Landlords, Retailers Think Out Of The Box as Cycle Swings Upward

Posted on September 28, 2012

Neither the continuing rise of Internet commerce nor the bumpy economic recovery will scuttle an expected rebound for retailers and shopping center owners, panelists agreed in an upbeat industry assessment at the ICSC Western Division Conference held last week in San Diego.

Reflecting a cross-section of disciplines — from lenders to developers to chain store operators and mall owners — panelists were clearly optimistic about the prospects for the sector over the next couple of years, fueled by a potent combination of strengthening tenant demand, retailer expansion and rising occupancies amid little new construction.

Meanwhile, low interest rates are likely to bring tremendous and sustained investment capital for acquisition and eventually, new retail development, experts said at the conference, which ended a three-day run in San Diego on Sept. 21.

“We have issues, but as an industry, our best days are ahead of us,” said panel moderator Patrick Donahue, chairman and CEO of mall owner Donahue Schriber. “There seem to be tremendous capital flows into real estate, so there will be tremendous investor interest … [capitalization] rates will likely remain low and maybe go lower.”

“Retailers have flushed out a lot of the dead wood, and we’ve got solid retailers that are reinventing themselves. The next two to three years should be very productive if you have capital, product, and the people to execute,” Donahue added.

While the economy and property markets continue a slow and steady but somewhat bumpy recovery, the central bank’s fiscal policies, such as QE3, are expected to result in increased liquidity, resulting in what’s likely to be an unprecedented seven years of zero percent interest that started in 2009, said Christopher Niehaus, managing director of GreenOak Real Estate Advisors LP.

“For at least the next couple of years, there appears to be unlimited liquidity, and that will clearly impact how we run our businesses,” Niehaus said.

For now, retailers are focused on smart growth and landlords on creative ways of keeping their spaces filled with tenants.

Scott Nelson, senior vice president of real estate for Target Corp., focused on the chain’s plans to enter the Canadian market for the first time. The popular retailer plans to open 125 stores starting in March 2013 in buildings formerly occupied by discount retail Zellers. It also is preparing for next month’s roll-out in San Francisco and Los Angeles of “City Target,” a new store format adapted for existing spaces in U.S. urban areas.

The City Target sites “are some of the best real estate we have in our portfolio,” said Nelson. “My teams are focused on optimizing the capital we have, using all our resources and being as flexible as we can in terms of designing our stores.”

Daniel Hurwitz, president and CEO of DDR Corp. (NYSE: DDR), a Cleveland-based shopping center REIT, discussed an innovative tenant leasing program his firm introduced called “Set Up Shop,” which offers rent perks and help with developing business plans to small tenants in exchange for leasing up chronically vacant space. The company signed 20 leases in Atlanta and 20 in DDR’s properties in Florida through the program.

Hurwitz said the program and unique merchandizing help differentiate the tenant mix at those DDR centers from those of its competitors.

“We can all sit around and talk about this box getting bigger or this box getting smaller. It doesn’t really matter. It matters what’s in the box. If the consumer wants it, it will do fine,” he said.

As at most retail real estate conferences this year, panelists spent considerable time mulling the Internet and the impact of on retail sales and space requirements at brick-and-mortar shopping centers.

Retailers that are able to multichannel through both stores and the Internet are the wave of the future, but the costs of shipping and item returns remain a barrier to profits, Hurwitz said.

“The question is, how do you make money? People have not quite been able to figure out how to make the model work and I think until we figure that out, it’s just it’s going to be a work in progress,” he said. “Bricks and mortar is safe because it’s the only vehicle currently that’s making significant money, it’s the most profitable part of the business.”

Accordingly, a prospective tenant’s multichannel distribution plans are a critically important discussion to DDR.

“We wouldn’t be happy if our retailers started going very, very heavily into the Internet, eroded their margins and as a result, negatively affected their balance sheet,” he said. “That wouldn’t be good for any of us.”

“When the market decides to start holding an Internet company like Amazon to the same standard they hold a Target, it will be interesting to see if Amazon can prosper. If you had $66 billion of sales and no earnings, you would be on the {bricks-and-mortar] tenant watch list.”

Other panelists included Joseph C. Hoesley, vice chairman of U.S. Bank; Alex Lelli, senior vice president, growth and development for ULTA Salon; and Charles Stilley, president of development for LOOK Cinemas.

Randyl Drummer, Costar Group