Charting a Path for a Retail Real Estate Recovery

Although attendance is markedly down from the heights reached in 2007 and 2008, the mood of the annual ICSC RECon is far from morbid. According to ICSC, more than 30,000 people have registered for the event, although most attendees on the floor believe the actual attendance is 25,000 or less. Across the board, however, attendees will be leaving the show on a positive note.

What attendees have found is that the retail real estate industry is not in a hunker down mentality. The signs of economic stabilization that preceded the event went a long way to calming people's nerves. And although everyone is less busy than in past years, meetings are still productive. There is a focus on trying to backfill vacancies and optimize the performance of existing stores and shopping centers. And there are select retailers looking to expand. The pace of expansion is far slower than in previous years, but it has not stopped completely. As a result, there is a great deal of competition to get those retailers, but company executives say the meetings here will produce tangible results.

"The show has gone about as expected," says Terry Brown, CEO of Columbia, S.C.-based Edens & Avant. "People are being realistic. Retailers are talking about 2010, 2011, 2012 and 2013. They're being selective, but it's not a bunker mentality. So it has been a productive couple of days."

Firms, by and large, are trying to focus on core competencies. Whereas in past years companies have gotten creative in the kinds of developments they pursued and initiatives they launched, today firms are keeping it simple. Chicago-based Urban Retail Properties, for example, is focusing on management and leasing and less on development, according to CEO Ross Glickman. He also thinks the company is well positioned to be a player in the receivership business as more and more properties with troubled loans get turned over to the banks. Similarly, St. Petersburg, Fla.-based Sembler Co. is focusing on its services business and wants to be a player in distressed real estate, according to COO Ronald Wheeler. "It's an opportunity to take advantage of the experience we have in property management, leasing and the relationships with retailers."

The drop off in development has also led to changes in personnel at companies. Development staffs have been cut back. In the case of Beachwood, Ohio-based Developers Diversified Realty, however, the company didn't let those people go. Instead they reassigned as many people as they could to other parts of the firm. One former development executive, for example, is now in the REIT's human resources department where he is in charge of conducting orientations with new employees. The idea is that when the development business revives the company will have pros in place and won't need to rebuild its staff.

Most firms are putting an emphasis on trying to gain a greater understanding of shoppers that come to their centers. Retailers want to know who their customers are and why they buy what they buy. Some developers, in turn, are trying to get a generalized picture across their entire portfolio to see if the tenant mix is right and that retailers at their centers truly complement each other. However, some observers say the process of gaining that information--despite a plethora of analytics firms in the industry--is still messy.

Retailers and owners want to use the information about customers to inform marketing strategies going forward. Firms are experimenting with all sorts of tactics to drive traffic including Twitter feeds, Facebook pages and email blasts to more traditional strategies such as holding more events at centers and doing targeted local advertising.

For its part, Washington, D.C.-based Madison Marquette is trying both the old and the new. The company has set up Facebook pages for many of its centers and has started a LinkedIn group for its tenants. It is also holding more events, including carnivals, circuses and pinewood derbies, at its properties. What's challenging, however, is that marketing budgets are also being cut. So companies are trying to find ways to generate buzz without shelling out tons of dollars.

In terms of when a clear turnaround might occur, there is little consensus. Many are hoping that predictions of the recession ending in the fourth quarter of 2009 come to fruition. Others think the economy might take longer to fully regain sure footing. So few are comfortable in pinning down a timeline for a rebound. Still, there is a least tempered optimism in the air. The uncertainty about the state of the financial system and lack of available financing isn't helping matters. Besides the question of distress, gaining loans for development or investment is difficult. That's kept the investment sales market at a standstill and cap rates are now at least 200 basis points higher than they were at the market's peak in early 2007. This drop in prices, however, is warranted according to some experts and is part of the industry's correction.

"The retail real estate industry is behaving the way it should," says Anthony Buono, executive managing director of retail services--Americas with CB Richard Ellis. "Prices have fallen and rents have fallen because consumer spending has fallen. ... When GDP is flat or positive for a year, retail will behave differently."

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