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The Real Estate Crisis: Finding Great Real Estate in Tough Markets!

• Finding those great locations• Demographic Modeling and Site Selection• Personal Networks – Brokers, Developers• New Trends• Systems and Methods Utilized to Maximize Development

Moderator: Joseph Ciardiello, SVP Acquisitions, National Retail PropertiesSpeakers: Ryan Cunningham, President, Javelin Solutions

Salman Siddiqui, Director, Duncan Brands, IncYaron Goldman, Franchisee, McAlister’s Deli

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The Real Estate Crisis

Ryan CunninghamPresident

Javelin Solutions

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3,000 Franchise Systems Today

0100200300400500

2003 2004 2005 2006 2007

so u rce : F ran D ata

N e w F ra n c h is e s /Y e a r

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Construction/Vacancy Trends

0

20

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60

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100

120

140

160

180

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2003 2004 2005 2006 2007 2008

so u rce :R EIS /C o S ta r

Mill

ion

SF

6 .4

6 .6

6 .8

7

7 .2

7 .4

7 .6

% V

acan

t

S F B u iltV ac anc y R a te

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2006 Demand Retail Space

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0

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M S F N o n -F ran ch iseF ran ch ise

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2006 Supply Retail Space

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0

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M S F

so u rce : C o S tar

P re -L easeA va ilab le

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Retail Rate Trends

2003

2004

2005

2006

2007

$ 13$14$15$16$17$18$19

so u rce: R E IS

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Trends in RE Development

• Delays in Lifestyle Centers due to Residential Slowdown

• More Focus on Tenant Mix• Media/Promotion/Marketing Funds• Significant Increase in Op. Expenses/Taxes• Increased Focus on Tenant Credit• No Tenant Improvements/Negative Shell• Harder to Obtain Use Exclusives

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Leveling the Playing Field

How to Offset the Rising Cost of Retail Space

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Piggybacking

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Symbiotic Relationship

• No site selection search• Faster to market• Existing customer base• Less expensive space

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Multiple Footprints

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Pursue Tertiary Markets

• Grand Junction, CO• Holden, MA• Pensacola, FL• Vancouver, WA• Jacksonville, NC• Albuquerque, NM• Lenexa, KS• Yardley, PA

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Non-Traditional Space

• Medical Centers• Resorts• High Schools/Colleges• Airports• Sporting Venues• Business Campuses

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Non-Primary Space

• Second Floor Retail• Office Space• Failed Big Boxes• Backroom Space• Limited Visibility• Flex Space

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“Research and historical data indicate that franchisors who seek out and

adhere to ‘best real estate practices’grow faster, significantly reduce store opening times, have higher sales and

build better brands’Franchise Times

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Components of a Site Selection Process

• Finding/Educating/Training Local Broker• Establish Space & Financial Parameters• Run Site Specific Demographics• Conduct a Comprehensive Market Survey• Develop a Standard Letter of Intent• Establish Mandatory Lease Guidelines• Set Up Weekly Project Update Calls

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The Real Estate Crisis:Finding Great Real Estate in Tough Markets

Salman SiddiquiDirector

Dunkin Brands, Inc.

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Agenda__________________________________________• Are we in a Real Estate Crisis?

• Developing Growth Strategy

• Dimensions of Real Estate Decision Making

• Site & Trade Area Evaluation

• Creating Leverage

• New Trends

• Summary

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Are we in a Real Estate Crisis?____________________________________

• Strong Growth in Franchising & Development Industries

• Many are successfully building everywhere….while others are failing?

May be the Crisis is not in Real Estate Industry?

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Developing Growth Strategy__________________________________________

Who is your Customer?

Market Planning & Demographics

What are your Growth Priorities?

Growth Strategy

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Many Dimensions of Real Estate Decision Making__________________________________________

Growth Strategy

Economics

Site Quality Demographics &

Sales Expectations

Real Estate: Sweet Spot

LocalNational

Local

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2 3

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Site & Trade Area Evaluation __________________________________________

Trade Area• Demographics

• Generators

• Competitors

• Proximity

Site• Location

• Visibility

• Access

• Economics

• Misc. – Parking– Interior Considerations– Other

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Site Decision- Its is about Trade-off’s__________________________________________

• Arriving at the right balance-– Real estate selection is an art & a science coupled with judgment,

above all. “ It is a disciplined process”

• Sales Forecasting Model’s– When it makes sense?– Positives– Negatives

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Creating Leverage__________________________________________• How to get the best locations in a tight real estate market?

– Brokers & Networks• Exclusive or Non-Exclusive

– Preferred Developers • Large• Small

• How to afford the best locations?– Higher Cost vs. Expected Sales Maximize Revenue/Square feet

• Sales to Investment Ratio– Portfolio Approach

• Matching opportunity to Asset type– Free Standing vs. End. Cap or In-line– With or Without Drive thru– Co- Branding– Carts/ Kiosks/ Gas & Convenience– Alternate Points of Distribution

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Examples of Portfolio Approach__________________________________________

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Disciplined Site Evaluation- An Example__________________________________________________

Site Criteria Table Grade 1-10 Weight 1-5 Points

Traffic Count; Cars or Pedestrian Count

Visibility Access

Zoning

Parking

Condition of Premises

Functionality of Premise

Ethnic Mix

Age

Median Income

Directional Growth of Area

Crime

Availability of Qualified Employees

Labor rates of Pay

Terms & Rental rate

etc.

TOTAL

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New Trends in Real Estate Landscape__________________________________________________• CVS & Walgreens cornering of corners

– CVS- testing in store clinics

• National and Regional Banks– From Internet back to street corners

• Fresh & Easy- Carafour vs. Walmart

• C-Stores becoming Larger- Multi-branded

• Small to Mid Sized Developers (Shopping Centers 4000-10,000 square feet)

– Funded by Private Equity, Street or Individual Investors– Cap rate driven market for small shopping centers– Risk

• Maximizing Foot Print- Portfolio Approach

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Summary__________________________________________1. Understand your Customer

2. Develop a Growth Strategy

3. Understand Your Elements of Success

4. Trade Area & Site Analysis--- Process and Trade offs

5. Develop various footprints that work

6. Leverage

There is no Crisis in Real Estate Industry…

It is a Disciplined Approach!

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THANK YOU!

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The Real Estate Crisis:Finding Great Real Estate in Tough Markets

Yaron GoldmanFranchisee

McAlister’s Deli

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Areas of Focus

• Site Modeling• Franchisor vs. Franchisee development

expectations• Realistic Sales Predictions• Building Relationships in the Market

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Site Modeling

• Benefits both Franchisor and Franchisee• Identifies all high potential target trade areas

by DMA• Predicts new site sales potential and

cannibalization impact • Annual in-store research to keep model up to

date

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Benefits Both Franchisor and Franchisee• Helps reduce lower performing units• Takes emotion out of selection process• Helps reduce franchisee turnover• Helps increase sales and profitability• Objective way to determine full market

potential

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Identifies all high potential target trade areas• Takes consumer research and overlays it on

top of known trade area demographics• Where not to go!

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Predicts new site sales potential and cannibalization impact

• Proposed Unit• Market Average (takes into account

operations)• System Average

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Annual Sales Potential(in thousands)

$1,555

$1,359

$1,271

$0 $500 $1,000 $1,500 $2,000 $2,500

System Average

Existing Market Average

Proposed Store

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Annual in-store research to keep model up to date• Total system commitment is necessary• Identifies who your customers are • Identifies where they are coming from• Identifies who your competitors are• Needs to be done every year

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Case Study #1

Real Estate Quality: Below AverageOperations Quality : Above AverageCurrent Sales : $973,091Upside Potential : $1,070,000 - $1,175,000

Rent for 4000 square feet: $20/footRent as a percentage at minimum potential: 7.47% EBITDA of 15%: $160,500

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Case Study #2

Real Estate Quality: Above AverageOperations Quality : Below AverageCurrent Sales : $1,306,334Upside Potential : $1,429,000 -$1,574,000

Rent for 4000 square feet: $25/footRent as a percentage at minimum potential: 6.9%EBITDA of 16%: $228,640

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Case Study #3

Real Estate Quality: Above AverageOperations Quality : Above AverageCurrent Sales : $1,482,000Upside Potential : $1,563,000 - $1,6720,000

Rent for 4000 square feet: $30/footRent as a percentage at minimum potential: 7.6%EBITDA of 17%: $256,710

46Franchisor vs Franchisee DevelopmentExpectations

• Use unbiased information• Be realistic• Franchisor Support• Franchisee expertise/capital

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Realistic Sales Predictions

• Use Site Model• Run Pro-Forma with the system average• Understand your market

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Building Relationships in the Market

• Experienced Real Estate Broker• Network in your market with developers

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THANK YOU!

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Q & A