RECon Update

I've been tweeting as regularly as I can from the ICSC RECon show floor. You can see my tweets here. Here I'll provide some observations on what the first full day of the show was like.

First--the negative. Yes, attendance is down. ICSC is saying that registrations have surpassed 30,000 and may end up near 35,000 when it's all said and done. However, few people I've talked to believe that many attendees are really here. A lot of people know folks that registered, but then didn't make the trip. Most people think the real number is more like 25,000. A common refrain I've heard from companies is that they've cut their presence by half or more. Many companies also opted not to pay the huge expenses required for unpacking lavish booths. Many booths are scaled down. In some cases, firms just have tables and chairs and a handful of blown-up site plans or aerial photos. However, this is a minority, not the majority. There are also fewer plasma screens, booths with offices, goodies being handed out and other bells and whistles we've become accustomed to in recent years. ICSC did opt to occupy all three halls, but there are gaps. There are spaces that were booths in the past that have become ad hoc seating areas or have simply been curtained off. Also, we knew it was coming, but it's incredibly odd to walk into the Central Hall and not see Simon Property Group and Westfield.

Despite all of that, the mood is far from dire. Attendees feel like with the economy showing some tepid signs of stability that perhaps the most severe crises for the industry have passed. Things are far from easy, but we're officially out of panic mode. I've heard more than one person say that attendance is down, but the people that came are serious dealmakers. There are less support staff and hangers on. There also may be fewer meetings taking place, but people are getting more time to sit down and getting more done. Rather than 15 minute or 30 minute sessions, folks are sitting down for 45 minutes or an hour. What Scott Schroeder of Developers Diversified told me is that the meetings with retailers are actual portfolio reviews this year. In the past, in shorter meetings there was little time to accomplish much.

Some of the big themes:

Optimization: Companies are trying all sorts of strategies to keep retailers healthy and operating. The last thing anyone wants is more vacancies. But that doesn't just mean granting concessions. Instead, despite pressure to cut costs, firms are trying to do as much marketing as they can to help drive traffic. Some firms are holding more events at properties. There is also a big emphasis on helping out regional or local retailers that don't have the resources that national players do. Owners are stepping in and helping retailers with marketing. They are also trying to help the little guys get better data about their customers so they can be more sophisticated in how they try and grow their sales. Madison Marquette is trying an interesting experiment as well. It has created a LinkedIn group exclusively for its tenants so it can share best practices with them. There are also many consultants and providers of software analytics at the show that continue to roll out more sophisticated tools for helping owners and retailers capture information. Wal-Mart Realty has its own spin on this issue as well. That's the division of the firm that handles converting Wal-Marts into other uses. The execs I talked to stressed that the firm is committed to finding the next best use for its former locations. In most cases, that's another retailer. In other cases, however, it has brought in other commercial uses to occupy its former spaces. The company had a lot of interesting things to say and examples to point to. I hope to bring you a longer feature for our Web site in the near future on Wal-Mart Realty's lessons.

Distress: Distress is a big buzz word. There's no getting around the large volume of loans coming due for refinancing that will face problems. Delinquencies, defaults and foreclosures are on the rise. So a lot of firms are trying to position themselves to take a piece of the receivership business. However, banks and other lenders are being slow to turn troubled properties over. They are granting forbearance or giving borrowers extensions even if they've already defaulted because they simply do not want to deal with a flood of commercial property coming onto their balance sheets. There's only so far banks can put things off, however, and the question of distressed assets will be a big one for years to come, especially as long as there is no financing source to replace the gaping hole left by the dormant commercial mortgage-backed securities market. Most observers expect hundreds of billions--if not up to $1 trillion--in commercial property to end up under water. That's exactly why so many firms are pushing their capabilities to handle assets in receivership.

Development: By and large, development is dead. There are projects going forward, but far, far fewer than in the past. Most interesting, to me, is how much development Forest City is still doing. The firm has a handful of big projects in the works and has no intention of slowing them down. What the projects have in common is that they are all in under-retailed markets or on sites in high barrier to entry markets. For example, the firm is currently building the first power center in Manhattan that will bring the first Target to the borough.

Retailers: Many retailers have stopped expanding or are closing stores. But there are firms looking to grow. There are some up-and-comers out trolling for cheap locations in the current environment, although not a ton. And value-oriented firms like TJX Cos. and the various dollar store chains are growing aggressively right now.

Debt: It is hard to get financing right now. On one booth, a company had printed out on 11 x 17 paper and pinned to its wall a sign that read, "We are actively seeking development loans." It's tough to get any kind of financing. The exception to that seems to be the REITs. Almost all the retail REITs have dealt with debt they have expiring in 2009 and a lot of their 2010 obligations. Most are now looking at 2011 and beyond. That's great news and means we're less likely to see any further bankruptcies in the sector, especially since the majority of the firms emerged from the first quarter with solid FFO and NOI numbers. Still, the big problem remains the question of distress.

Investment sales: There's not a lot going on here. There's still too much of a gap between buyers and sellers. Cap rates are rising, but no one knows how high they should really be. There is still a ways to go before the market loosens up--especially with the lack of financing available.

For another take on the current situation, check out this write-up from our sister publication NREI.

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