Monterey, March 2010 – While St. Patrick may have driven the snakes out of Ireland all by himself, it took a team effort—a global economic collapse actually—to clear out the ICSC’s annual retail conference here on St. Patrick’s Day.
With the snakes gone, the survivors had plenty of room for deal-making. The catch? The few deals that did get wrapped up could have been done at a bus stop with room left over for the commuters. As recently as 2008, one could have wallpapered a penthouse with the thousands of developer site plans displayed like peacock tails in the hope of inflaming reluctant tenants. Alas, in this, the year of living quietly, there were none.
The annual Monterey conference attracts Northern California’s entire retail community: landlords, tenants, brokers, architects, lawyers, contractors, lobbyists, public relations types. In theory, it offers everyone a chance to meet in a central place at appointed times in quick succession.
This year, your correspondent had but one formal pre-arranged tenant meeting for the entire three-day conference. It wasn’t pretty. The sole purpose was to determine how much rent I had to give away to keep a good tenant from bolting. Bad tenants just bolt. Going into the meeting, I pegged the necessary discount at 15 percent but—and here’s the first good news—the tenant’s real estate rep was willing to present her committee with only a 5 percent cut…practically an increase if rightly viewed.
A rigorous survey asking various and sundry (that is, anyone who drifted by) if this year would be better than 2009 revealed an unexpected strain of optimism. Admittedly, this is kind of like asking the circle at an AA meeting whether they intend to take the 13th step back to BevMo, but this carefully-selected focus group seemed so upbeat as to cause one to wonder whether we just might be inching off the bottom.
The sense was that the lender-deal logjam is showing cracks, but not yet breaking up. One developer spoke of buying a $40 million note on a vacant power center for just $5 million. He might have been telling the truth. A savvy mortgage broker crowed that money is flooding back into retail: five- and 10-year non-recourse debt with a sixish price tag and the lenders jacking LTV’s upward. (The latest irony: the borrowers still ambulatory are resisting higher leverage while the lenders want to shovel it out).
A couple architects chirped about their new business rolling in, but when pressed, these coal-mine canaries sang a slightly different tune, agreeing their new work was either for non-profits (the intentional kind) or store remodels. Under fiercer interrogation, they admitted they had no work for anything remotely resembling a new, ground-up retail development.
The lawyers on hand gauged their loss of RE retail business (2009 over 2008) at anywhere from 60 to 100 percent, while the ever-cheerful brokers (refreshments were available at the no-host bar) looked upon 2009 as ancient history and focused instead on 2010.
One seasoned broker said he decided the symbol to depict our recovery would be neither a “U” nor a “W” (the time for a “V” having long since past), but a square root sign. That is, a sharp dip followed by a slight upward recovery and then a long flat line extending into the foreseeable future. Ouch.
Back to good news: The leasing brokers uniformly observed that small independent tenants—the proverbial Moms & Pops—are making deals right now, taking advantage of wonderful rent bargains to move into better centers or open second and third stores. Correspondingly, the somewhat dazed developers—knocking on whatever wood happened to be handy—allowed as how their occupancy rates had stabilized, if only for the moment.
While the local tenants are moving, if not exactly shaking and baking, the only national tenants truly fogging mirrors in Monterey were the discounters. It’s all well and good to claim you will do a deal if you get the corner of “No” and “Brainer” for $1 a foot, but the discounters are actually making deals, admittedly deals that only work in second- and third-generation space but deals nonetheless. Notable by their absence from this conclave were the big nationals (e.g. Wal-Mart & Target) and virtually all of the soft-goods categories.
Finally, the developers, being developers, had to brag about something and with no new deals to speak of, they were reduced to bragging about how bad their old deals were. The trick of course in this situation is to be the last liar. “You think that’s bad? That’s nothing. My lender burned the center down, grabbed my house, towed away the Ferrari and cleaned out my bank accounts quicker than a trophy wife smelling trouble.”
