5/4/2009

1

The Market: The Whole Truth and Nothing but the Truth

BDI Spring Seminar

May 1, 2009

Are We Hearing the Truth?"Our country has six times more retail space per capita than any other country,“ Ellen Dunham‐Jones, director of the architecture program at Georgia Institute of Technology.

"Restaurant supply now exceeds consumer demand. On top of that, many consumers tell us that traditional casual dining chains lack differentiation, that 'they all look alike.’” Ron Paul, president of Technomic

The Chicago retail market posted a vacancy rate of 10.2 percent. This increase of th t i l t t t t th l t t lmore than one percent since last quarter amounts to the largest quarterly 

increase of recent record. CB Richard Ellis, Market View: Chicago Retail, 4th Quarter 2008

148,000 retail locations closed in 2008 and another 73,000 retail locations will close in the first half of 2009. Michael Niemira, Chief Economist for the International Council of Shopping Centers 

What is the True Shape of Recovery?

Typical U.S. economic adjustment is “V” shaped

Most economists believe this is a “U” shaped adjustment where it merely takes longer to recover

Warren Buffet has implied that it may be an “L” shaped adjustment that permanently alters consumer behavior

What Trends Determine National Shape?

Later baby boomer retirementI ill k 5 8 k l• It will take 5 to 8 years to recover average market loss

• Higher jobs/household demand

More purchase decisions made from home• Shorter shopping trips• Greater connection between the internet and shopping• Greater connection between the internet and shopping

Private label here to stay• Smaller average transaction• Supply chain collapse

5/4/2009

2

What Trends Determine National Shape?

Eating out declines• 53% eating home moreg• 36% bring snacks from home• 33% bringing lunch from home

Unemployment is not expected to be 5% until 2013• 5.1 million jobs lost since December 2007• 9 million more employees forced to work part‐time• Rebound “Boom” entering workforce

Change from “debt” led consumption• No more home equity loans• Onerous consumer credit

What trends determine local shape?

Auto dealership melt down

Bank lending recovery/rationalization

Population staying in place

A t t li iApartment living

Zero sum or growth

What Features Determine Shape?Stage: Land Conditions• Water Conditions• Soil Conditions Set• Political Boundaries

Scene: Development Pattern• Lot size• Lot positions• Infrastructure condition

Set: Temporary

Set

Scene

Stage• Tenants• Flowers

Texture• Tenant size• Tenant type

Stage

The Basic Truth

To survive a business must make money

T k b i t d li l

Sales ‐Variable

Cost‐

Fixed

CostsProfit

To make money a business must deliver value

Who delivers value?

5/4/2009

3

Who will Survive on their Value?

Businesses you love to hate

• Wal Mart & other large discounters

Must have purveyors

• Fashion: Urban Outfitters• Wal‐Mart & other large discounters• Dollar Stores• Auto Repair• Amazon.com

Bankruptcy Beneficiaries

Fashion: Urban Outfitters• Necessity: Grocery Store• Replacement: GameStop• Escape: Cooking Schools

OthersBankruptcy Beneficiaries• Best Buy• Bed, Bath & Beyond• Others

Others• Low debt• Controlled Inventory• Lower negotiated lease cost• Friendly employees• Low overhead

What Policies Impact Value & Shape?Planning Policies• Too much land zoned retail Economy

Incentive policies• Sharing incremental sales tax• TIF without residential acceptable

Tenant Preemption• Open before market develops to prevent competition

Owner Optimism

y

Owner Optimism• Overbuild by 20% to grab high rent, non‐credit tenants• Leverage the project with very available bank financing

Industry Practices• More profit in moving than remodeling• Incentives can never expire if profit target are to be met

What can we do now?Steve’s Project•What it is•What it is• Why it works

Results Oriented Market Assessment•What it is• An examination of behaviors• Recommendations to capture identified activities

•Why it works• Engages stakeholders• Has “Here and Now” sense of urgency

Information Exchange

Who is doing well in your community?• Retailers• Restaurants• Property Owners• Customers

l i h h “ h d ”Help me with the “uncharted waters”• blane@business‐districts.com• Steve@newchannelsrealty.com

5/4/2009

1

Bankruptcy and Foreclosure: WhatBankruptcy and Foreclosure: WhatBankruptcy and Foreclosure: What Happens When It Hits Your

Retailers?

Bankruptcy and Foreclosure: What Happens When It Hits Your

Retailers?Diane Williams

BDI S i 2009Diane Williams

BDI S i 2009BDI Seminar 2009May 1, 2009

BDI Seminar 2009May 1, 2009

For Today’s Consideration…For Today’s Consideration…

Foreclosure and Bankruptcy Foreclosure and BankruptcyForeclosure and Bankruptcy Definitions Differences General Processes

Major Retail Sales Tax Generators Foreclosure: What You Should Know

Foreclosure and Bankruptcy Definitions Differences General Processes

Major Retail Sales Tax Generators Foreclosure: What You Should Know Bankruptcy: What You Should Know The ‘Slop’ on Certain ‘Biggies’ Implications for Malls

Bankruptcy: What You Should Know The ‘Slop’ on Certain ‘Biggies’ Implications for Malls

For Today’s Consideration…For Today’s Consideration…

Things to Ponder Things to Ponder Things to Ponder Stressed Fundamentals Lease Renegotiations Single Tenant and Stand Alone Retail

What You’re Seeing Out There

Things to Ponder Stressed Fundamentals Lease Renegotiations Single Tenant and Stand Alone Retail

What You’re Seeing Out Theregg

ForeclosureForeclosure Court proceeding under state/local law filed Court proceeding under state/local law filed

by mortgagee Reasons ‘On beyond’ default Delinquency is most common reason

Occurs more often than assumed in normal market

by mortgagee Reasons ‘On beyond’ default Delinquency is most common reason

Occurs more often than assumed in normal marketmarket

Exhaust initial possibility of ‘workout’--extension, restructuring, sale, deed in lieu, etc.

market Exhaust initial possibility of ‘workout’--

extension, restructuring, sale, deed in lieu, etc.

5/4/2009

2

Foreclosure (cont)Foreclosure (cont)

Most are individual properties Most are individual propertiesMost are individual properties Need to Know Redemption rights--vary by jurisdiction Deficiency judgment and personal liability

Today’s Market 65% increase for undeveloped land in 2008; 17%

Most are individual properties Need to Know Redemption rights--vary by jurisdiction Deficiency judgment and personal liability

Today’s Market 65% increase for undeveloped land in 2008; 17%

to date in 2009 Single tenant spaces--how will they fare? Exacerbate CMBS issues

to date in 2009 Single tenant spaces--how will they fare? Exacerbate CMBS issues

BankruptcyBankruptcy Federal proceeding to collect debtor assets Federal proceeding to collect debtor assets p g

and for liquidation or for restructuring debt repayment (to remain in business)

Chapter 11 ‘stays’ foreclosure proceedings The ‘single asset real estate debtor’ (can be

any legal entity)E titi d b j t k d

p gand for liquidation or for restructuring debt repayment (to remain in business)

Chapter 11 ‘stays’ foreclosure proceedings The ‘single asset real estate debtor’ (can be

any legal entity)E titi d b j t k d Entities used by majors to package and insulate

Single asset debtor subject to special provisions

Entities used by majors to package and insulate

Single asset debtor subject to special provisions

Bankruptcy (cont)Bankruptcy (cont) Basic Process Basic Process Filing Schedule and Statement of Financial Affairs Creditors’ meeting (Legal proceeding) 2004 Examination Plan of Reorganization compares Chapter 11 with

Chapter 7

Filing Schedule and Statement of Financial Affairs Creditors’ meeting (Legal proceeding) 2004 Examination Plan of Reorganization compares Chapter 11 with

Chapter 7p Negotiation Bankruptcy Court approval of Plan of

Reorganization or convert to Chapter 7

p Negotiation Bankruptcy Court approval of Plan of

Reorganization or convert to Chapter 7

Bankruptcy (cont)Bankruptcy (cont)

Chapter 11 permits debtor to: Chapter 11 permits debtor to: Chapter 11 permits debtor to: Reject and get rid of leases Reject and nullify contracts (development

agreements?) Pay unsecured creditors less than 100% Liquidate the property

Chapter 11 permits debtor to: Reject and get rid of leases Reject and nullify contracts (development

agreements?) Pay unsecured creditors less than 100% Liquidate the property Market property Increase occupancy Obtain new financing

Market property Increase occupancy Obtain new financing

5/4/2009

3

Bankruptcy (cont)Bankruptcy (cont)

Remember--it’s the same for debtor Remember--it’s the same for debtor Remember--it s the same for debtor lessors and debtor lessees Other benefits to bankruptcy Workouts Assignments

Remember--it s the same for debtor lessors and debtor lessees Other benefits to bankruptcy Workouts Assignmentsg Forbearance And sometimes, foreclosure proceeds

g Forbearance And sometimes, foreclosure proceeds

Major Sales Tax Generators Major Sales Tax Generators

Major Contributors Major Contributors Major Contributors Auto Dealers Grocery Stores Mass Merchandisers Home Centers Warehouse Stores

Major Contributors Auto Dealers Grocery Stores Mass Merchandisers Home Centers Warehouse Stores Warehouse Stores

Mall Operators Warehouse Stores

Mall Operators

Each Sales Tax GeneratorEach Sales Tax Generator

Auto Dealerships or catching up with Auto Dealerships or catching up withAuto Dealerships…or catching up with Michigan

Issues Financing provided for inventory (fleet finance) Financing provided for service (short term

revolving) Foreclosures by financial arms/affiliates

Auto Dealerships…or catching up with Michigan

Issues Financing provided for inventory (fleet finance) Financing provided for service (short term

revolving) Foreclosures by financial arms/affiliates Foreclosures by financial arms/affiliates Major real estate firms (e.g. Cushman) working as

receivers

Foreclosures by financial arms/affiliates Major real estate firms (e.g. Cushman) working as

receivers

Auto Dealerships (cont)Auto Dealerships (cont)

Shrinking is key--the pains or the low Shrinking is key--the pains or the low Shrinking is key the pains or the low margin--40% is likely number Cross-complaints by majors against

their dealers owning non-’Big 3’ dealerships Attacking those with rental car

Shrinking is key the pains or the low margin--40% is likely number Cross-complaints by majors against

their dealers owning non-’Big 3’ dealerships Attacking those with rental car Attacking those with rental car

franchises Twin Cities example--21 to 7

Attacking those with rental car franchises Twin Cities example--21 to 7

5/4/2009

4

GrocersGrocers

The bright spot sort of The bright spot sort of The bright spot, sort of… Some expansions in area market Food4Less growing; some curtail (Fox & Obel,

Whole Foods examples) Right size for others Demographics, consumer spending, and more

The bright spot, sort of… Some expansions in area market Food4Less growing; some curtail (Fox & Obel,

Whole Foods examples) Right size for others Demographics, consumer spending, and moreDemographics, consumer spending, and more

meals at home Value proposition

Demographics, consumer spending, and more meals at home

Value proposition

Mass MerchandisersMass Merchandisers

Discount remains the ‘bright’ spot Discount remains the ‘bright’ spotDiscount remains the bright spot Consumers continue to seek value and

convenience, tempered with price Focus on grocery, health care, and

accessories continues Real estate issues a la Target--potential REIT

Discount remains the bright spot Consumers continue to seek value and

convenience, tempered with price Focus on grocery, health care, and

accessories continues Real estate issues a la Target--potential REIT g p

separate real estate from core businessg p

separate real estate from core business

Home CentersHome Centers

Not so good Not so good Not so good… Follows housing market with big plunge

in national housing indices Slow, or mostly, no growth Focus on sustaining/improving same

l

Not so good… Follows housing market with big plunge

in national housing indices Slow, or mostly, no growth Focus on sustaining/improving same

lstore sales Street focus on margins--they’re

watching inventory turn

store sales Street focus on margins--they’re

watching inventory turn

Warehouse StoresWarehouse Stores

Declining sales or neutral per recent Declining sales or neutral per recent Declining sales, or neutral per recent numbers Decline in gas sales is an issue Sales increasing for most, excluding gas Consumer focus on value sort of

Declining sales, or neutral per recent numbers Decline in gas sales is an issue Sales increasing for most, excluding gas Consumer focus on value sort of Consumer focus on value, sort of… Consumer focus on value, sort of…

5/4/2009

5

MallsMalls

It depends It depends It depends… Lots of surprises-- General Growth’s bankruptcy including

premium properties with additions Simon wants to actively market malls

It depends… Lots of surprises-- General Growth’s bankruptcy including

premium properties with additions Simon wants to actively market malls What is the real impact of tenant lease

renegotiations and concessions? Is it happening as the press indicates?

What is the real impact of tenant lease renegotiations and concessions? Is it happening as the press indicates?

MallsMalls

Role of retailer mix--do you have the Role of retailer mix--do you have the Role of retailer mix do you have the perceived strong ones?

What about higher vacancy rates? Off mall? Ownership strength helps Competitive positioning

Role of retailer mix do you have the perceived strong ones?

What about higher vacancy rates? Off mall? Ownership strength helps Competitive positioning Understanding your mall/store grades Impact of ‘too much’ retail Leasing strategies for vacancies

Understanding your mall/store grades Impact of ‘too much’ retail Leasing strategies for vacancies

The FundamentalsThe Fundamentals

Job recovery--2013? Job recovery--2013?Job recovery 2013? Consumer spending--the value proposition The ‘Street’ are fragile CMBS is scary; no secondary market Is commercial, non-retail the next to drop? And what about credit and credit criteria?

Job recovery 2013? Consumer spending--the value proposition The ‘Street’ are fragile CMBS is scary; no secondary market Is commercial, non-retail the next to drop? And what about credit and credit criteria? And what about credit and credit criteria?

What kinds of deals are in our future? Communities: Extensions? Are they all

rational? Evanston example

And what about credit and credit criteria? What kinds of deals are in our future?

Communities: Extensions? Are they all rational? Evanston example

The Fundamentals (cont)The Fundamentals (cont)

Who has liquidity? Do they have cash Who has liquidity? Do they have cash Who has liquidity? Do they have cash flow from operations? Are your pockets deep?

Who has liquidity? Do they have cash flow from operations? Are your pockets deep?

5/4/2009

6

Single Tenant/Stand AloneSingle Tenant/Stand Alone

Old lending adage--diversity of income Old lending adage--diversity of income Old lending adage diversity of income stream? Really know the landlord, even in

darkness Ask tough questions based upon

situation

Old lending adage diversity of income stream? Really know the landlord, even in

darkness Ask tough questions based upon

situationsituation Long term view of vacant space Property owner/broker engagement

situation Long term view of vacant space Property owner/broker engagement

Lease RenegotiationsLease Renegotiations ‘Media darling,’ but true ‘Media darling,’ but true Reduce costs, extend terms, strong

tenant demands Happening for those with leverage 14,000 store closings expected, or not What does it mean for

Reduce costs, extend terms, strong tenant demands Happening for those with leverage 14,000 store closings expected, or not What does it mean for What does it mean for

owners/investors? Portfolio implications for CMBS

What does it mean for owners/investors? Portfolio implications for CMBS

Lease Renegotiations (cont)Lease Renegotiations (cont)

Surprising tenant strength--Pier 1 Surprising tenant strength--Pier 1 Surprising tenant strength--Pier 1, Borders, as examples Midnight pull-outs continue in certain

markets

Surprising tenant strength--Pier 1, Borders, as examples Midnight pull-outs continue in certain

markets

Major ClosingsMajor Closings

Who is done?--SuperValu with Who is done?--SuperValu with Who is done? SuperValu with Albertson’s Another--Office Depot with total units Bad decisions--buying, positioning, site

selection‘Y O Y ’ l d li J

Who is done? SuperValu with Albertson’s Another--Office Depot with total units Bad decisions--buying, positioning, site

selection‘Y O Y ’ l d li J ‘Years Over Years’ sales declines--Jones Apparel announcement about 225 units ‘Years Over Years’ sales declines--Jones

Apparel announcement about 225 units

5/4/2009

7

Finally…Finally…

What are you seeing? What are you seeing? What are you seeing? Who’s weak or strong in your

community? Anything unique stuff? Can we talk?

What are you seeing? Who’s weak or strong in your

community? Anything unique stuff? Can we talk? Can we talk? Can we talk?

1

Surviving The Retail Crunch: Can There Be

A M nicipal SafetA Municipal Safety Net?

Municipal Strategies and Action PlansTerrence M JenkinsTerrence M. Jenkins

Sequential Steps To Developing A Strategy

Take the time to do outreach Understand the market for the retail

center/cluster Understand the physical issues associated with

the center/cluster Understand the center/cluster economics which

impact owner motivation

Sequential Steps To Developing A Strategy (Continued) Determine the viability of working with this

center/cl stercenter/cluster Is it worth the effort? How does it compare to other challenges in the

community? What is the motivation of the owner? Are there alternate uses for the center/cluster? How does the center/cluster needs fit into limited How does the center/cluster needs fit into limited

municipal resources? Are there cross-tenanting opportunities?

Determine the strategy

Take The Time To Do The Outreach Primarily focus on property owners…visit all of them Secondarily, take the pulse of a sample of tenants Meet with the brokerage community Review regional economic reports Network with regional economic development entities Create mini-regional focus groups with other municipal

economic development directors Determine the priority matrix for those centers/clusters

which will be the focus of municipal efforts Create an information data base of the target areas

2

Understand The Market For The Retail Center/Cluster

Primary and secondary marketQ f Quality of the market

Location and traffic counts Day time market Employee counts Bonus markets CompetitionCompetition Using traditional market analysis techniques,

make a determination of market strengths and issues

Understand The Physical Issues Associated With The Center/Cluster

Access Ingress and Egress Facades Signage Landscaping Parking Lot Quality Parking Lot Quality Maintenance Cleanliness

Understand The Economics Of The Center/Cluster

The need for anchor tenants The reason that centers are sometimes

sustainable with low capitalized tenants Tenant mix issues The goal of a “quality” group of tenants The relationship between investment to p

improve centers and subsequent rents Standard capitalization rates

Understand The Economics Of The Center/Cluster (Continued) The access to capital The motivation of the owner The potential role of outlots The potential role of alternate uses The impact of visibility vs. functionality Public-private partnership issues Public private partnership issues

3

Development Economics Scenarios

Tenant Rank*

Median GLA(Square Feet)

Median TotalRent per

Sq. Foot of GLA

Restaurant with liquor 1 4,900 19.12

Supermarket 2 52,376 7.90

Medical and dental 3 1,600 16.80

Nail salon 4 1,200 18.54

Unisex hair 5 1,340 21.35

Women's ready‐to‐wear 6 4,240 16.51

Bank 7 3,370 22.32

Cosmetics/beauty supplies 8 1,600 17.00/ y pp ,

Family shoes 9 3,475 15.60

Sandwich shop 10 1,500 22.81

Total GLA & Average Rent 110,036 18.04

The copyright to this spreadsheet is held by ULI--the Urban Land Institute.

Anchor Rent ImpactMedian GLA

Median TotalRent per AnnualMedian GLA

(Square Feet)Rent per

Sq. Foot of GLAAnnualIncome

Center With Anchor 110,036 $18.04 $1,985,325

Center Without Anchor 110,036 $18.30 $2,013,384

Change $28,059

Vacancy ScenariosOccupancy 50% 60% 70% 80% 95%

Estimated Rent/ SF $6.00 $7.00 $9.00 $12.00 $17.00

$ $ $ $ $Annual Income $900,000 $1,260,000 $1,890,000 $2,880,000 $4,845,000

Income Value at 8% Cap Rate (mil) $11. 3 $15.8 $23.6 $36.0 $60.6

Estimated Investment per SF $5 $25 $50 $100

Renovation costs(mil) $0 $1.5 $7.5 $15.0 $30.0

Total Investment (mil) $8.2 $9.7 $15.7 $23.2 $38.2

Net Value(mil) $3 0 $6 0 $7 9 $12 8 $22 3Net Value(mil) $3.0 $6.0 $7.9 $12.8 $22.3

Value per acre $351,563 $492,188 $738,281 $1,125,000 $1,892,578

Return on Investment 10.9% 13.0% 12.0% 12.4% 12.7%

Determine The Viability Of Working With This Center/Cluster

Is it worth the effort? How does it compare to other challenges in the

community? What is the motivation of the owner? Are there alternate uses for the center/cluster? How do the center/cluster needs fit into limited

municipal resources? Are there cross-tenanting opportunities? Discuss results with brokerage and municipal

economic development networks.

4

Determine The Strategy Go---No Go If Go:

If No Go---Alternatives Science: Continuous improvement Partial redevelopment Mixed use Total redevelopment

Art: Additional land assembly Finance-economic issues Mix assessment Mix assessment Incentives Tenant quality Regional market assessment Physical issues

Determine The Strategy Carrots:

Sales tax rebates Sticks:

Ordinances Sales tax rebates TIF Business District IDOT interface Municipal networking opportunities Grants SSA’s CIP opportunities Facades

Ordinances Codes Permits Violations

Facades Parking lots Landscaping Signage Community marketing

Determine The Strategy Establish clear objectives and related

l ti t levaluation tools General progress toward goals Return on investment analysis No Go evaluation

Re-evaluate on an annual basisF ll i t l d lt t Fully communicate plan and results to elected officials and citizens annually

Seminar 2009-The Market.pdfSeminar 2009-Bankruptcy & Foreclosure.pdfSeminar 2009-Municipal Strategies.pdf