire leasing departments. With senior management from retail and development, we haven’t seen the fall-off and the reduction in registration for retailers is not down from where it was last year.”

There will be a noticeable shift in the character of meetings from 15-minute “meet and greets to half-hour meaningful discussions,” said Kercheval.

While acknowledging the inconvenience of certain developers situating off-site, Kercheval noted ICSC has responded with a free “retail connection” area at the convention center, to encourage developers and retailers to get together. Some other attractions are the U.S. Conference of Mayors, being hosted by ICSC, meaning retailers will be able to meet with mayors and economic development officials from cities such as Miami, Boston, Newark, Chicago and St. Louis, which are receiving U.S. government stimulus funds.

The industry mood is multilayered and tainted by “a little bit of misconception that the shopping center industry is directly tied to consumer spending,” Kercheval said. “As sales go down, retail margins are being squeezed, but not so retailers can’t pay the rent. Even at General Growth [which went bankrupt last month after failing to refinance its heavy debt], the net operating income and the cash flow are fairly strong. That’s because rents are continuing to be paid.

“Fundamentally, shopping center companies are pretty sound, even with consumer spending going down. A prolonged depression [if it occurs] will filter back into the shopping center industry, but right now their cash flow looks pretty good. They have plenty of cash to pay interest and a little bit of principle. On the consumer and retailing levels, I really can’t see any meaningful impact from the General Growth bankruptcy. General Growth has great locations and great management teams,” though it underscores a serious issue. “Refinancing and restructuring loans is the primary problem, not servicing the loans.”

Kercheval said occupancy rates industrywide are generally north of 90 percent, down roughly 3 percent from a year ago and likely to drop further this year. Malls hit with some major retail liquidations will be challenged to find new tenants. “If you lost both Linens ‘N’ Things and Circuit City, that is going to be hard to replace.”

Regarding the convention agenda, he said, “The tone this year is about the people and the professionals in our industry, more than the companies in this industry. We’ve added a lot of programs about personal and professional development, about how to find jobs and improve your job. We will have an employment opportunity center, called the ‘reconnect pavilion’ with sessions on job coaching, résumé writing and starting a business.”

For the pavilion, which is open to anyone — even those not registered for the convention — ICSC is teaming up with the International Franchising Association and the Community Bankers Association, as well as representatives from the federal government and search firms. Wal-Mart; various dollar stores; fast-food chains; middle-market specialty chains such as The Dress Barn Inc., Forever 21 Inc., Hennes & Mauritz and Mango, as well as upscale brands such as Tory Burch and Wilford seeking to open outlets, are expected to be among the most aggressive in hunting for new real estate. Others seen taking a high profile in the quest for space are Jimmy Choo; Christian Louboutin; Judith Leiber; Tous fashion jewelry from Barcelona; Bebe, and the South Korean chain called Who.A.U.

 

 

On the other hand, “When we speak with developers and brokers, we hear about a lot of people renegotiating leases and quite a few retailers trying to get out of leases,” said Vikram Reddi, president of Mackenzie Keck Construction, which has built key locations for Abercrombie & Fitch, Hollister, Urban Outfitters, Anthropologie, Ferragamo, Gucci and Versace.

 

“We were on the fence for awhile, but we are going to the convention,” Reddi said. “We typically attend. For us, it is a networking event. Sometimes we get some work.”

This year, “We are not really expecting doom and gloom. Ultimately, what I would like to find out is who is real and who is not real,” said Reddi. “We want to find out from the real estate community who is actually trying to back out of leases and who has been having trouble meeting rent. We liked to be paid at the end of a project, and we like to target retailers that are capitalized and looking to actually expand. It’s one thing to meet with old clients and say hi. We have that loyalty. It’s another thing to try to cultivate new clients. We are certainly not anywhere near as busy as we were this time last year. We are scouring the market for new opportunities, and there are opportunities. It’s mostly middle-market stuff.”

“If you are interested in making deals, you can really make deals. This is going to be one of the real deal-making conventions,” said Faith Hope Consolo, chairman of the retail leasing and sales division of Prudential Douglas Elliman, who has the exclusive on Who.A.U. — which she described as a cross between Polo and Abercrombie, serving ages 12 to 18 — in 8,000- to 12,000-square-foot boxes.

“Shopping owners and developers are making some of the most reasonable deals I’ve seen,” including in some cases giving a year’s rent-free and taking on building costs. “Really aggressive deals can be made now,” Consolo said. “Before, it was take it or leave it. You had to take a dozen mall locations, meaning you would get three good ones and the rest you could die. Now it’s developers saying, ‘Tell us what you want.’ It’s a different tone. It’s very friendly.”

“National tenants are hiding in a shell,” said Steve Greenberg, president of the Greenberg Group Inc. retail real estate advisers. “Other than the outlet business, the retail business is just decimated.

“I will say there is more good real estate available at better prices than we have seen in many, many years,” he continued. “We see landlords being overly cooperative to work with tenants who want to lease space. If you are a good brand, like Lacoste or Façonnable, you will find that the big REITS have been extremely cooperative. They want to make it palatable for retailers to open new stores. There is a wonderful sense of community and cooperation. Misery loves company and through pain. People gravitate towards one another and problem solve.”

He said that thanks to a couple of bankruptcies, he was able to secure some “wonderful” spaces for a client, Vince, the subsidiary of Kellwood.

Greenberg encouraged participating in the convention. “If you don’t get in the mix of things, you limit your opportunities. The landlords and tenants that are there are serious about business. They’re not going for the cocktail hour. You can do business anywhere, but nothing replaces a face-to-face meeting and the opportunity to meet senior executives. If you want to see Billy Taubman, he’s at the Taubman booth.”

“There is value in catching up with people on the fly, seeing what projects are out there, even if you are there for one or two days,” said Raymond Brunt, a partner in Stanbery Development, a nine-year-old developer of upscale specialty centers featuring a mix of fashion and food retailers in 90,000- to 150,000-square-foot settings. “There is a lot that can be learned by wandering around the convention.”

Stanbery has two developments opening soon — Shoppes at Hamilton in Hamilton, N.J., on May 30 and Shoppes at Cross Keys, Gloucester, N.J., on Aug. 1. One project is on hold, the Shoppes at Lake Manassas in Gainesville, Va. “You’ve got to get a certain amount of leasing filled before you can move forward with the project. Several retailers were willing to move forward and even signed letters of intent, but they put the brakes on.”

He described them as national retailers that were key to getting other retailers signed up, too. Typical specialty anchors at Stanbery projects include Banana Republic, AnnTaylor Stores Corp., Chico’s FAS Inc., The Talbots Inc., Coldwater Creek Inc., Jos. A. Bank Clothiers, Children’s Place Retail Stores Inc. and New York & Company Inc.

“It’s no secret. Fewer retailers are doing deals,” Brunt said. “There are more retailers going out of business than going into business. The value of space has diminished because of supply and demand. This is a perfect storm for a retailer that is looking to take on the chore of wanting to expand at this time. If somebody has the capital, wherewithal and the stomach to expand in this world, they can take advantage of opportunities. Retailers are more in the driver’s seat than they were three years ago.”

“People are coming to the convention to do deals, or they’re not coming at all. That is the biggest difference this year,” said Mary Lou Fiala, vice chairman and chief operating officer of Regency Centers, and the outgoing chairman of ICSC, to be succeeded by Peter Sharpe, president and ceo of The Cadillac Fairview Corp. Ltd.

Although Regency is sending 75 people to the convention, compared with 100 last year, “I think we will do about as many deals as we do typically, though the momentum has definitely changed from the developer holding the cards to the retailer.”

She said Regency’s retail leases are being signed at “moderately lower” rates while renewals are holding steady.

Fiala sees drug stores, groceries, discounters and moderate-priced restaurants as the best performers in shopping centers lately. “The consumer is out spending, but certainly at a different level. It is still difficult in discretionary and luxury businesses.

“However, you will start seeing more positives by the fourth quarter. Everything stopped in November and December” of last year. “We are going to be up against those numbers, and unless some catastrophic event occurs or unemployment goes significantly higher, there will be more spending in November and December this year than people might anticipate.”

Forbes said he was also reducing his contingent to ICSC, down to about 12 staffers, from 15 to 20 in recent years. He also said a project in Sarasota, Fla., in partnership with Taubman Co., was put on hold due to difficulties financing and leasing the property.

“Tenants expect to see some form of representation,” Forbes said. But they shouldn’t expect to see reduced lease deals, even though there’s been a slight reduction in Forbes’ occupancy rate from 98 or 99 percent to 95 percent.

“We haven’t changed our terms,” Forbes said. “We are not offering inducements. We still have highly productive centers, and we are not about to negotiate from weakness. There might be a temporary blip in sales, but this is not going to jeopardize 10 years of strong economics.”

As far as the outlook, “We are going to continue to see a rocky reporting of business. Certain categories will be OK; certain others will struggle. There might be better months ahead, but I am not anticipating any strong trend upward with any sustainability this year,” he said. “My outlook on the [more distant] future is really bullish. This country is very resilient. Retailers are very resilient. They will find a way to create different products, different price points and different perceived value.”