Reflections on ICSC RECon 2009
Back to basics…creatively
Randy S. Gold, CPA
May 27, 2009
There is no doubt that this year’s International Council of Shopping Centers RECon in Las Vegas was unlike any in recent memory. Even with show attendance down approximately 50 percent and parties significantly scaled back, attendees at this year’s edition of the largest real estate show in the world meant business.
Conversations about the poor economy were as common as a $1.99 all you can eat Vegas buffet. While the prevailing theme of the show was the sour market condition, many discussions focused on – brace yourself – making the most of these troubling times. With no clear end to the economic malaise in sight, most think the marketplace will get worse before it gets better, evidenced through many conversations on the floor.
Eva Horton of Grubb & Ellis said, “Over the last few months cap rates have been inching up almost weekly. It took a while for cap rates to adjust, but now we are seeing properties with credit tenants that were trading at around 7% to 7.5% ticking up to over 8%. Smaller, non-credit tenant deals are touching 10% or 10.5%. Stand alone bank deals that were hanging around at 6.5% even recently are now over 7%.”
As cap rates begin to step up slightly, companies and individuals are trying to maintain a positive outlook to stay in the game, while others are generating creative ways to actually grow their business.
Bob Hart, President and CEO of Kennedy Wilson Multifamily in Beverly Hills, was in Vegas looking to take advantage of the down economy. When I asked him what brought an apartment guy to the retail show, he replied, “We are looking for distressed opportunities to purchase and to manage properties in the bank’s Real Estate Owned portfolios. The same banks that are here in Vegas have multifamily properties that they may need help with.”
Location, Location, Location
The noticeable omissions of Simon and other large players on the convention floor created opportunities for many firms to upgrade and pick up some new “real estate.” Jerry Beale of the Beale Group, a management and brokerage company in Southfield, Michigan, moved from the back of the Lower South Hall to the edge of the Central Hall – a move Beale described as “Outstanding!”
Across the aisle were Eli Loebenberg and Elliot Zaks of Madison Commercial Real Estate Services in New Jersey who said the move from the South Hall was simply “incredible for our business.”
Other notable moves included Aronov Realty, Jones Lang LaSalle and CB Richard Ellis all of which moved to the front entrance of the Central Hall.
On the other hand, did anyone venture over to the North Hall? Talk about bad real estate. With few exhibitors, the North Hall was emptier than a jackpotted slot machine, leaving many exhibitors there feeling left out at best.
Maximizing the Low Attendance
Feelings were mixed as to whether the lower attendance was good for business. Rob Hellman, Managing Director for David Landau and Associates, a real estate consultancy in NY commented, “It will be interesting to see what this year means to the long term value of the show. So many people used to come out and party, and I think we will see a decrease in attendance for a few years.” Perhaps the social highlights from ICSC of years gone by may not be seen again for a few years, yet many attendees were actively pursuing and even closing new business.
I spent time with Chris Burk, Director of Domestic Acquisitions in the TIAA-CREF Newport Beach office, who was at the show seeking new acquisitions. Burk had a full schedule at the show and was actively seeking properties to add to the company’s west coast portfolio. “It’s been a great show for us, very busy with a tremendous amount of meaningful, productive meetings,” said Burk.
In the span of just a few minutes I spoke with Kate Peterson, a real estate manager with Home Depot, who was at the show marketing 15 company-owned properties for sale, and Michael Alterman, the Chief Operating Officer of HT Group, LLC, a privately held real estate company in Atlanta, who was looking for centers to buy.
There were also many players out there looking for specifics like a good infill location. Peter Weitzner, director of real estate for Rooms to Go, the country’s largest independent furniture store, was enthusiastic about the company’s latest plan to open in part of an old Home Depot Expo store. He was in Las Vegas meeting with potential tenants for the unused space.
The low turnout also meant more meetings and easier access to professionals, resulting in deeper, significant conversation, as evidenced by Allen Brown, a broker with Grubb & Ellis, who mentioned he had more meetings back-to-back this year than ever before.
Similarly, Abe Schear, Partner at Arnall Golden and Gregory, a law firm in Atlanta, was seen in meetings at every corner of the convention center. Schear said, “The lack of attendance means that I can get around easier and spend some quality time with our clients, which is what I love to do.”
Getting Back to Basics
Current market conditions force us all to remain lean and nimble, but to thrive in this economy we all have to sharpen our pencils and focus on the basics of our industry, and we must also find creative ways to stay ahead. For many, this ICSC was all about taking care of the house... and the tenants, with lease renegotiation, property repositioning and increasing cash flow as prime topics.
Horton suggested that at Grubb & Ellis, “We are advising landlords to give temporary rent reductions rather than renegotiating leases all together. We are finding that some landlords are saving the tenant by renegotiating the lease but are setting themselves up on the back end by locking themselves into rental rates that won’t tick back up fast enough. You don’t want to lock yourself into something you can’t get back up to market in two to five years.”
Billy Bauman, President of Bauman Company in Atlanta, said, “We look at every situation individually. A lease negotiation depends on so many factors including submarket, co-tenancy clauses, etcetera. It’s not ‘one solution fits all.’ We have one national tenant in some deals that has seen same store sales increase 8%, so it’s not all bad.”
Marty Taffel, with Wakefield Beasley and Associates, an architectural firm in Atlanta, said, “Although there are very few development deals around, we have had numerous discussions with clients wanting to spend a little money redesigning current centers to drive shoppers to their site.”
Loebenberg of Madison Commerical Real Estate Services said, “Many owners are now looking at cost segregation as a defensive play, whereas before it made sense to do, now it is a must to enhance cash flow. Madison recently completed a cost segregation study on a four million square foot project, deferring over $1 million in taxes in the first year alone.” Loebenberg also noted that “we are even offering payment plans to help our clients take advantage of our services, which is something new for us.” This type of creativity allows companies to keep an optimistic view for the future.
Creativity may also include branching out into previously underdeveloped markets. Amanda Reeves, a broker with Melaver in Savannah, Georgia, said, “Savannah is a good market that has survived pretty well. We never reached the highs of the market, and I don’t think we will hit the lows either. Lots of retailers were trying to get into Savannah before, but the market is highly underserved in terms of retail space. Now we are seeing at least some opportunities for stores that previously didn’t have a presence.”
Anthony Wagner of Melaver adds, “There are very few power centers in Savannah, which hurt the market a few years ago, but now there are fewer dark shops than you might see in other cities.”
Of course, other opportunities exist in a weak market. For example, Lynn Zuckerman Gray, formerly a Senior Vice-President with Lehman Brothers said, “You have to go with your passion.” For Lynn, who spends much time teaching Cornell and NYU real estate courses, her passion is helping companies recruit better on campuses. While it is not directly real estate, it is refreshing to know there is life outside Wall Street for financial professionals.
Brother, Can You Spare a Dime?
While the overall attendance of the show was down, one industry more than any other contributed to the poor numbers.
“Wall Street” corner was sparse with many banks cutting back the number of attendees, not having a booth at all, or simply having gone out of business… not many banks today are looking to grow their real estate portfolio, but instead they are watching values closely and hoping not to increase their REO portfolios.
Hellman of David Landau and Associates, also an adjunct professor at NYU, is readying his syllabus for next semester’s class on real estate capital markets. When asked how it was possible to teach a course on something that didn’t exist, Hellman smiled and simply said “it’s a history class.”
While many lenders were absent, some were seen working the floor seeking new business and maintaining existing relationships.
Julie Merkelson, Director of Global Private Markets forTIAA-CREF mortgage division in Charlotte, was in Vegas to meet with current borrowers and look for new opportunities. Merkelson’s busy schedule at the show indicates there is still some activity out there.
When Will This End?
Opinions vary from two to five years as to when the economy and real estate industry will resurface; however, the professional gambler in Vegas knows a key to winning is riding the waves of success and hedging bets when things are down. In real estate, we all certainly rode the success waves, but in order to hedge our bets, we must take new and yet unexplored courses. We all must look for ways to not only survive but thrive, so when we emerge from this recession we are all stronger and better positioned for anything that can happen in the future.
This ICSC will not be remembered for the glamorous parties and limitless expense accounts. Perhaps it will be remembered as a critical turning point in our industry – a moment when we all sharpen our skills as professionals and maximize even the slightest opportunity and find the creativity to push our businesses forward.