Alternative anchors, who are they and where can you find them?

With vacancies rising and dark space becoming harder to fill, a concept that many may not be familiar with is beginning to come to the forefront. That is of using restaurants to replace anchors and draw traffic.

I first was introduced to this concept in 2005 during my time with Casto Lifestyle Properties in Florida. I had the privilege of working with/for Mr. Brett Hutchens (President) who was one of the pioneers of this concept.

Brett brought the concept into existence during a total makeover of the old Winter Park Mall, in Winter Park, FL. For those unfamiliar with the mall, this is one of the first malls in which the term "Lifestyle Center" was borne from. The old enclosed mall became what is now Winter Park Village, a collection of office, retail and residential components. Winter Park Village hosts a complimentary mix of entertainment, shopping, dining, living and grocery anchors which were way ahead of their time.

The tenant mix includes Regal Cinema's, Cheesecake Factory, Albertson's (Now Publix), The Loft's at Winter Park Village (53 loft style apartments), Brio Italian Restaurant, P.F.Chang's, Border's books, Ruth's Chris Steakhouse and other national and local retailers.

Mr. Hutchens outside the box thinking and ability to exploit opportunity where few could imagine allow this center to continue to thrive even in this economic climate.

Hutchens ability to view high end, sit down restaurants as drawing cards made people stand up and take notice. He realized then that people would pay for an "experience". A place to see and be seen in their local community.

In my view, what Hutchens did was play to certain truths based in economic reality. Regardless of economic times, people will go out to eat and they want to be entertained. He put the restaurants in position to be the anchors then in-filled around them.

While the restaurants alone may have been enough to insure survival, the addition of several other key components cannot be overlooked.

First are the office tenants. Those tenants allowed the restaurants and small shops to maintain balance. Having a captive audience in close proximity during lunch hour five days a week (and even dinner) boosted foot traffic throughout the week which in turn drove sales through slow periods. Second, the incorporation of a sub-market of residential units by converting the second floor of an old Dillard's store into Loft Apartments allowed not only traffic, but an ingenius use of former big box space.

While that would seem to be good enough for many, he went one step further and placed a 50,000 sf. grocery anchor within the center which further strengthened the center's ability to keep everything "in-house".

When you combine the above factors with an on-site cinema there is no real reason to "leave home".

Having experience in this concept it is my opinion that higher-end, sit down restaurants are a better option than using big box operators to fill space. Alternatively, using that same big box space to your advantage by creating something unique within the market offers incredible opportunity as well.

I think Hutchens only real risk on the project was that of Regal Cinema's. As some of you may recall, there was a time pre-2005 that movie houses were limping along and many had shut their doors. I think in this case he had hedged his bets by again using the restaurants to fuel the theater, where the two actually compliment each other. The overall "lifestyle" concept was certainly worth the risk.

My main concern with big box retail or cinema's has always been what is your alternative strategy should they fail?

Fortunately, I think Hutchens may have already given us the answer.

I'm fortunate to have learned from some of the best and brightest entrepreneurs in the real estate business. I place Brett Hutchens at the top of that list not just for his entrepreneurial ability, but he was always honest and genuine in all of his dealings as well as with me on a personal level.

So, if you are looking for viable alternatives to fill big box space or add life to your center, food and entertainment are clearly the choice to weather this economic storm.

Co-Tenancy Could Lead to Retail Bankruptcy

In a recent Globe St. article Ms. Terry Sheridan sheds light on the Co-Tenancy lease clause that was so prevalent in the last decade or so.

http://www.globest.com/news/1339_1339/florida/176671-1.html

While the article sheds light on the subject for those who were unaware, it gives no specific information as to how to combat the problem. Getting current tenants to remove those clauses from their leases in this economy is not very likely to happen without some compelling reason for them to come to the table. Retailers I'm familiar with are using that leverage as a hammer to keep up the pressure on Landlords. Most (tenants) are immune from Landlord BK's and unless a mall loses a significant number of tenants there is no reason to consider re-negotiating on their part. Even with that scenario, it probably makes more sense financially for the tenant to close its doors than to stay and anchor a declining mall.

So how do Landlords stem the flow of upcoming Co-Tenancy issues? In my opinion Landords need to begin researching how those clauses will effect the bottom line at each property BEFORE it becomes an issue. Landlords who are proactive in this approach will fare better than their conterparts.

The most significant part of the Co-Tenancy clause is the negotiated rent reduction or "alternative rent". Landlords and their Property Managers should be analyzing and projecting adjusted cash flows using a worst case scenario. Assuming the worst case as a starting point will allow for strategic planning to begin earlier and anticipate changes before they occur.

The next step would be to fully investigate cost centers to understand what makes up the operational expenses of the center. Managers need to know not only what the expenditures are currently, but need to drill down to fully comprehend what makes up those individual numbers.

Using this information as a baseline, Landlords and Managers can now work backward and formulate a management strategy to keep the property stabilized through the downturn. Using the theory for "every action there is an equally opposite reaction", a plan can be formulated to adjust expenditures accordingly to meet revenues.

While this is easier said than done, the landlords first priority is to keep the lights turned on and the mortgage paid. It may be necessary in dire circumstances to curtail all discretionary expenditures including basic upkeep such as landscaping and janitorial etc. Some of this can be

overcome through effective planning assuming you have been providing routine maintenance to this point in time.

The sooner management gets a handle on Co-Tenancy the better prepared they will be to weather the economic storm that is about to ensue.

Sam Zell and The Residential Housing Market

In a recent Reuters news article, Sam Zell head of Equity Investments proclaims an end to falling home prices by the end of the summer in a speech he gave at the recent ICSC convention in Las Vegas.

While I do not have the weight of Mr. Zell, I have been telling everyone within earshot since late 2007 that this downturn (including falling real estate prices) would begin to slow between late September 2009 and February 2010.

While economists "officially" stated the recession started in September 2007, the reality is it started in April (and when this is over, it will be adjusted and I told you so!) when gas prices began to crimp spending.

In my role as GM of an asset for which I travel more than 100 miles a day to get to the office, I felt the pinch then and adjusted personal finances earlier than others. Further, as I was looking for an investment property in Nevada in December of 2007, it was already evident that home prices had fallen 10% by October of 2007 and as I did my valuations, it was clear we could easily slip another 10-20% (which we did).

What Mr. Zell said is nothing new, I guess it just needs to come from a source that's quotable or printable. However, my disagreement with Mr. Zell stem from the job situation. We still must shed another 2 percentage points in unemployment before we will begin to see a solidifying stabilization. The key benchmark for me, will be when weekly jobless claims move closer to the 300,000 level. Some will argue that weekly claims that continue to move downward for 3 or 4 consecutive weeks will trigger the first signs of stabilization. But I think those assumptions are erroneous.

My conclusions are that even though unemployment claims may be slowing, it does not account for those who are no longer counted, therefore, it gives the appearance of stabilization. What Mr. Zell (and many others) do not understand is that until job reports stabilize, there can be no stabilization in the housing market.

Further, it is unlikely that banks will be loosening credit during this period as people continue to lose jobs and personal bankruptcy protection rises. What we are likely to witness in the times ahead is class warfare. Pitting the haves vs. have-nots when it comes to purchasing real estate.

Another consideration that isn't being addressed is what will be the new acceptable credit score for home purchases? Will it be 570? 600? 630? It cannot continue to be 700 or higher. There are too many people with poor credit (or have recently filed BK) who will not qualify for 7-10 years if it remains at 700 or 720. How will they get loans? Credit of any sort?

No, housing stabilization is not coming soon and it is a fallacy to believe so given the other factors I just mentioned.