PLACES: Issue 3 by Madison Marquette

www.places–magazine.com | 2009

Opening for Business The Rise of the Restaurant Anchor The Future of Retail A Publication of Madison Marquette

“All In” in Las Vegas

what makes a difference. “Czar is terriﬁc… incredibly organized and have everything under control.”

architecture

Angela Sweeney Vice President, Property Marketing Madison Marquette

brand awareness

technology

engagement

strategic marketing

increased mindshare

Madison Marquette ICSC Exhibit Scope of work: Design/Fabrication/Storage/I&D Labor

install & dismantle

“Czarnowski made us feel as if we were their only client at the show. “

accomplished

Starbucks Coffee Company

events

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involvement Starbucks Coffee Company ICSC 2008 Exhibit Scope of work: Design/Fabrication/Storage/I&D Labor

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2009

A Publication of Madison Marquette

www.places-magazine.com

Creating Special PLACES PUBLISHER Kurt Ivey

ur third issue goes to press amid small indications that a global economic rebound may be afoot. Against this backdrop, PLACES examines many of the challenges confronting our industry and the trends that will shape its future. Many of the challenges we face today are the result of retailer contraction and the drop in consumer spending. In this issue we tackle how to respond to rent relief requests, what resources are best to help source new leasing leads, how to foster local retail entrepreneurship and what opportunities exist in specialty retailing. We are very pleased to showcase some of the industry’s most important voices, including Tom Stemberg, the legendary founder of Staples and Managing Director of Highland Capital Partners, a leading venture capital fund for retailers. This issue also looks forward to the trends that will shape the industry in the years ahead. We highlight a ground-breaking report by TNS Retail Forward and PricewaterhouseCoopers on the future of retailing. We examine these trends and see how they are already playing out in select projects around the country. Another piece looks at the rise of restaurants as anchor tenants in retail destinations and includes a Q&A with Panera Bread’s top real estate strategist. Other stories in this issue include an exclusive interview with Washington, D.C. Mayor Adrian Fenty, who has taken an active role in promoting the city’s growing retail and entertainment districts. We also examine the future of two unique markets — Las Vegas and Bellevue, Washington. How and when we will come out of this economic recession remains uncertain, but as an industry we must stand ready to respond and capitalize on the inevitable rebound. I encourage you to join our dialog by visiting our blog (http://blog.places-magazine.com) and following the PLACES Retail Real Estate News feed on Twitter (http://twitter.com/RetailRENews).

Amer Hammour Chief Executive Ofﬁcer Madison Marquette

SVP, Corporate Marketing & Communications

EDITORIAL Editor-In-Chief Jeff Ingram, Ein Communications

DESIGN Design Director Jacki Silvan, Senior Graphic Designer

PLACES TEAM Angela Sweeney, VP, Marketing Walter Bialas, VP, Research Bryan Steffen, Research Associate Erin Mercer, Investment Coordinator Isis Black, Marketing Coordinator

EDITORIAL BOARD Phil Akins Merle Brann Tom Gilmore

Paul Harnett Peter Jun Kelly Maher

Laurie Malasky Virginia Pittarelli Scott Trafford

CORPORATE HEADQUARTERS 2001 Pennsylvania Avenue, NW, 10th Floor Washington, DC 20006 (202) 741-3800 NEW YORK 461 Fifth Ave, 12th Floor New York, NY 10017 (212) 255-2900

SAN FRANCISCO 909 Montgomery St, Suite 200 San Francisco, CA 94133 (415) 277-6800

PHILADELPHIA 1717 Arch St, Suite 3930 Philadelphia, PA 19103 (215) 399-5600

LOS ANGELES 111 S La Brea Ave, Suite 300 Los Angeles, CA 90036 (310) 443-7500

CHARLOTTE 4720 Piedmont Row Dr, Suite 421 Charlotte, NC 28210 (704) 625-7000

SAN DIEGO 8899 University Center Lane San Diego, CA 92122 (858) 622-0858

FT. LAUDERDALE 110 E. Broward Blvd, Suite 1530 Ft. Lauderdale, FL 33301 (954) 712-1339

SEATTLE 401 Broadway East, Suite 223 Seattle, WA 98102 (206) 322-1610

MADISON MARQUETTE LEADERSHIP Amer Hammour Chief Executive Ofﬁcer

Gary Mottola President, Property Investments

Peter Jun Chief Operating Ofﬁcer

Phil Akins Chief Financial Ofﬁcer

Greg Bergan EVP, Operations

Kurt Ivey SVP, Corporate Marketing & Communications

David Brainerd Managing Director, Property Investments

Eric Hohmann Managing Director, Property Investments

Jay Lask Managing Director, Property Investments

PLACES MAGAZINE

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PLACES

TA B L E O F C O N T E N T S

SPECIAL SECTION

MARKET WATCH

32 Geek Chic? The Rapid Growth of Tech-Happy Bellevue, Washington

36 “All In” in Las Vegas

Maybe the House Doesn’t Always Win

Opening for Business Nuturing Entrepreneurship in an Economic Recession

TOOLBOX

FEATURES

40 Seeking Overseas Expansion Select U.S. Retail Concepts Opening Stores Internationally

Q&A

08 The Rise of the Restaurant Anchor Insights and Trends

22 Keeping Focus on Long Term Value A View from the Asset Management Ofﬁce

PLACES MAGAZINE

14 Generating Leads The Best Tools to Source Leasing Prospects

Adrian Fenty

Specialty Retailing

Big Box Retailing

Property Valuation

Rent Relief

05 46

STARTING PLACES

Mayor of the New Financial Capital of the World

Helping Centers Overcome New Vacancies

What’s Next?

Addressing Transparency

Navigating Options & Alternatives

24 The Future of Retail Evolving Preferences that Will Shape Retail Real Estate

CONTRIBUTORS 3

RETAIL OFFICE VALUATION SERVICES INDUSTRIAL MULTIFAMILY

Our Valuation Services Group is one of the largest fully integrated real estate valuation and consulting organizations in the world, acting as the foremost valuation advisor to corporations, institutional investors, and lenders on critical debt and equity investment decisions. We provide appraisal services, highest and best use analysis, dispute resolution and litigation support, along with specialized expertise in various industry sectors. With over 575 valuation professionals in 90 offices around the globe… We’re There.

SPECIALIZED SERVICES AFFORDABLE HOUSING Rick A. Zbranek 713.963.2863

GOVERNMENT AFFAIRS Kathleen Holmes 602.229.5837

PROPERTY TAX Edward Williams 201.508.5216

AGRIBUSINESS D. Matt Marschall 760.707.1207

GREEN & SUSTAINABILITY Theddi Wright Chappell 206.521.0241

RESIDENTIAL DEVELOPMENT Brian J. Curry 858.334.4051

APPRAISAL MANAGEMENT Clarke Lewis 631.234.5050

HOSPITALITY & GAMING Eric B. Lewis 212.841.5964 Mark D. Capasso 213.955.6442

RETAIL Richard W. Latella 212.841.7675

FINANCIAL ADVISORY SERVICES Joseph J. Vella 415.658.3629 FINANCIAL REPORTING Marius Andreasen 312.470.1881 GOLF Rick A. Zbranek 713.963.2863

LITIGATION SUPPORT Richard Marchitelli 704.916.4447 PORTFOLIO VALUATION George Rago 212.841.7851

www.cushmanwakefield.com/valuation

SELF STORAGE R. Christian Sonne 949.930.9241 SENIOR HOUSING/HEALTHCARE Gerald Rasmussen 203.326.5884 Meg Howe 704.900.8256

WE’RE THERE

PLACES G]c` a]c`QS T]` (

Starting PLACES Insights, highlights and key information to navigate the retail real estate industry.

ach issue of PLACES will start right here. The Starting PLACES section of PLACES magazine is devoted to highlighting the best posts from our blog (blog.places-magazine.com), providing updates from previous articles and suggesting appropriate resources to better understand the ever-changing retail real estate environment.

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Charlotte Light Rail

PLACES Continued LAâ&#x20AC;&#x2122;s Hot Retail Destination

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In the last issue of PLACES, LA-based SVP of Investments, Tom Gilmore wrote an article describing one of LAâ&#x20AC;&#x2122;s hottest retail districts. While impacted by the current economic and retail environments, the area remains a primary shopping district for both the local Los Angeles market and visiting tourists. The area runs from La Brea Avenue to Robertson and encompasses the cross streets of Melrose Avenue, Beverly Boulevard, and Third Street. Today, the street front retail is a mix of eclectic shops that range from vintage clothing to ďŹ ne home furnishings in a gritty urban backdrop. Madison Marquette recently acquired 1.9 acres on 18 parcels along South La Brea Avenue between 1st and 2nd Streets in Los Angeles, California. The acquisition is part of a joint venture with the previous landowner Bomel Companies. The acquisition encompasses almost the entire block and includes seven buildings totaling 87,000 square feet of existing retail and oďŹ&#x192;ce space. Madison Marquetteâ&#x20AC;&#x2122;s preliminary plans call for rehabilitating the deteriorating structures and re-conďŹ guring them for retail, restaurant, and oďŹ&#x192;ce uses. Large format retail, eclectic shops, and new residential housing already surround the block. Other nearby retail destinations include the Farmerâ&#x20AC;&#x2122;s Market, The Grove, Third Street, and Melrose.

PLACES MAGAZINE

The last issue of PLACES reported on the initial success of the light rail system in Charlotte and the rise of the historic Southend neighborhood. Ridership has declined since that report, falling 18% from the peak last Julyâ&#x20AC;&#x201C;January. Still, with an average of just under 14,000 trips per month in January 2009, ridership is up 17% year-over-year. The Charlotte Area Transit System (CATS) attributes the decrease in ridership from last summer to lower gasoline prices and the growing unemployment rate in Charlotte. Regarding the unemployment situation, CATS Chief Executive Keith Parker explained, â&#x20AC;&#x153;Locally itâ&#x20AC;&#x2122;s gone up 50% in an 18-month period. People use us to get to and from work â&#x20AC;&#x201D; thatâ&#x20AC;&#x2122;s what we are for.â&#x20AC;? A Marcus & Millichap report projects Charlotte will lose 22,000 jobs in 2009, after losing 15,600 last year. Still, the report also cites that retail demand remains consistent and that 1.2 million square feet of retail space will come online in 2009. The residential sector has slowed as a dozen projects along the light rail line have now been delayed or canceled as developers decide to wait for the economy and housing market to recover. Despite the delays, developers remain bullish on the transit corridor. â&#x20AC;&#x153;As we come out of this cycle, I canâ&#x20AC;&#x2122;t imagine a better place to be,â&#x20AC;? says Greg Pappanastos, president of Argos Real Estate Advisors. The city of Charlotte is also still bullish on mass transit, voting in April to extend the current blue light rail line and build the new purple line North from the city, despite higher cost projections and lower revenue.

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PLACES S TA R T I N G P L AC E S

Best of the Blog

order to sell oﬀ excess inventory from their ever growing list of clients.

own budgets issues and relying on taxes for a large portion of their funding.

From a center owner’s perspective, these opportunities can generate substantial cash ﬂow while the leasing process runs its course. However, it is important to consider several factors before proceeding:

Lowering real estate taxes can have a substantial impact on tenants’ total occupancy costs. In some cases, the cost savings could even be considered in lieu of rent relief. Reducing the tax burden will help keep existing tenants in place, could be a competitive edge over other centers in leasing, and is a powerful demonstration of center management’s commitment to keeping operating costs as low as possible.

• Will liquidation stores be selling merchandise that existing retailers are selling at full price? If so, restrictions need to be put on what types of merchandise can be sold. • Does a liquidation concept harm the upscale look and feel of the center? If so, partner with a liquidator who understands how to design a temporary store that doesn’t look temporary. Despite the stereotype, there are some very sophisticated new concepts.

The Liquidation Store Dilemma

BusinessWeek recently tackled the complex world of merchandise liquidation and suggested that liquidators are overwhelmed with the amount of product moving through the system. One by-product of this swelled pipeline is that some liquidators are in talks to bring merchandise back to the “scene of the crime” and create specialty liquidation events in vacant space at malls and other traditional retail destinations. Liquidators like Liquid Event Sales and AMS Liquidators (Disney Character Warehouse Liquidators) are in talks to lease space recently vacated by big boxes in

• Hosting liquidation stores should never come at the expense of traditional leasing eﬀorts. Liquidation services are at an all-time high because of the dismal holiday season. Retailers have responded by scaling back inventory. No one should expect these temporary tenants to transition into long term leases.

The tax assessment and appeals process is diﬀerent in every municipality. The underlying philosophy to a successful appeal is gathering and presenting the most accurate and relevant information. If done properly, the investment of time and resources is rewarded handsomely. Ending Insanity on Madison Avenue

Filing Tax Appeals

USA Today’s article about New York’s famed Madison Avenue vacancies is more than ﬁve years in the making. The vacancy rate on Madison Avenue is certainly among the highest and most noticeable in the city, but it does not come as much of a surprise to those familiar with this market.

There are very few silver linings to the slumping economy and falling property values. Lower tax assessments is one, but getting this beneﬁt requires taking a proactive approach as state and local jurisdictions will be reluctant to lower taxes. They’re struggling with their

Rents over the past ﬁve years have grown at an alarming rate. Other than Fifth Avenue, Madison was the ﬁrst retail strip in New York to break the $1,000 per square foot barrier. Once it did, it quickly became $1,500 per square foot and until the recent downturn asking rents

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PLACES S TA R T I N G P L AC E S

exceeded $2,000 per square foot. The fact that space did not sit on the market for very long emboldened landlords to continue to charge such astronomical rents. International luxury brands and jewelry retailers quickly snatched up the space and in many cases the high rent numbers were absorbed in part by their large marketing budgets. Years ago, Madison Avenue was the only destination for luxury shopping in Manhattan. Much of the rest of Manhattan has changed while the Madison rents skyrocketed. Neighborhoods like SoHo and The Meatpacking District became viable alternatives for high-end retail. Retailers, like Moschino, who only require one Manhattan location, opted to move to West 14th Street for a fraction of the cost that would have been required to renew on Madison. These newer neighborhoods oﬀer brands the ability to appeal to a younger, hipper crowd — one that might reject Madison Avenue’s perceived stodginess. The real victims of the Madison Avenue collapse have been the smaller, local brands. Forced to renew at rents three to four times what they had been historically paying, many tenants have found themselves underwater and unable to stay aﬂoat. There is a positive side of all this turmoil, however. Once rents correct and stabilize at a lower number, it will allow these smaller retailers to return to the market. Not only will this relief be good for the retailers, it will add diversity and charm to Madison Avenue and once again make it one of the world’s most unique shopping destinations.

What the Experts are Saying

http://twitter.com/DirtLawyer

Attorney with a practice limited to commercial real estate and related matters; Chair, River West National Title & Escrow LLC

Retail Real Estate on Twitter

PLACES magazine is now on Twitter, the popular social networking site that allows people to exchange thoughts and links in 140 characters or less (for reference, that sentence was 145 characters). To follow us on Twitter visit http://twitter.com/RetailRENews.

Sample Tweet: ICSC tells me Illinois may want to ban percentage rent in commercial leases. Are they kidding??? http://twitter.com/TalkRetail

Corporate strategist at major US retailer. My views are my own and don’t represent any company.

Although communicating in short snippets is diﬃcult at times, it tends to crystallize thoughts and information sharing better than blogs or email. Many people share links to larger new stories, blog entries and research reports posted elsewhere on the Internet. Others have found more novel ways to leverage the viral power of the site. For instance, Andrea Wasserman, a retail strategist based in Seattle has developed a devoted following to what she calls “Mall Walk Wednesday” (#mallwalkwed). Each Wednesday retail experts and non-experts alike visit some of the most popular retail concepts at malls around the country and report on what they are seeing. It is real-time intelligence that oﬀers tremendous insight into industry trends. Here are three retail-related professionals that everyone in the industry should follow:

Sample Tweet: Anthropologie - extrmly busy, conversion hi, fabulous product, little on sale; such a fun lifestyle concept w/ rm 2 grow $URBN #mallwalkwed http://twitter.com/jlkresearch

Consulting practice specializing in retail location research, GIS, competitive intelligence, and demographic analysis. Sample Tweet: Wallpaper Magazine oﬀers their 2009 survey of cutting-edge retail design from around the world...http://tiny.cc/aLOqw If you have a question, comment, or topic that you feel needs to be addressed either on the blog or in a future issue of PLACES, please email Kurt Ivey at kurt.ivey@madisonmarquette.com or 202-741-3818. P

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FEATURE Langosta Lounge Asbury Park, New Jersey

The Rise of the Restaurant Anchor Insights and Trends

By Eric Rubin

here is a growing wisdom among retail developers and owners that great restaurants are essential anchors of a successful retail destination. Restaurants, both full-service and quick-service, are no longer afterthoughts in retail development and are particularly prominent in projects seeking to become the center of a community’s social life — as many of the new lifestyle and town center projects aim to be. The growing prominence of restaurants in retail destinations mirrors the growing role that restaurants play in the lives of consumers. Dining out has become an ingrained part of American culture and in many ways serves as the primary form of entertainment and social activity. In 1955, just a quarter of every food dollar was spent on restaurant dining versus nearly half today, according to the National Restaurant Association. This dramatic shift has propelled steady inﬂation adjusted sales growth in the industry for more than three decades.

Good Indicators

The restaurant industry has not been immune from the economic recession. In fact, 2008 was the first year on record it experienced negative inflation-adjusted growth of more than one percent. However, the National Restaurant Association expects a slight improvement in 2009. There are several indications that the economic downturn will not impact the industry’s long term growth forecasts. Some evidence indicates that consumers are still eating out at high rates, but are opting to trade down from full-service to quick-service restaurants (a phenomenon already established in retail categories). Doug Schnell, Vice President, Real Estate for Panera, agreed in an interview with PLACES that they are seeing some additional diners who would have chosen a full-service restaurant before the downturn. Estimates also confirm this phenomenon. Between 2008 and 2009, quick-service restaurants are actually forecasted to grow sales slightly despite a significant decline for full-service restaurants.

MADISON MARQUETTE

FEATURE There are other indications that restaurants are becoming more appealing to consumers. A November 2008 National Restaurant Association consumer survey found that 68% of adults said restaurants offer flavors and tastes that cannot be duplicated at home. Approximately two out of three consumers said the quality of restaurant meals is better than it was two years ago and that there are now more restaurants at which they enjoy dining. Even more impressive, two out of five consumers said that eating out is now just as cost-effective as cooking at home and cleaning up. High Stakes

The long term growth indicators for the restaurant industry only suggest that their role in retail destinations will continue to strengthen. The shift is both an opportunity and a challenge for center owners. Traditionally, restaurants are a high volume, low margin business. Their ability to generate extremely high sales per square foot often translates into higher rents and opportunities to capture additional revenue through percentage rents above a certain threshold. The downside to restaurant tenants are the extremely high build-out costs required to open them and the heavy toll they extract on common area maintenance expenses (more cleaning, waste disposal, utilities, etc.). Local operators are also notoriously susceptible to failure. Landlords often have to provide substantial upfront tenant allowances to get a popular restaurant concept to open. However, the costs can be recaptured through long lease terms, higher rents, and the traffic they draw to the center. The other benefit is that once a restaurant space has been built out, replacement tenants are much easier to find because the initial infrastructure expenses have been incurred.

Paul Mangiamele, President and CEO, of Salsarita’s Fresh Cantina, says many restaurants in today’s environment are focusing on sites in great trade areas where existing concepts are not performing well. “Taking an existing restaurant space will have a considerable amount of savings from a construction standpoint. Until the lending environment starts loosening the purse strings, this will be a tactic by many restaurant chains,” he said.

tastes. Regional and national chains are best at providing a consistent dining experience that consumers crave and appreciate. They also have deeper resources and are more likely to become stable members of the tenant mix — an important element because of how expensive it is to replace restaurants. Retailers, historically, have not always welcomed restaurants in their midst. Jay Chambers, a noted tenant

Once a restaurant space has been built out, replacement tenants are much easier to ﬁnd because the initial infrastructure expenses have been incurred. Finding the Right Mix

Creating the synergies between restaurants and retailers and among the restaurants themselves is critical to maximizing a center’s performance. A good restaurant mix captures various price points and cuisines. A mix of quick-service, casual dining, and fine dining concepts is important. Depending on the size of a center, it is also important to appeal to different palates with seafood, steak, Asian, Mexican, Italian and French, among others. Centers should also have a healthy mix of local, regional, and national concepts. Often local operators are the best sources of unique and compelling menu items and ambiance. Their flexibility makes them ideally suited to capitalize on the latest trends and to cater to local

representation specialist throughout the Carolinas and the Southeast, says that attitude is now changing. REI opened a store last year in Biltmore Park Town Square, a new mixed-use lifestyle center in Asheville, North Carolina. Chambers said clauses in their lease did not allow for nearby restaurants. However, REI realized how well the synergy might be with the customer segment of a restaurant interested in nearby space and is currently negotiating an amendment to their lease to allow a particular restaurant to open at this speciﬁc location. Chambers is now seeing retailers and restaurants across the country allowing this type of change as they recognize how the dynamic between them increases traﬃc and sales. Carol Gilbert, a tenant representative specializing in restaurants on the West Coast, sees a similar acceptance Continues on page 10 >

ARE YOUR RESTAURANTS HITTING THE RIGHT NOTES? The National Restaurant Association analyzes the latest restaurant trends each year. Their analysis includes both operator and consumer surveys. Here are several of the top trends they identified in their 2009 Restaurant Industry Forecast.

Local Sourcing

Value

Healthy Eating

Consumers more than ever are passionate about eating local foods and generally knowing where their food is grown. Chefs believe this trend will continue to gain popularity among operators and consumers.

Value is the biggest buzz word for 2009 and perhaps moving forward in the minds of consumers.

76% of adults say they are trying to eat healthier today in restaurants than they were two years ago. Restaurants are answering that call and offering more portion options and health-conscious options than ever before.

Are you more likely to visit a restaurant that offers locally produced food items?

Would you patronize a full service restaurant more frequently if it: Offered discounts for frequent dining? . . . . 75%

Are restaurants offering more healthy options than two years ago?

Offered discounts for dining on less busy days of the week? . . . . . . . . . . . . . . . . . . . . . . . . . . 75% 30% No 70% Yes

12% No

Offered the option of small-sized portions for a lower price? . . . . . . . . . . . . . . . . . . . . . . . . . .68% Offered discounts for dining at off-peak times of the day? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64%

88% Yes

Sources: National Restaurant Association, Madison Marquette Market Research

PLACES MAGAZINE

FEATURE

DOUG SCHNELL VP, Real Estate Panera Bread

An Interview with Doug Schnell of Panera Bread daytime population density, the retail environment, and site characteristics. Panera Bread is a very flexible concept that allows us to pursue a wide range of development strategies ranging from a neighborhood grocery anchored strip center to a super-regional power center or mall location. Where a retail focus is lighter, we typically need stronger residential and daytime demographics. In terms of the site characteristics we seek, like most restaurants in the quick casual sector, we look for highly visible and accessible end-cap and freestanding locations. Where the option is available, we are also actively pursuing drive-thru compatible locations.

Panera Bread is one of the fastest growing quick-service restaurant concepts in the United States. To learn about their perspective on the relationship between restaurants and retail real estate, we asked their Vice President, Real Estate, Doug Schnell, a few questions. Q:

How is Panera responding to the economic downturn?

DS: Anchored by a debt free balance sheet and a concept that continues to see strong comps relative to the rest of the industry, we are looking at the current environment as a tremendous opportunity to continue our growth and improve our unit-level economics through lower occupancy. In addition, we believe that we will see more opportunities materialize in our targeted trade areas as many restaurant and conventional retailers are not able to survive as a result of the downturn. In short, we believe that the best time to grow is during a recession.

What co-tenancies are you most interested/concerned about?

DS: Not surprisingly, we view strong retail anchors as one of the key drivers of our performance in terms of extending the reach of our trade areas and driving additional traffic. As a concept that tends to skew more female, we are somewhat more focused on anchors and co-tenants that attract female shoppers. Because of our desire to locate near retail, and in light of the current environment, we are much more aware of our co-tenancy. We rigorously track distressed retailers, primarily in an opportunistic fashion in the interest of acquiring new locations, but also as a way of understanding our risk as we evaluate the co-tenancy of a shopping center.

Panera Bread, Issaquah Commons, Issaquah, Wa. Q: Q:

What changes have you seen in real estate?

DS: While there are fewer sites available because of the lack of new development, the competition for restaurant space is now less fervent. As one example, some of the most significant competition that we used to see for restaurant quality sites was from banks, which has now greatly subsided. In addition, the pool of restaurant competitors that are actively growing has declined. With our balance sheet and ability to generate traffic for a center, many landlords are now viewing Panera as an anchor in its ability to attract other tenants to a shopping center. Q:

What are some of your criteria for site selection?

DS: For Panera, every location decision is about evaluating the trade-offs between residential and

What trends will most impact your location decisions in the future?

The Rise of the Restaurant Anchor, cont. > Continued from page 9

of the harmonies between restaurants and retailers. “Developing synergy between the people who visit the restaurant and those who shop in the stores is an obvious path to enhance revenue productivity for both,” she said. Both Gilbert and Chambers also agree that location within a center is an important factor in attracting restaurants and making them successful. Chambers says they need good road visibility, signage, and access to parking. Gilbert says here clients also want to be near book stores and movie theaters, which she says can increase sales as much as 20–25%. Being near a hospital is also a draw for restaurants because they see opportunities to meet the needs of people who often come in during non-peak hours. For enclosed malls, one of the challenges is to use restaurants to activate the center without losing connection between the dining and shopping amenities. Restaurant pad sites can be a popular option for enclosed centers. However, the drawback is that they often fail to drive diners into the mall shops. Ideally, restaurants should be located near front entrances so that they are highly visible on the exterior and yet still connected to the common area or interior of the property. The importance of getting the synergies right between retailers and restaurants will only heighten as the restaurant industry continues to grow and diversify. As developers and owners continue to evolve retail destinations into places to live, play, and work, so too will their need to understand the role of restaurants in people’s lives. Eric Rubin (eric.rubin@madisonretailgroup. com) is Principal, Madison Retail Group in our Washington, D.C. ofﬁce. P

DS: Probably the single most significant change for Panera’s expansion is the shift from growth through new centers to growth through existing real estate. Quality locations are now much more difficult to identify and secure than two or three years ago. In this new environment, we have become and will continue to be much more proactive in our site selection process. This includes creating a comprehensive plan for each of our markets that targets the optimal intersection for each of our top trade areas. It also includes doing a full inventory of the top sites in each of our targeted trade areas. Through this process, our real estate managers and brokers are able to proactively seek existing locations rather than wait for availabilities.

McCormick & Schmick’s Grill, The Shops at Anaheim Gardenwalk, Anaheim, Cali. MADISON MARQUETTE

WASHINGTON DCâ&#x20AC;&#x2122;S PREFERRED RETAIL REAL ESTATE CONSULTANTS We provide strategic retail leasing and tenant representation services in major metropolitan markets

Partial Client List

throughout the United States, with an emphasis on the Washington DC and New York metropolitan

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areas. We value the long-term success of our clients and take a thoughtful, strategic approach to every assignment. As a result, we enjoy long-standing relationships with many top urban storefront owners, retail chains, institutional landlords and mixed-use developers. Our team has over 150 years of combined experience in retail real estate and draws upon an unparalleled passion for the business of retail.

The Washington DC office is headed by Jim Farrell, Michael Pratt, Chris Harlepp and Eric Rubin, Principals of Madison Retail Group.

/JLF #SPPLT #SPUIFST 8JMMJBNTm4POPNB 5SVF 3FMJHJPO 7JMMBHF 3PBETIPX i(PME $MBTT $JOFNBTu "OO 5BZMPS + $SFX .JDIBFM ,PST /FX :PSL $PNQBOZ

202-730-2000 | www.madisonretailgroup.com 2001 Pennsylvania Avenue, NW | 10th Floor | Washington, DC

Q&A

Q&A with Adrian Fenty: ADRIAN FENTY Mayor, Washington, D.C.

Mayor of the New Financial Capital of the World restaurants customer base. We have 25 million visitors come to Washington each year, they are seeking increasingly sophisticated activities and experiences. They want a unique and authentic Washington experience — they want to enjoy all that the city has to offer — beyond the monuments. That is exactly the kind of retail we would like more of — unique, authentic and interesting.

Many are calling Washington, D.C. the new financial capital of the world because of the enormous amount of public funds flowing into the financial markets. While that title is still up for debate, there is no doubt that the District of Columbia’s economy is being buoyed by the federal government’s growth. Washington is also benefiting from a string of successful revitalizations of residential and commercial districts throughout the city. Its new Major League Baseball team, the Nationals, debuted in a new stadium last year; the quality and quantity of retail, restaurant, and entertainment options downtown continues to grow. Since 2000, the city has added 55,000 new jobs and expanded office space by almost 15 million square feet. PLACES magazine recently had the opportunity to interview the Mayor of Washington, D.C., Adrian Fenty, who is once again pitching the District at this year’s ICSC RECon in Las Vegas. The Mayor, born and raised in Washington, knows the city inside and out. His parents still own and operate a very successful retail store, Fleet Feet, in Adams Morgan. Fenty received his law degree in Washington at Howard University and began his career in politics as a councilman in 2000 by defeating a four-term incumbent. After being re-elected in 2004 for a second Council term, Fenty made the decision to run for Mayor in the 2006 race. He won all 142 precincts in the city’s democratic primary and was sworn in on January 2, 2007. Mayor Fenty lives with his wife Michelle, and their three children, in the District’s historic Crestwood neighborhood. Q:

Penn Quarter, Washington, DC AF: There are two key categories we are targeting this year: Downtown, destination retail and neighborhood-serving retail. During the past decade our downtown has made an incredible transformation from a 9–5 office park to a vibrant 24/7 city center where thousands of people not only work, but live and play. High quality, convenient neighborhood-serving retail is not distributed evenly across the city. In too many cases, our residents still have to get in their cars and head to the suburbs to find the kind of shopping they would love to have closer to their homes. We lose more than a $1 billion in retail sales each year and we are working as hard as we can to reverse that trend. Q:

What message about the District are you delivering to retailers this year?

AF: We are open for business. Obviously, across the country and as well as the District of Columbia, we are enduring a very rough economic cycle. But here at home we are somewhat insulated from the stormy economic conditions. We have an incredible new administration in the White House. The federal government is still hiring. We are adding jobs. Investment is still occurring and we have a tremendous pent-up demand for new retail. Q:

What areas of the District are you most interested in promoting to retailers?

What impact do you think the Obama family will have on the local economy and on the local retail scene?

AF: ICSC is the event for the retail industry and we see this gathering as the opportunity to highlight — to the decision makers — all of the opportunities in our development pipeline. Q:

What retailers are you most interested in attracting to the District?

AF: Washington has come a long way during the past decade in becoming a culinary capital. We have some of the most inventive chefs in the nation. I think the emerging restaurant industry is really a reflection of the changing dynamics of the

Are there ways in which you would improve the retail development process?

AF: As Mayor, it is my job to make doing business in the District of Columbia as easy as humanly possible. That means streamlining the entitlement process and make the regulatory process consistently fair and predictable. Q:

How can developers and municipalities work together better?

AF: We need to let developers do what they do best — and that’s build things. As a city, we need to strive to make their jobs as easy as possible. Q:

AF: More than anything, the Obama’s have brought a sort of electricity to the District that we have not felt in some time. They take every opportunity to get out of the White House and explore their new city and we are happy to roll out the red carpet in any way we can.

As an ICSC convention veteran, what are your impressions about the event?

Do you support the “shop local” movement that calls on consumers to patronize local retail concepts and consume goods produced locally?

AF: Local, small businesses are the backbone of every city. They are an excellent place for entrepreneurship to thrive and they are an essential ingredient in building distinct and authentic neighborhoods. But every world-class city has to have a mix of both small, local and independent businesses as well as large national-brand retailers and we are working hard to make sure both types of businesses are not only welcome here, but have great opportunities to grow and thrive.

MADISON MARQUETTE

RETAIL DEVELOPMENT IN DC’S PENN QUARTER NEIGHBORHOOD

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AD DIT IO NAL 400,000 SQ FT M IX ED -U S E PLANNED H STREET

18 19 20

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6TH STREET

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24 Source: Madison Retail Group Washington DC

PLACES MAGAZINE

FEATURE

Generating Leads The Best Tools to Source Leasing Prospects By Denise Browning

easing professionals are facing an ever-challenging environment as vacancies rise and national tenants retrench.

show some general consensuses and also disparities based on years of experience. Trade Media

The “good old days” are gone. No longer are leasing representatives playing matchmaker — bringing together hot-to-trot retailers with landlords who have available space. For every national retailer with plans to open one new location, there are dozens of unanswered phone calls from local leasing professionals. Better odds are being found in the pursuit of local and regional concepts that were priced out of markets in previous cycles. This pursuit is not easy and relies less on the rolodex and more on research and on-the-ground intelligence. It is a matter of persistence, observation, networking, and knowing where to look. PLACES polled leasing professionals at various companies representing every region of the country and spanning expertise in all retail formats to ﬁnd out which publications, resources, and activities are best at helping generate leasing leads. The results were revealing and

Top 5 News Sources #1

Local Business Journal/Newspaper

Crittenden — Retail Space News

Dealmaker Email Blasts

GlobeSt.com

Shopping Center Today

Locally and nationally there are many business and industry trade publications that proﬁle and report on the activities of retailers large and small. The shear volume of content that is available can be overwhelming and so many leasing professionals pare down their reading list to the most useful outlets.

MADISON MARQUETTE

FEATURE When asked to rank the publications they rely on most to generate leads, leasing professionals ranked their local business journal and local newspaper as the best resource. Given the heightened importance of local and regional concepts along with the uniqueness of local content, it is easy to see why these resources are most popular. Crittenden Retail Space News and Dealmaker also ranked high on the list. Respondents noted that these publications were particularly helpful in identifying retailers with expansion plans. The stories are also bulleted and easy to read. Most items include retailer contact information as well — a blessing and a curse to some. One respondent noted that the number of inquiries a retailer rep will receive after publication makes it impossible to get their attention for several weeks. While there was general consensus on the most useful outlets, there is some distinction among leasing pros that specialize in various formats. For instance, fashion center reps are more likely to rely upon Women’s Wear Daily than reps for other types of centers. Electronic Directories

Top 5 Online Resources #1

ICSC Website: Tenant Contact Information

Retail Tenant Directory

Plainvanillashell.com

Chain Store Guide

Retail Lease Trac

Online directories have become a popular way for leasing professionals to review retailer profiles. Surprisingly, a significant number of respondents indicated that they do not use these directories with any regularity, if at all. Leasing professionals with less experience suggested that it was a generational issue and that more experienced colleagues prefer their own rolodex of contacts and traditional information sources. The most popular database according to our survey was actually the ICSC membership database. Some professionals use ICSC’s database to look up the names and contact information of specific tenant/real estate representatives, searching by company name.

Nothing seems to beat a conversation and a handshake. On the whole, networking ranked highest amongst all other categories for generating leads. While ICSC conferences were rated the highest of any source in any category, a few respondents noted that while the conferences were frequent and informative,

Networking

Top 5 Networking Opportunities #1

ICSC Conferences

Walking Properties

Local Real Estate Groups

Other Regional Conferences

Broker Functions

PLACES MAGAZINE

Not surprisingly, the results diﬀered based on years of experience. The percentage of leasing professionals with 15 or more years of experience using no internet tools was 45%, versus only 17% for those with fewer than

Experienced professionals emphasized how critical it is to keep a thorough list of prospects and stay in front of people. the contacts gained there have never turned into a deal. Others clearly disagreed. Networking is difficult for less experienced leasing pros who do not have an extensive list of connections. In fact, it can take years to develop a reliable “go to” list of contacts. In the meantime, they must hit the ground running by walking properties in the market to find prospective tenants and cold call to identify potential opportunities. Not surprising, more experienced professionals emphasized how critical it is to keep a thorough list of prospects and stay in front of people, regardless of whether they are expanding now. Another popular networking strategy identified by respondents was the importance of keeping in close contact with area contemporaries. Around the country there are hundreds of informal groups of leasing pros who gather on a regular basis to discuss what’s happening in the industry. Whether over lunch, drinks or via email, these groups of trusted professionals are said to be vital sources of information that could never be found in a news account or online directory. For professionals still developing their networking groups, outlets such as Commercial Real Estate Women (CREW), ICSC’s Next Generation, and ULI’s Young Leader programs are available. The usefulness of these organizations may vary from city to city. One respondent shared that CREW was active and helpful to her in San Francisco, but had not been useful when she lived in Chicago.

Top Resources LinkedIn

26%

Blogs

20%

Twitter None

Despite their use of Internet tools, some younger leasing professionals doubted the utility of them at this time. They said that many tools are not yet suited to retail real estate and that only when better tools emerge will a critical mass of the industry begin using them. Respondents who had used Craigslist to advertise vacant space or look for potential tenants reported successfully receiving responses, but also noted that this tool was better suited for searching for smaller tenants. Interestingly, the free search capabilities of both CoStar and Loopnet.com were not used as extensively to identify tenants as we thought they would. One respondent commented that this is because they are more tenant rep resources than landlord-related tools. She did cite loopnet.com as a great example of an easy-to-use online directory of commercial real estate that she uses all the time and many of the large brokerage houses utilize — yet one-third of respondents indicated that they never use it. During this difficult recession, it is important that leasing professionals think outside of their usual tools and explore new ways to generate leads. While a generation gap is clearly evident in the survey results, it would benefit both young and old to learn from each other and combine the best of both online and offline tools.

37%

Craigslist

Facebook

15 years experience. Similarly, only 23% of those with over 15 years experience were using LinkedIn, the most popular tool, versus 56% of those with fewer than 15 years of experience.

Denise Browning (denise.browning@madisonmarquette.com) is VP, Leasing in our Charlotte ofﬁce. P

Online Tools

One concern mentioned by several respondents was the timeliness of the data in these directories with rapidly changing market conditions and personnel changes. Even a slight lag in the data can end up costing leasing reps valuable time and energy.

with popular Internet-based tools and found 33% of respondents were not engaged at all.

13% 4% 33%

The conﬂuence of online directories and online networking tools makes the Internet a potentially compelling resource for leasing professionals. We wanted to measure the industry’s current level of engagement

SPECIAL ENTREPRENEURSHIP SECTION

Opening for Business Nurturing Entrepreneurship in an Economic Recession By Jonathan Shartar

onsumer spending is down and retailer bankruptcies dominate the headlines, yet budding retail entrepreneurs may find the business landscape more hospitable than most may assume.

berg too was let go just before founding Staples. Often when someone gets laid oﬀ, they place an increased premium on being able to control their own destiny. Retail entrepreneurship is one way to satisfy that desire.

Retail has never been for the faint of heart. Just ask Tom Stemberg, founder of the Staples franchise and a serial retail entrepreneur. In an interview with PLACES, he cautioned aspiring retailers “Don’t quit your day job.”

New retailers will find surprisingly hospitable conditions right now. Established retailers are less agile than ever. They are generally more diversified, with multiple brands, numerous customer segments, multiple channels of operation including online and offline. While this diversification was intended to reduce the risk, today’s far-reaching recession has left them distracted by costcutting, debt management, and inventory overages.

He’s right, retail is not for everyone, but those undeterred by such expert warnings are exactly the type of people who are most likely to thrive. They are the ones who walk into a store and cannot stop thinking of ways to do it faster, cheaper, or better. They have a vision for a different way of serving consumers and have the determination to see their ideas through. For many entrepreneurs, being fired or laid off was instrumental in getting their ideas off the ground. Take Bernie Marcus and Arthur Blank, who did not even know each other until they were both laid off on the same day. They went on to start The Home Depot. Stem-

Upstart retail concepts can be far more agile. They can better react to evolving customer demands and seize opportunities as they arise. Niches once dominated by strong national competitors, such as linens or electronics, suddenly have voids that may need to be ﬁlled. Contractors and suppliers are now willing to negotiate lower prices and accept reduced margins. Landlords, most of all, are eager to identify and incubate these new entrants like never before.

MADISON MARQUETTE

SPECIAL ENTREPRENEURSHIP SECTION Leases are nothing more than documents outlining mutually acceptable operating conditions. While the assumption may be that landlords are more willing to negotiate terms, that belief is not entirely correct. Rents are clearly down, but recent boom times witnessed lease negotiations becoming less about ﬁnding agreeable partnership terms than about winning. Now, circumstances have changed. The greatest opportunity for new retailers is in vacant spaces where national operators have abandoned fairly new store build-outs. For nimble local and regional operators, these spaces help overcome the lack of standardized store designs. The ability to occupy space at reduced costs for both themselves and the landlord is what helps lower rents and increase proﬁts. While national tenants priced out their competition in the past, that is no longer an option for landlords and the values they placed on creditworthiness now appears overstated.

When landlords believe in a concept they will make unique trade-offs. Landlords now place a premium on small retail operators with several successful stores that are looking to expand. Their experience and track record make them attractive tenants. For newer operators, landlords must evaluate not just the concept’s ability to attract consumers, but the entrepreneur’s ability to execute successfully.

Tom Stemberg on Retail Entrepreneurship

Founder, Staples

Tom Stemberg founded Staples in 1986 after being let go by a supermarket chain. He saw how oﬃce supply needs were being ﬁlled by mom-and-pop stores and thought there had to be a better way. After building Staples into a $19 billion company, he now serves as Managing General Partner of the Highland Consumer Fund which focuses on investing in retail and consumer services companies. He currently serves on the boards of CarMax, Inc., Guitar Center, lululemon athletica, PetSmart, Inc., and Pharmaca.

New stores generally do not expect profits in the first 9–12 months and it can take up to three years for sales to stabilize. That means the downturn can be an ideal time to set up shop and be uniquely well positioned for the economic rebound. Jonathan Shartar (jonathan.shartar@madisonmarquette.com) is an Investment Associate in our Washington, D.C. office. P

PLACES MAGAZINE

cover your overhead. The other businesses often require little more than an office and a few PCs. Q:

What advice would you give to someone who does not have retail experience but has an idea for a retail business?

TS: Keep your day job: retail is way tougher than it looks.

Tom recently took time to answer questions about entrepreneurship from PLACES.

TS: This magazine is not long enough for my answer, tsk. Treat them with respect. It is the exciting innovators who can make your development special. Do the landlords who took credit risk to sign up lululemon and Pinkberry in their early days regret it today?

What personal attributes makes someone a good retail entrepreneur?

TS: The biggest difference between entrepreneurs, especially retail entrepreneurs, is that we view every challenge as an opportunity, as well as a barrier others will have difficulty surmounting.

And we can always see the light at the end of the tunnel, even if it is a train coming the other way!

What should landlords do to help start-up retailers succeed?

What are the biggest challenges when expanding from one store to multiple stores?

TS: The toughest challenge — and there are many — to building a retail business from one to many stores is attracting and retaining great people. When we look at investing in these companies, which we do for a living at the Highland Consumer Fund, this is a primary focus. One can hire a new CEO but it is much tougher to replace a dozen store managers and store teams!

When landlords believe in a concept they will make unique trade-offs. If investment capital is required, landlords may be willing to take ownership stakes in the business, equating to higher rents in the long term. If less capital is required, a new business will be met with the ability to gain significant bargains on real estate. In some cases, landlords may be willing to engineer leases to almost entirely remove the risk for a new retailer in a way they never have before. Since a landlord is, at the end of the day, nothing more than a diversified investor in retail operations, they too are interested in new retail concepts. They want to support these retailers and help them grow into tomorrow’s retail giants. Entrepreneurs with a penchant for retail too should realize that times will improve. Now is the perfect time to set up, get back to the basics, not only to best capitalize on today’s changing consumers, but to take full advantage of the upswing when it comes.

TOM STEMBERG

Staples, Bayfair Center, San Leandro, Ca. Q:

How is retail entrepreneurship different from starting other types of businesses?

TS: The challenge one has starting a retail business is that it consumes a great deal more capital than a software or medical device start-up. You need inventory, fixtures, systems, not to speak of a considerable amount of overhead to get a store off the ground. You then need countless more stores that have reached profitability to

In your view, what types of retail concepts have the greatest growth potential right now?

TS: In the short term, economic challenges will favor deep discount concepts like dollar stores and grocery hard discounters; this will rapidly change as the economy recovers. America and the world are becoming more fragmented both in terms of demographics and taste. The winners will be concepts that serve the needs of particular segments very well. That is why we are excited about investments like Pharmaca — an integrative pharmacy that offers both traditional and holistic remedies — and City Sports, which offers the city-dwelling athlete everything he or she needs in apparel and gear.

SPECIAL ENTREPRENEURSHIP SECTION

Helping Retail Entrepreneurs Succeed In April 2009 Madison Marquette launched an online community for retail tenants in the company’s nationwide property portfolio. The ﬁrst-of-its-kind community brings tenants together with each other and with Madison Marquette’s in-house experts and consultants in retail operations. The success of any property relies on the success of its tenants. This online community is aimed at aggregating and archiving the best resources to help tenants succeed. The community leverages the LinkedIn platform which has over 35 million registered users and is considered the leading social network for professionals. The group, The Madison Marquette Retailer Network, features expert support in all areas of retailing, including store design, merchandising, human resources, marketing, and accounting.

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Included in this section are several examples of the resources available on the company’s retailer network.

The 3 P’s of Merchandising By Michael Walker

In tough economic times, getting the fundamentals of merchandising correct is more important than ever. The essential components of successful operations are people, presentation, and product. Each of these elements is intertwined and each requires dedicated focus and attention. People

In-store staﬀ must be educated about the products they are selling. Customers expect to be told where products are made, what they are made of, and why they are a good value. But that’s not all. Sales staﬀ also need to know what products make the highest margin and which products need to move quickly. Too often owners are reluctant to involve their frontline employees in this level of detail, but it is absolutely essential to do so.

Owners also need to understand how merchandise displays beneﬁt from their location within a store. Research shows that customers instinctively look to the right side of the entrance ﬁrst. This area needs to feature the fastest moving and most engaging merchandise. At every turn thereafter, shoppers need to be met with compelling displays. Owners also need to understand how much income each turn is producing. If a display does not sell, remerchandise it. Consumers are shopping with less money and are increasingly concerned with where they spend their dollars. In boom times, a few blown light bulbs and stale store displays may not have mattered. But today, if the store is not immaculate and products not displayed with care, it shows, and consumers will choose to go elsewhere. Product

Empowering employees with knowledge gives them a greater sense of confidence and helps avoid anger, frustration and a sense of hopelessness that often comes with uncertain economic times. If they understand what they need to do to keep the store operating, they feel more in control of their own destiny and more motivated to maximize their productivity. Tough economic times also demand that owners and sales staff be actively clienteling — maintaining a database of loyal customers and keeping them engaged. When new shipments arrive, let them know. When items go on sale, make them aware. These communications are best done via telephone, but email can also be effective. Presentation

Recently, the 3 P’s were applied to Modern Times in University Mall (Chapel Hill, N.C.). Over two days, the store was completely remerchandised, repainted, and refreshed. The response from shoppers has been great.

Creating a visually appealing store says a lot to customers about how passionate the owner is about their merchandise. When owners are tired and burned out, it translates into a boring rack of clothes. When they are engaged and passionate, it translates into vibrant visual displays and current fresh designs.

Having the products that people want to buy is fundamental, but being successful requires proper inventory management, good timing, and smart pricing. Today’s environment is all about value. In many ways, customers are pulling back from big ticket items and yet are not ready to sacrifice luxury. This trend translates into higher demand for accessories and basics; for instance, instead of buying six high priced leather jackets, buy 40 designer t-shirts. The lower priced items are far less risky in this economy. Owners need to be smart about pricing complementary items. Consider selling one piece of an outfit at steep discount — perhaps even at a loss. Shoppers will be compelled to buy the entire outfit because of the value they perceive they are getting with the discount on the one component. In today’s climate, shoppers also expect a sale rack. If none exist, they may suspect that the products in the store are all over-priced.

MADISON MARQUETTE

SPECIAL ENTREPRENEURSHIP SECTION NINE IDEAS TO KICK START SALES (FOR UNDER $100 EACH) In today’s economy, people need a good “excuse” to shop. Sales people need a reason to pick up the phone, call them, and give them that compelling reason that makes shopping feel good again. Below are some great summer-themed special event ideas that cost less than $100 each but will get the cash registers ringing again. In order to maximize success, keep the promotions and gift card redemption periods short to foster a sense of urgency. Make sure you capture as much client information as they are willing to share so that you can include participants in upcoming events.

25 Weddings and Nothing to Wear

Hot Summer Nights

One Shoe, Two Shoe, Three Shoe — Score!

Throw a wine and cheese cocktail reception and showcase great dresses to wear to all types of weddings — formal, informal, day or evening. Have a drawing that night for a $50 gift card towards a dress that weekend.

Invite store patrons to register to win a $100 gift card for a great Fourth of July party outfit. No purchase necessary, but limit the length of time to enter. Make sure to keep and use the contact information for all who registered.

Have your local cobbler set up shop in your store. Invite your 15 best customers to bring in three pairs for complimentary repair. Return the shoes the following weekend so your best customers have visited two consecutive weeks!

Queen for a Day

Naughty or Nice?

A Surprise for Dad

Invite the prom queen nominees from your local high school to a special prom fashion show party in the store. Use student models, iPod music, and snacks to keep their attention. Give the girls a $25 gift card towards a purchase.

Invite a local tattoo artist to offer temporary tattoos, serve cocktails, play music, and create a shopping frenzy. Have participants invite their significant others for a fashion show and tattoo reveal.

For Fathers Day, show Dad how much you love him. Give away 20 $5 gift cards for the purchase of lingerie. Invite brand representatives to do proper fittings and offer refreshments.

Free Manicures with Purchase

Get Ready for Swimsuit Season

Private Sale Night

What girl doesn’t love a free manicure? Invite your local manicurists to meet with your clients, set up in front of your store and offer free manicures with any $50 purchase.

Create an event around beach season. Offer personalized fittings and give away inexpensive beach items such as totes, sunglasses, novels, and towels and arrange them in a great display.

Invite your 10 best customers to a special private sales night. Give them each $10 gift cards and offer them first crack at new markdowns or just arrived merchandise.

Contributed by Angela Sweeney (angela.sweeney@madisonmarquette.com).

PLACES MAGAZINE

SPECIAL ENTREPRENEURSHIP SECTION

Ten Traits to Look for When Hiring Retail Workers By Reynolds Atkins

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1. Demonstrated commitment to the retail sector

6. Understand and hire for the target customer

Even if retail sales remains something of a classic “second job” for the financially over-extended, your true floor-leaders should be there because they want to be there. They should understand the merchandise they are selling and look to the sector as an appropriate place for a career, whether on the floor, in management, in merchandising, or as a buyer.

A sales staﬀ distinguished mostly by their body piercings will be out of place at a Saks or Nordstrom just as a 30-year veteran of couture sales will likely feel uncomfortable talking compression shorts at an Under Armour store. This seems blindingly obvious, but until this economic downturn the desirability of positions in the retail sector was seldom high and purchasers often found a disconcerting mix of skills, capabilities, and experience levels at many of the stores they frequented.

2. Flexibility

Anyone looking for a traditional “9-to-5” opportunity in retail will likely not find it. On the other hand, anyone who craves an alternative to the increasingly outdated work routines of the typical corporate office will be able to find a retail schedule to suit just about any lifestyle choice or personal situation. 3. Attitude

A successful retail experience for any consumer depends on encountering sales associates who actually want to be in the store. Trying to convince a bored, disinterested, or even actively hostile sales associate to help locate an item, return, or exchange merchandise is as close to a universal experience as most Americans have. A good attitude is key to ensuring a good customer experience. 4. Know the products or service being sold

This is just as obvious in a shoe store as it is in an electronic store. It is great if a company is able to hire from a ready pool of sales associates with experience in the products or services being sold. If that is not the case, select associates eager to learn where the products come from, who typically buys them, the features and options, how to upsell, and so forth. 5. Pay attention to communication skills

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America is wonderfully diverse and our retail establishments should reflect that diversity, but the buying experience will be better for everyone if the sales associate and the buyer can engage in a meaningful conversation on the potential purchase. Even our most upscale retail establishments hire from a variety of backgrounds and nationalities and while this has the potential to make for a positive buying experience, it more frequently does not. If it requires special language training or seminars in managing cultural differences to improve the experience, the investment will no doubt pay off in increased sales in the future. In fact, retail establishments can actually exploit this diversity as an advantage. Marriott headquarters, located outside Washington, D.C., brings trainees from all over the world to work in its local hotels and identifies their home location on a special badge. Celebrating rather than hiding diversity cannot help but broaden the appeal of the store.

7. Look for candidates who respond positively to recognition and rewards, and don’t be afraid to single out the top performers

There is an almost inﬁnite variety of sales base pay and incentive plans that retailers can draw upon and experiment with. Pay matters; when done right allows a retailer to build a committed, engaged, and long term relationship with the sales associate and more importantly, consumers. 8. Find creative ways to keep your best sales associates out of sales management

Success as a sales associate has very little to do with success as a manager and retailers should be prepared to be creative in keeping the right people on the ﬂoor in front of customers. 9. Select for initiative and judgment

A competent, well-trained sales associate should be able to handle most challenges on his or her own. The most irritating and pointless response a purchaser can hear during any transaction is: “Let me talk to my supervisor.” Trusting sales associates with some level of discretion can over time make him or her feel like an owner rather than merely an employee. 10. Select for self-conﬁdence

The sales floor is no place for the timid, diffident, or insecure (though it is also appropriate to avoid the opposite unless one is selling labor-saving devices on late-night cable television or timeshares in Aruba). Reynolds Atkins (reynolds.atkins@madisonmarquette.com) is VP, Human Resources in our Washington, D.C. office. P

MADISON MARQUETTE

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FEATURE Bell Tower Shops Ft. Myers, Florida

Keeping Focus on Long Term Value A View from the Asset Management Ofﬁce By Greg Bergan

he economic recession is demanding a renewed focus on the fundamentals of retail real estate that drive property performance and enhance long term value. Asset managers are increasingly reliant on their leasing and management teams to be more creative and think more strategically about how to trim expenses and increase revenues without sacriﬁcing the future. To explore the new dynamics between ownership and their property teams, PLACES initiated a series of interviews with leading asset managers at some of the largest investment management ﬁrms in the world. The dialogue clearly pointed to an increased consciousness of all of the relevant traits of a successful property team. New Level of Dialogue

Daniel Braver, Executive Vice President, U.S. Portfolio Management at Heitman, highlighted the increased complexity of today’s environment and described how the tone and tenor of the relationship between ownership

and management has evolved. “Rather than a [property team] simply accepting the facts and circumstances presented to them and asking ownership for decisions, we demand a reasoned explanation of alternatives on how to handle a problem and a strong recommendation to ownership as to how a particular matter should be addressed and communicated to tenants,” he said. Braver’s sentiments reﬂect the importance of having a veteran team in place with members who have experienced downturns earlier in their careers. Rising vacancies, declining values, fearful tenants, and dwindling budgets are not new to retail real estate. Short Term Versus Long Term Leasing

On the leasing side, experience needs to be balanced with creativity. Joe Lipuma, Senior Asset Manager of DRA Advisors LLC, said “there has been a greater focus on the leasing team’s ability to ‘think outside of the box’ on chronically vacant space, as well as newly vacated anchors.” Although Lipuma is sensitive to the current environment and admits it is not an easy challenge, he

MADISON MARQUETTE

FEATURE states they “value the team that can achieve short term goals that continue to provide cash flow while not compromising our overall long term leasing goals for the center.” Temporary stores or pop-up stores are one way to recapture lost revenue from a vacating anchor or other store. While they can certainly provide cash flow in the short term, selecting a concept that does not fit into the fabric of the center can hurt its appeal to shoppers and may even cause conflicts with other tenants. It is critical for the leasing team to understand the importance of thinking long term while seeking short term remedies. Leasing representatives must also think long term when negotiating traditional leases and not feel tempted to “give away the store” while attempting to secure new

property management team as essential to laying the foundation for successful agreements. One of the biggest areas of concern for tenants is common area maintenance (CAM) costs and other expenses passed on to them. Steve Schnur, Senior Vice President at LaSalle Investment Management, says “our merchants are constantly comparing our shopping centers to our competitors in respect to expenses and charges.” He sees managing vendor relationships and using portfolio-wide presence to negotiate discounts and priority service levels as an essential part of keeping down costs versus competing centers. Keeping expenses down is especially important in today’s environment. Management teams that draw upon national operating platforms enjoy the ability to negotiate volume discounts for energy, mainte-

Temporary stores or pop-up stores are one way to recapture lost revenue from a vacating anchor or other store. deals. There is a sense among many industry players that the frenzied pace of leasing in recent years gave too many concessions, including dark store clauses, expense caps, and exclusions. Many of these types of provisions are only now revealing the errors in judgment.

nance, security, marketing, and waste disposal. These savings keep CAM costs low and allow rental rates to strengthen. In cases where leases provide for ﬁxed CAM expenses, these discounts contribute directly to the bottom line of a center.

Asset management teams must now ﬁght tooth and nail regarding the economies of today’s deals. They will not mortgage the long term future to cover a short term “bump in the road.”

Schnur relies on his management teams to be extremely engaged with the merchants. “They have to be aware and diligent in handling accounts receivables and collections and able to identify any merchants who may default or go dark,” he states.

regional tenants. Local expertise is clearly an important trait and one that every asset manager seems to be emphasizing. It is especially important for smaller centers. DRA’s Lipuma also sees leasing expertise, in particular formats such as lifestyle centers or regional malls, as an important component in gaining bargaining power with tenants. He says, “we often look to our leasing team to achieve leverage by working on several deals at various properties, rather than single, one-oﬀ deals.” Other asset managers say there is a disturbing trend in how centers are assessed and valued as it relates to leasing. There is a shifting of focus from tenancy mix to total return and an over reliance on the ﬁnancial returns to determine the health and success of the centers. A poor tenant line-up may look great on paper, but the asset’s long term value potential can be far weaker than a competing center with the right tenants getting slightly lower rents. Communication

Asset managers also stress the importance of remaining in close contact with the property team in the current environment. They prefer to stay very close to the asset and to obtain regular and constant feedback. Since we are in a very difficult environment, it is even more important to stay ‘plugged-in’ to the asset. For well-oiled teams, communication should come naturally. There should not be any hesitation to share ideas and discuss difficult issues. Asset managers are realistic about property-level challenges and our interviews revealed that fact. Instead of shying away from the challenges, the best property teams, they say, are the ones that take a proactive approach. All agreed that new avenues and changes must be considered to reflect a commitment to value preservation and enhancement.

Management’s Role Local Leasing

More often, owners and management see lease renewals as a key component in maintaining stability and preserving asset value. While the leasing team needs to mange the negotiation process, asset managers view the

When tenants do go dark, the leasing team is vying for far fewer national tenants still expanding. Increasingly, the leasing team is now seeking to attract local or

Greg Bergan (greg.bergan@madisonmarquette.com) is EVP, Operations in our Washington, D.C. ofﬁce. P

ASSET MANAGER PARTNERS

Heitman began providing real estate investment management services in 1980, and now manages over $19 billion in assets in private real estate equity, public real estate holdings, and real estate debt. Heitman focuses on three areas of real estate: direct investments in real estate, both in the U.S. and Europe, investments in publicly traded securities, REITs, REOCs and other real estate companies in the U.S., Europe and Asia, and origination and servicing of debt secured by real estate.

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DRA Advisors LLC is a registered investment advisor specializing in real estate investment and management services for institutional and private investors. DRA currently has over $10 billion in assets under management and focuses on conservative, value-added real estate investments in the office, retail, multi-family and industrial sectors in the United States.

LaSalle Investment Management as we know it today was formed in 1999, and manages approximately $41.1 billion (as at 4Q 2008) of private and public property equity investments. Their diverse client base includes public and private pension funds, insurance companies, governments, endowments and private individuals from across the globe.

FEATURE Space 15 Twenty Hollywood, California

The Future of Retail Evolving Preferences that Will Shape Retail Real Estate By Tom Gilmore

echnology, shifting demographics and evolving consumer preferences are shaking up the retail industry. The global economic recession is hastening — and perhaps altering — which retail concepts will emerge and which ones will disappear. These same forces will transform retail real estate and will impact value creation opportunities in the next 10 years.

quickly because weaker retail business models are being exposed. TNS Retail Forward Senior Vice President, Al Myers, told PLACES, “We are so over-stored in this country and you are seeing the shake-out now.” Retailer Realignment

Eighteen months ago TNS Retail Forward and PricewaterhouseCoopers issued 15 predictions for what retail would look like in 2015 (predictions listed on the opposite page). They pointed to fundamental changes in the way retail concepts will be conceived and presented to consumers and in the way products and services will be developed and delivered. Recently they updated many of the predications in light of the depth and breadth of the economic downturn. Although the underlying trends are unchanged, they said, much of the fallout they predicted is happening more

The recent liquidation of Circuit City, Linens n’ Things, and Mervyn’s is one component of a wave of global big box retailer consolidation that is predicted by the report. Many of the most successful U.S.-based big boxes, they argue, have reached their domestic maturation point and will seek further overseas expansion to satisfy their growth objectives. With global competitors already well-established in local markets, the report predicts that U.S. big boxes will grow through acquisition. Much of this consolidation has now been delayed by frozen credit markets.

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FEATURE Other retail chains, the report says, have reached the end of the runway and have little opportunities for growth. The natural end for these chains will further contribute to the retailer realignment.

RETAILING IN 2015

The bigger drivers of the realignment though are the major demographic and cultural shifts occurring. Among the changes — the post-WWII Baby Boom Generation is retiring, Generation Y is rising in their place. The report argues that retiring baby boomers will require new products and services to meet their retirement needs, especially in light of their substantial ﬁnancial resources and desire to remain “active.”

1. The Downsizing of (Almost) Everything

9. Consumer as Co-creator

Expect (almost) everything except mega-store chains and formats to downsize during the decade— products/packaging, retail chains, store footprints, living spaces.

The line between maker and consumer will blur. Consumers will have almost limitless opportunity to get what they want by participating in the value chain as creator, co-creator, adapter, editor, re-mixer, and re-packager.

The larger challenge for retailers will be meeting the evolving preferences of all consumers. “The evolving consumer in the near future will not be easy for retailers to understand or master,” it said. “The value proposition guiding their product purchases is changing; consumers will put heightened emphasis on personalization, look for opportunities where their input matters, and value product and service solutions. Consumers are increasingly proactive in their purchase decisions and selective about with whom they want to do business. Additionally, consumers will increase their focus on purchasing products from socially responsible and ‘green-friendly’ manufacturers and retailers.”

The evolving consumer in the near future will not be easy for retailers to understand or master.

Predictions by TNS Retail Forward and PricewaterhouseCoopers

2. The “Glocalization” of Retailing For many big retailers, the next growth phase will be about segmentation and localization. Big retailers of the future will get there by operating multiple formats and multiple concepts, targeted to specific customer segments, in specific local markets, for specific end-use needs and occasions.

3. Breaking the 80/20 Rule The future of retailing is selling less of more. With expanded access, consumers will buy less of what’s “popular” and more of what “suits me.” Retailers that can figure out how to deliver what niche markets are looking for will reap the profits.

4. The Unchaining of Retailing We will see the demise of the cookie cutter specialty chain. The day of the 1,000-outlet specialty chain delivering the same homogenous, narrow and deep assortment everywhere, regardless of location, is over. Chain size will top out at lower store counts. Retailers will expect to achieve more of their growth from new concepts than from established concepts.

5. Global Consolidation of Big Box Retailers Big box retailing doesn’t go away in 2015, but expect to see even greater concentration of market share on a global scale. Those players that remain after consolidation will be stratified by price tier and lifestyle.

6. Share of Life Retailing Technology is also driving these changes. The Internet is allowing consumers to have perfect access to product pricing and performance information. The ability of consumers to easily discover today’s “hot” products will lead many to obsess over “the next big thing.” Product life cycles will move more quickly with exclusives and limited editions becoming more dominant. The retail realignment will have a signiﬁcant impact on retail real estate, including which concepts will become the next generation of anchor tenants and what criteria will drive their site selection process. Segment Killers

The 2015 retailers will be deﬁned by the customers they serve, not the products they sell. Whereas the last twenty years were dominated by “category killers” that carved out product niches such as housewares, electronics or books, the next twenty years will be dominated by “segment killers” that carve out and serve customer niches such as active seniors, avid outdoorsmen, gadget gurus, urban trendsetters, or soccer moms. The report calls it “share of life” retailing. > Continues on page 26

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Retailers will define themselves by the customers they serve, rather than by the products they sell. Retailers will grow by positioning themselves as more than just purveyors of “stuff” but also as one-stop purveyors of lifestyles or need states. Service offers will help bring the brand experience to life.

10. Exclusivity Escalates Penetration of private brands and manufacturer exclusives will explode across virtually all categories as retailers require differentiation, versatility, newness, and return on inventory investment. Private brands will be key as retailers strive to satisfy niche opportunities, enable customization and keep pace with here today — gone today trend lifecycles.

11. Suppliers Defend Turf In 2015, suppliers will live by two credos: “The best defense is good offense” — and — “If you can’t beat them, join them”. Supplier-retailer relationships will be increasingly collaborative but also increasingly competitive. Branded supplier-retailer partnerships will multiply but so will retailer private brands.

12. Power to the People Tools and technology will change the balance of power in retailing, shifting the power to the people. Consumers will have almost perfect information access about products and pricing. It will be almost impossible for retailers and producers to maintain a significant difference in margins on widely distributed commodities, underscoring the importance of differentiation, innovation, and integrated lifestyle approaches to doing business.

13. New Technological Environment Technology will pervade the living and shopping experiences of 2015. Most of the technology trends anticipated for 2015 are progressions of trends that are under way today; they will just be more ubiquitous tools and technology within reach wherever, whenever and for whatever purpose.

14. Value Chain Evolution

It will get harder to answer the question “what’s a store” — much less “what’s in a store.” Multi-channel will multiply — covering more than stores, catalogs and an online presence — and come to mean a bigger, broader brand presence.

Today’s value chain is designed for mass merchandising. The value chain of 2015 will need to support niche merchandising, down to the location, day part and customized individual unit. It will be defined by connectivity, early capture of true demand signals, total visibility, shared data, real-time information, real-time response, decentralization, and integrated shared logistics.

8. The Rise of the Anchor Place

15. Triple Bottom Line Scorecard

Like the store of the future, the shopping center of the future will be closer to the customer. We will see the demise of the anchor store as the main draw. The place becomes the destination. New generation lifestyle centers will offer the ultimate in simplification and convenience—a “pre-packaged total lifestyle experience” where busy consumers can shop, work, socialize, eat, be entertained, live.

Retailers and suppliers will need to become better global citizens. In 2015, the definition of corporate success will take into account environmental and social performance in addition to financial performance. Retailers and suppliers should expect to be measured against an expanded set of criteria— planet and people as well as profit.

7. The “Un-storing” of Retailing

A full copy of the report can be downloaded at http://www.retailforward.com/.

FEATURE RETAILERS AT THE FOREFRONT

The Future of Retail, cont. > Continued from page 25

“Share of life retailing will replace widget retailing,” said Myers, “retailers will incorporate solutions to a lot of the needs of people’s daily lives and serving a broader array of household spending categories.” The company’s brands, including Urban Outfitters, Anthropologie, Free People and Terrain are ideal illustrations of many of the 2015 trends. As they describe themselves, “Each brand chooses a particular customer segment and sets out to create sustainable points of distinction with that segment.” In addition to targeting niche segments, the company’s brands also achieves a greater “share of life” by offering a variety of soft and hard good merchandise.

Bass Pro Shops is an early pioneer of this type of retail. They have perfected serving their core “hook and bullet” crowd, providing products and services that meet all aspects of this niche customer segment’s life. They offer travel support, fishing demonstrations, and golf lessons. They also have an on-demand inventory management system that allows them to customize local merchandising and replenish store shelves at the per-unit level with amazing efficiency. Bass Pro is ahead of what the report calls “glocalization” — the ability of retailers to localize their brands and offerings to specific customers in specific markets.

This big box has mastered the “hook and bullet” customer segment with an impressive assortment of merchandise, services and in-store experiences. They also have a tremendous inventory management system that allows them to customize and restock their stores based on the local market. Look for them to grow by capitalizing on some of the recent vacancies in their big box category.

Their Denver flagship is a great illustration of understanding their customer segment and delivering a total experience — from an interactive mountain bike trail to a 45 foot climbing wall.

The Apple brand has become synonymous with a lifestyle and their experience-oriented stores with “endless isles” of online merchandise, in-store classes and roving salespeople with instant check-out service are precursors of the 2015 trends. They are a great illustration of high tech/high touch service.

Wal-Mart is also experimenting with the glocalization concept. Earlier this year they announced intentions to open Spanish-language-focused Supermercado de Walmarts in Phoenix and Houston. The company said the stores would feature a “new lay-out, signing and product assortment designed to make them even more relevant to local Hispanic customers.” Myers said, “We spent a lot of time on supply chains and IT and point of sale to get the back door set — now we’re seeing a focus on the front of the store.” Although successful big boxes will be segment killers, the report says specialty retailers will “target finer niches with bigger portfolios of smaller footprint, smaller store count, more narrowly focused concepts.” The Internet and hundreds of cable television stations are defining and reinforcing more narrowly interested consumers with distinct styles and preferences. Lifestyle centers were originally conceived as a precursor to this trend. They targeted the 40+ Baby Boomer Generation with a mix of specialty apparel retailers, book stores, restaurants, and home goods that targeted styles that would appeal to that demographic. The lifestyle centers of tomorrow will target other niches, more narrowly defined with co-tenancies that differ from today’s conception of a “lifestyle” tenant.

Niche Centers

Shopping centers of the future will follow the new retail model of defining themselves by the shoppers they serve, not by their footprint, tenant mix, or trade area. Narrowly tailored centers, or niche centers, are likely to emerge in the 50,000–150,000 square foot range and feature highly complementary retail, restaurant, entertainment, and other share of life offerings. Speaking from the consumer perspective, Myers said, “I want the niche concept that appeals to me so I don’t have to trudge through a lot of stuff that doesn’t appeal to me.” By locating within close proximity of target customers, these niche centers have an opportunity to become convenient daily destinations akin to traditional grocer-anchored neighborhood centers. In Hollywood, Urban Outfitters recently debuted Space 15 Twenty, a niche center with many of the elements highlighted by the 2015 report. The company describes it as “an opportunity for Urban Outfitters to collaborate with creative brands we find inspiring and interesting.” Space 15 Twenty is an open-air environment including a community stage and gallery for local musicians and artists. It also includes restaurants, an architectural book store, and other unique apparel and accessory retailers. There is also temporary space dedicated to limited edition merchandise. For instance, during the month of April, pop-up space was dedicated to unique designs from Annie Costello Brown, a popular jewelry designer “taking cues from the aesthetic talismans of ancient cultures and the inherent nostalgia of vintage costume jewelry.” Niche indeed, and very Hollywood. In Jacksonville, Florida, a local development team is creating a niche environment called a “Doctor’s Village” where 50,000+ of medical office use and surgery center will be combined with 30,000 square feet of retail and restaurant use. For an aging senior population it is a compelling mix and another model for niche centers.

The company has transformed the grocery concept into a true experience. They are at the forefront of the sustainability trend and have matched their organic “Whole Foods” orientation with a “Whole Planet” and “Whole People” approach.

Space 15 Twenty, Hollywood, Cali.

Doctors Village, Jacksonville, Fla.

MADISON MARQUETTE

FEATURE Adaptive Re-Use

The economic downturn has stalled much of the exurban growth and it is likely to be several years before the housing construction industry returns. The opportunities for value-added retail real estate investments, especially in the niche center category, will be adaptive re-use of existing urban in-ﬁll locations. Many of these neighborhoods continue to grow and evolve into more economically powerful markets and retail oﬀerings have not often kept pace.

ADAPTIVE RE-USE IN ACTION Madison Marquette recently acquired a block of commercial property in L.A.’s evolving La Brea neighborhood. There is tremendous opportunity to revitalize and reposition the 87,000 square feet of space across the street from iconic retailer American Rag. The preliminary plans for adaptive reuse of the existing structures are demonstrated below and call for an organic combination of food, retail, and creative ofﬁce establishments.

Adaptive re-use of existing space fits well within the 2015 trends. Alan Pullman, a principal of Studio One Eleven, an architectural firm based in Los Angeles, said to PLACES that consumers are “tired of generic shopping centers.” Adaptive re-use allows elements of the past to be preserved to give new spaces a distinctive feel and the authenticity craved by niche consumer groups. According to Pullman, it can also be a cost reduction strategy if implemented correctly. This aspect is particularly relevant as property prices fall and financing is scarce. Pullman’s firm was the original architect of “Malibu Lumber Yard,” a niche center in the heart of Malibu that is an adaptive re-use of a former lumber yard. The center features local wood planks throughout and other nods to its former use. The project also fits squarely into the niche center category with 30,000 square feet of diverse retailers and restaurants catering to the eclectic and affluent Malibu community. J.Crew opened it’s “At the Beach” concept store there and is offering a number of unique services, including beach delivery and welcome baskets filled with items suited for house guests. Temporary Architecture

Pullman is also an advocate for “temporary architecture,” another economically viable development option that addresses several of the trends in the 2015 report.

One of the signature features of the block is the Continental Graphics facility featuring mid-century ofﬁce architecture (once forsaken, now in vogue). The rendering above highlights the creative use of color and façade enhancements to preserve the historic and authentic grittiness of the building while allowing the tenants’ identity to be the focal point.

Temporary architectures include pop-up stores and semi-permanent structures to house farmer’s markets and other temporary market concepts. According to the 2015 report, retailers will seek out these opportunities to push limited edition products and niche offerings. Consumers also embrace the improvisation, activity, and authenticity of these temporary spaces. Existing centers are already adding farmer’s markets to their community spaces and expect that trend to continue and extend to other product lines with established brands. “What architects do is create more experiential places,” said Pullman, who sees temporary architecture as a necessity in today’s environment while also bringing much-needed personality to retail destinations. The 2015 report highlights many trends that are already being witnessed in some form throughout retail and retail real estate. While challenging, the current economic climate is hastening the fallout in retail and is producing a significant inventor of distressed centers. Viewed as an opportunity, many investors will see value added opportunities in leveraging the above trends to reposition and reintroduce these centers to the marketplace. Tom Gilmore (tom.gilmore@madisonmarquette.com) is SVP, Investments in our Los Angeles office. P

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A series of small courts and paseos are envisioned to mitigate the effect of a continuous façade along the very long streetfront. These small social spaces, along with street side landscape improvements, are designed for lingering as well as gathering spots for programmed events.

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Q&A

Specialty Retail: Helping Centers Overcome New Vacancies Center owners are facing increased vacancy rates and turning to specialty leasing as a category to help ﬁll space and drive revenue until the economy rebounds. To get a better understanding of what is happening in the specialty retailing business, we spoke to Patricia Norins, Publisher of Specialty Retail Report and Joan Woods, Director of Specialty Leasing at Madison Marquette. Q:

How has the industry changed in light of the recent economic challenges?

PN: As specialty retail rents rose over the past few years, many local/regional merchants felt priced out of the market. Today, more and more entrepreneurs are turning to shopping centers to launch new products and services because the cost to entry is substantially lower. JW: Many of the specialty retail concepts that were once shunned by developers are now in high demand. For example, many centers would never consider hosting a carnival or circus in the parking lot, but are now open to them because of the traffic and income they generate. Q:

Why is specialty retail so important right now?

PN: The first and most obvious reason is because of the income it generates. The typical specialty retail program can generate several hundred thousand dollars to the bottom line with larger programs bringing in well over $1 million. Cart programs can also be an important point of differentiation and offer a competitive advantage to the “sea of sameness” that exists in retailing today. JW: As national retailers consolidate their portfolio’s locations and close stores, specialty retail offers landlords an opportunity to keep the lights on and generate income from their vacant spaces. In addition, specialty retail brings “life” and excitement to what might be an otherwise lackluster common area through interactive retail merchandising unit programs.

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RETAIL STAR

Retail Star is a retail business incubator program sponsored by Madison Marquette. The program invites budding entrepreneurs to submit business plans and compete for $25,000 in seed money, a free build-out, prime space in newly renovated Bayfair Center and free rent for one year. Contestants will be judged by area business leaders and challenged to refine their idea throughout the 6-month contest. The winner will open in November 2009 in time for the holiday shopping season. The program is being aggressively promoted in local media outlets. The goal of the program is to create a on-going dialogue with local retailers about opportunities at the newly redeveloped center and to identify multiple tenant prospect, including the winner.

What tips can you offer for ﬁnding quality specialty retail merchants?

PN: CANVAS, CANVAS, CANVAS! You can’t expect prospective retailers to come to you. You need to hit the pavement and find them. Don’t limit your searches to other shopping centers — some of the best merchants are in street-front locations in up-and-coming neighborhoods. Hosting Business Opportunity Days are also a great way to introduce prospective merchants to your cart/ kiosk programs. And last but not least, consider non-traditional media outlets like Craigslist.

PATRICIA NORINS

JOAN WOODS

Publisher, Specialty Retail Report

Director, Specialty Leasing

JW: At trade shows like Spree and Fusion, I often meet with suppliers who have interesting new products, but don’t have operators in my region. I use my Business Opportunity Days to partner great products with local entrepreneurs who want to start a new business. Q:

What are some categories/products to watch in the coming months?

PN: Affordable Luxuries…Consumers may have cut back on extravagant luxuries like the latest designer handbag or expensive dinner out…but they are still buying the seasons newest shade of lipstick, making a statement with accessories (scarves and jewelry) and gourmet foods and chocolates.

I’m also seeing developers and merchants thinking creatively about how to fill a void in the marketplace — an interesting concept I recently came across is Furnishments in Seattle. The owner, Kristina Puetz, capitalized on the recent home staging trend to open a store that offers high quality furniture and accessories on a short term rental or purchase basis. She brings furniture in on consignment so she has very low start up costs and has become a popular resource for the home staging community. JW: As taxes on tobacco products continue to rise, ECigarettes created a disposable electronic cigarette that delivers the experience of smoking a cigarette — including the nicotine — without the tobacco. It’s a less expensive alternative to real cigarettes and they are flying off the shelves. Patricia Norins is publisher of the Specialty Retail Report. Joan Woods (joan.woods@ madisonmarquette.com) is Director of Specialty Leasing in our San Francisco office. P

Q&A THREE TRENDS TO WATCH IN SPECIALTY RETAIL

Liquidators

Beauty Products & Services

Vending

The recent wave of retailer closings has focused a lot of attention on the liquidation industry. Liquidators have become an important part of the inventory management cycle for many prominent retailers and are increasingly using vacant spaces in shopping centers to host pop-up sales and move excess inventory.

While the recession has caused many to cut back on fashion purchases, billions of dollars are spent annually on “affordable luxuries” like beauty care products and services. Services such as eyebrows waxing, teeth whitening, and even henna tattoos can happen without ever leaving the center of the mall.

A new form of vending is taking space in shopping centers and offering popular brands a cost-efficient alternative to staffing a cart. ZoomSystems (zoomsystems.com) retail stores can be found in over 700 airports, malls and stores internationally. Proactive and Rosetta Stone are two examples of this trend.

AMS Liquidation

Shapes Brow Bar

Proactive

Asset Management & Sales, LLC (AMS) operates several outlet stores and conducts traveling liquidation events. AMS partners with retailers to offer great merchandise at low prices. They currently operate Disney Character’s Warehouse Outlet Stores at several shopping centers on the West coast.

Shapes Brow Bar has grown from a street front store in Chicago to a global leader in brow shaping and other ethnic beauty treatments. They currently have more than 50 locations and serve over 500,000 clients with plans to expand to locations throughout the U.S.

Vanessa Williams and Jessica Simpson are among the celebrities who have endorsed this popular skin care product. For many years, Proactive used cart space in malls to make their products more accessible to consumers. They are now using interactive vending machines.

www.ams-liquidation.com

www.shapesbrowbar.biz

www.proactiv.com

Liquid Event Sales

Private Label Products

Rosetta Stone

Liquid Events, LP produces great sales events that cater to successful catalog companies, fashions, and lifestyle businesses including Red Envelope, Diesel and Fresh Produce. Liquid Events launched their first outlet location last year which offers brand name merchandise at up to 90% off retail.

Private Label Products manufactures a spa-grade line of lotions, oils, soaps and shampoos. They offer merchants the ability to package and sell their own custom branded product line.

Rosetta Stone is promoted as the number one language learning software and “the fastest way to learn a language. Guaranteed.” Instead of using the traditional cart program, the vending machines offer an interactive touch screen which allows consumers to try the product before they make a purchase.

www.liquideventsales.com

www.privatelabelproducts.biz

www.rosettastone.com

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MARKET WATCH

Geek Chic? The Rapid Growth of TechHappy Bellevue, Washington

irectly East of Lake Washington, the once sleepy suburb of Seattle turned tech hub will soon be home to the most exclusive retail shops in the world.

residential neighborhoods, and the rising skyline is tempered by an abundance of parks, as well as lakeside and mountain views.”

Debuting later this year on a site that previously housed a Dairy Queen, Travel Lodge, Red Robin, and Taco Time, is The Bravern — a grand mixed-use development boasting Neiman Marcus, Hermès, Louis Vuitton, Jimmy Choo, Tory Burch, DNA 2050, Botegga Veneta, and Salvatore Ferragamo.

The area’s demographic proﬁle is certainly impressive. The city’s resident population stands at 118,000, while its workforce is over 138,000 and climbing. Average household income within a ﬁve mile radius is $122,000 — almost twice the national average. Estimates of daytime population are around 200,000.

This striking before-and-after portrait is a perfect illustration of how quickly Bellevue, Washington has grown in the span of a few short years and its maturity as an economic center.

Microsoft’s Role

Impressive Demographics

By Chad Eisenbud

In 2008, Fortune magazine named Bellevue the number one place in the country to live and launch a business. “Bellevue has grown with unusual grace in recent years,” wrote Fortune, “Huge corporations exist symbiotically with startups, a booming downtown abuts healthy

The area’s biggest employer is Microsoft, based in nearby Redmond. It employs nearly 40,000 workers in the Puget Sound region. In 2006, the company signed commitments for over a million square feet of new oﬃce space in Belleveue, including the entire two-tower oﬃce component of The Bravern. Microsoft estimates that Bellevue will soon house 5,700 workers in three separate projects.

MADISON MARQUETTE

MARKET WATCH Microsoft says it chose Bellevue for the convenience of its employees — 80% of whom live on the Eastside. The proposed East Link light rail line has also been approved to connect Bellevue with downtown Seattle and Redmond and the area enjoys easy access to the freeway. The town’s relationship with Microsoft has not always been rosy. During the tech bust in 2000–2001, the company pulled out of Bellevue and propelled an office market collapse that scarred the community for several years, ultimately raising office vacancy rates north of 20%. It prompts questions about the strength of an area so heavily reliant on one company and its countless vendors and suppliers that call Bellevue their home. When the new space is delivered, Microsoft alone will occupy approximately 10% of the downtown office space. Microsoft’s huge presence and myriad of tentacles in and around Seattle are eerily reminiscent of cities such as Detroit that have paid dearly for their over-reliance on one industry and a small number of large companies. There are already some signs of weakness in the Microsoft engine. The company recently cut 5,000 local jobs and backed away from a tentative agreement to take 300,000 square feet of space in a new office building in downtown Seattle which is under development by former Microsoft cofounder Paul Allen’s real estate development organization, Vulcan, Inc. To be clear though, Bellevue does house other major corporate

headquarters, including T-Mobile, Expedia, Paccar, and Eddie Bauer. High Tech and High Fashion?

The abundance of technology companies has led some to wonder whether Bellevue’s affluent residents and workers are as fashion-conscious as other shoppers in other affluent markets around the country. In an interview with the Seattle Post-Intelligencer in February 2009, Neiman Marcus’ Senior Vice President of Store Development, Wayne Hussey, said psychographic issues were an original concern for the retailer. The PostIntelligencer described it as the “shopping habits of fashion-blind Pacific Northwesterners.” Hussey said the recent growth and maturation of the area has mitigated many of their concerns. Andrea Wasserman, a Seattle-based retail strategist, reflected on her move to the area from Manhattan. “People ‘warned’ me that everyone would be exclusively outdoorsy. In reality, while there’s an appreciation for the outdoors, many of the same people who are camping in the woods over the weekend really care about what they wear to work each Monday through Friday,” she said. The fact that downtown Bellevue is home to one of the country’s most successful enclosed malls, Bellevue Square, help further mitigate any concerns. The 1.2 million square foot center is reportedly grossing over $600 per square foot in average tenant sales. Already anchored by one of the highest grossing Nordstrom

stores within the chain, it recently underwent a remerchandising eﬀort to enhance the number of fashion brands, including Burberry, 7 For All Mankind, Vera Bradley, Eileen Fisher, Lacoste, and Free People. Regarding the prospects for the area’s new retail scene, Wasserman said, “There may be more interest in casual attire than there is in the Northeast, but that doesn’t mean people don’t want to look good. For many of these shops, it will come down to buying the right assortment for each store, which is no diﬀerent than what they need to do for any of their other locations across the country.” Condos, Hotels and New Urbanism

Downtown Bellevue is also getting a jolt from thousands of new condominiums recently added and under construction. The Bravern alone has 455 new residential units delivering in 2010. According to a May 2008 article in the Bellevue Reporter, Bellevue’s Planning and Community Development Director told a group of 300 realtors that the downtown population will double by 2010 and experience the fastest residential growth per capita of anywhere in the country over the next 10 years. One challenge to creating the urban experience for these new residents will be the existing infrastructure. Originally developed in the 1960s and 70s, Bellevue is not exactly a pedestrian paradise. Each block spans two football ﬁelds creating “superblocks” and the streets Continues on page 33 >

GROWTH IN BELLEVUE, WASHINGTON Downtown Bellevue has grown rapidly in the 21st century. Between the years 2000 and 2008, both office RBA and population growth in downtown were up ~62%, and population figures are expected to almost triple by 2020. The 2001 photo (below) shows downtown Bellevue in its early stages as an urban center. When compared to the 2009 photo on the next page, the maturation of downtown Bellevue over the last eight years is evident.

City of Bellevue Incorporated . . . . . . . . . 1953 Downtown Subarea Plan Developed . . . . . 1979 Downtown in Acres . . . . . . . . . . . . . . . . . . 410

Bellevue, Washington 2001

Downtown Office RBA Growth 2000 Q1 . . . . . . . . . . . . . . . . . . . . . 2009 Q1 . . . . . . . . . . . . . . . . . . . . . Office Vacancy . . . . . . . . . . . . . . . . Under Construction (as of April 2009) .

. . . .

. . . . . . . . 5,341,000 .8,667,000 (+62%) . . . . . . . . . . . . . 14% . . . . . . 827,800 SF

Downtown Retail RBA Growth 2000 Q1 . . . . . . . . . . . . . . . . . . . . . 2009Q1 . . . . . . . . . . . . . . . . . . . . . . Retail Vacancy . . . . . . . . . . . . . . . . Under Construction (as of April 2009) .

. . . .

. . . . . . . 3,301,000 3,693,000 (+12%) . . . . . . . . . . . 3.2% . . . . . 408,000 SF

Downtown Population

Number of Residents 2000 . . . . . . . . . . . . . . . . . . . . . 3,100 Number of Residents 2008 . . . . . . . . . . . . . . . . . . . . 5,000 Number of Residents Projected 2020 . . . . . . . . . . 14,000

Downtown Employment Number of Employees 2000 . . . . . . . . . Number of Employees 2008 . . . . . . . . . Number of Employees Projected 2020 Daytime Population . . . . . . . . . . . . . . . . White Collar Jobs . . . . . . . . . . . . . . . . . .

. . . . .

. 21,000 . 35,000 . 63,000 . 53,000 . . . 86%

Sources: CoStar, Sites USA, City of Bellevue, Madison Marquette Market Research

PLACES MAGAZINE

MARKET WATCH

Geek Chic?

Bellevue’s unprecedented rise has drawn national attention and many of the new development projects are poised to capitalize on its continued growth. The story of Bellevue is still very much being written though, and a new chapter will begin this Fall with the opening of The Bravern’s retail portion in September 2009. Growth is certainly coming to Bellevue, but how the city reacts to this upscale center may have a great impact on the form of future development downtown. It is a fascinating case study, stay tuned.

The Impact of the Downturn

> Continued from page 33

span four to six lanes of traffic. These barriers will make it difficult to connect the new mixed-use projects like The Bravern with other existing amenities such as Bellevue Square. Local foot traffic is getting another boost from thousands of new and renovated hotel rooms. Recent openings include a Westin, a Courtyard by Marriott, a renovated Hilton, and Hyatt Regency. With several more hotel projects in the pipeline, Bellevue expects the boom in downtown development to attract more visitors. Microsoft anticipates it will contribute 100,000 local hotel room nights per year.

The recent economic slowdown has not missed Bellevue. However, relative to downtown Seattle, conditions remain strong. A first quarter 2009 Cushman & Wakefield report showed Class A office rents down nearly 15% in Seattle but down only 3% in Bellevue. Office vacancy rates are also lower in Bellevue than in Seattle. Area observers credit the stable office market to successful pre-leasing and the lack of over-building. However, the slowdown may still stall some of Bellevue’s aggressive growth plans. At least five office projects at various stages of planning have been shelved until the economy rebounds.

Chad Eisenbud (chad.eisenbud@madisonmarquette.com) is Director of Investments in our San Francisco ofﬁce. P

DOWNTOWN COMMERCIAL DEVELOPMENT Downtown Bellevue is a one square mile island of development surrounded by a sea of low-density residential development. This map highlights the major development projects recently completed, under construction, or permitted downtown. City of Bellevue figures project 2,740 residential units, 350 hotel rooms, 313,800 square feet of retail space, and 1.6 million square feet of office space will be completed in 2009. Currently permitted, under review, or in the pipeline are another 2,750 residential units, 465 hotel rooms, 840,000 square feet of retail space, and 2 million square feet of office space.

BELLEVUE SQUARE

9 1

Legacy Tower

Tower 333 18

Bellevue Towers Condominium Units . . . . . . 480 Retail Space . . . . . . . 22,500 SF

Office Space . . . . . . 348,000 SF Retail Space . . . . . . . .14,500 SF

12 13 15

Avalon Meydenbauer

Apartment Units . . . . . . . . .250 Retail Space . . . . . . . . 11,000 SF

6 4

Apartment Units . . . . . . . . .368 Retail Space . . . . . . . 80,000 SF

Westin

Hotel Rooms . . . . . . . . . . . . . 337

Avalon @ NE 10th Street Residential Units . . . . . . . . 400 Retail Space . . . . . . . . 8,000 SF

Hyatt Expansion Hotel Rooms . . . . . . . . . . . . .350

Washington Square Condominium Units . . . . . . . 353 Townhomes . . . . . . . . . . . . . . 26 Retail Space . . . . . . . .15,000 SF

City Center East Office Space . . . . . . 700,000 SF

10. Belcarra Apartments Apartment Units . . . . . . . . . 320 Retail Space . . . . . . . . 11,500 SF

11.

The Ashton Residential Units . . . . . . . . . 202 Retail Space . . . . . . . . 2,000 SF

14. The Bravern Condominium Units . . . . . . .456 Office Space . . . . . . 620,000 SF Retail Space . . . . . . 240,000 SF

12. Bellettini Senior Housing . . . . . . . . . . 150 Retail Space . . . . . . . . 3,000 SF

15. Pacific Regent Phase II

17.

Ashwood II Apartment Units . . . . . . . . . 274

18. Metro 112 Apartment Units . . . . . . . . .300 Commercial Space . . 25,000 SF

Senior Housing . . . . . . . . . . 168

19. Meydenbauer Inn 13. Ten20 Tower Apartment Units . . . . . . . . . 175 Retail Space . . . . . . . . .9,700 SF Theater Space . . . . . 250 Seats

16. Courtyard by Marriott

Apartment Units . . . . . . . . . .68

Hotel Rooms . . . . . . . . . . . . . 241

20. The Summit Building C Office Space . . . . . . 300,000 SF

Sources: City of Bellevue, Madison Marquette Market Research

MADISON MARQUETTE

Q&A

Big Box Retailing: What’s Next? The recent wave of big box bankruptcies is shaking up the industry. The leasing fallout has been signiﬁcant and we sat down with two of Madison Marquette’s Senior Vice Presidents of Leasing, Joe Morris in Philadelphia and Chuck Taylor in Florida. Although both are dealing with vacant boxes, regional distinctions are clearly evident. Q:

CT: No, there are not enough traditional retailers to fill the void. There are fewer retailers overall, especially in the large box category. To fill all the space we have to start looking at tenants that may be more local or regional. We need to seek alternatives such as health services, wellness centers, entertainment uses, or government uses such as libraries. We may also be on the cusp of a new evolution of retailers, perhaps the merging of two concepts such as electronics and home furnishings that could fill the void over time.

Circuit City whereby many of their spaces have been taken over by Kohl’s. The mid-size boxes can prove to be a little more challenging, and this seems to be where most of the fallout is occurring. While a 35,000–50,000 square foot space may have greater ﬂexibility to break up, the 15,000–30,000 square foot spaces may prove to be more challenging if the depths of the spaces are deeper than 120 feet.

JM: Twelve months from now I think we will see that the majority of the noted spaces will be filled. Of course this prediction assumes that we do not have any more fallout. Unfortunately, this places a lot of tenants in the 20,000–40,000 square foot range out of the deal making arena for new developments in the pipeline. Many of the vacated spaces are in “A” locations and are available at bargain rates. It will be hard for developers to compete for the attention of desirable boxes that are the backbone of new development leasing.

CT: In general, sub-dividing big box retail space is very expensive because of the physical costs. Demising space — adding various sprinkler systems, utility separation, additional bathrooms, separate HVAC units, etc., can compress the rent structure and is hard to justify. If the market can support alternative uses, that is almost always preferable to subdivision.

JM: Often times it depends on the circumstances, such as configuration of the space and level of competition in the market. Fortunately, we have not seen many true “large box” spaces become available that warrant the need for sub-dividing. The ones that have become available have been taken over by retailers of the same size. An example of this would be Mervyn’s portfolio

PLACES MAGAZINE

JOE MORRIS

SVP, Leasing

JM: We have been fortunate in the Northeast; with the exception of what I refer to as the “mid-sized boxes” sitting on the sideline, that there are many retailers of the large-box format actively seeking sites. We are seeing action from Wal-Mart, Kohl’s, Costco, BJ’s, who are pretty serious about making deals. We are also seeing action from some of the “smaller” large box tenants such as Staples, PETCO, PetSmart, and the health clubs.

Are there enough existing substitute boxes to ﬁll the vacancies of Circuit City, Linens n’ Things and other recently liquidated big box concepts?

Is sub-dividing big box retail space a good alternative or are there other better remerchandising strategies?

CHUCK TAYLOR

What trends are you seeing in the kinds of large format retailers that are doing well and expanding?

CT: Discount boxes are doing well and expanding at the same time. As you go down the retailer lineup, those with higher price points are suffering while mid to low price point retailers are expanding. Customers are looking for more value for the dollar and finding it at such retailers as Kohl’s, Wal-Mart, and TJ Maxx. They are benefiting right now from this difficult environment.

Will big boxes continue their push into urban areas?

JM: Many urban areas are incredibly underserved and certainly offer expanded horizons for retailers. The problem with this kind of development is that it is expensive; the majority of the “mid-size” boxes are unable to join these larger tenants because they are focused on the value opportunities that are being left behind by departing retailers. This will also change when the vacancies are cycled through and funds for new developments become more readily available. CT: A recent conversation with Nordstrom Rack provided details on their vigorous plans for urban locations. Many of the target markets they wanted to expand in used to be completely untouchable and cost prohibitive. With the loss of junior boxes, rents have fallen and they are evaluating multiple opportunities to take advantage of the situation. Q:

How are category killers trending differently than department store or discount boxes? What are the drivers?

CT: Category killers seem to be trending similar to department stores with sales being down. Discount boxes are trending the other way with strong sales and value for the customer. People are really thinking of the value of their dollar. The increasing unemployment rate and concern for overall welfare in this economy are the primary drivers. Chuck Taylor (chuck.taylor@madisonmarquette.com) is SVP, Leasing in our Ft. Lauderdale ofﬁce. Joe Morris (joe.morris@madisonmarquette.com) is SVP, Leasing in our Philadelphia ofﬁce. P

MARKET WATCH CityCenter Las Vegas, Nevada

“All In” in Las Vegas Maybe the House Doesn’t Always Win

By Walter Bialas

as Vegas is battling the economic recession on two fronts — a local housing market in disarray and the first-ever yearly decline in tourism. Both call into question whether widespread speculative development in Las Vegas will ever be the jackpot it had been. Steve Wynn, the legendary casino magnate, recently admitted in a 60 Minutes interview that if he had known that the economy would have turned down so signiﬁcantly, he would not have started his latest casino resort, Encore. Of course, he added that developments like Encore take many years to come to fruition and the signs of economic distress were not evident when the project was being planned four years ago. Not surprisingly, the hubris that characterized the overall economy in recent years was especially evident in Las Vegas. No single project embodies this mix of optimism and gambling spirit like MGM Mirage’s ambitious CityCenter. Conceived as the U.S. economy hit its peak, the 16 million square foot development in the heart of “The

Strip,” includes 5,000 rooms spanning three hotels, a casino, shopping mall, and 2,700 condominium units in two towers. Development costs were a staggering $7.5 billion. Overruns and construction problems have pushed that number to $8.6 billion. Today, disagreements between its investors and ﬁnancing challenges have stalled progress. Even though MGM recently paid contractors $70 million to keep them on the job, the real possibility of an MGM Mirage bankruptcy due to the $13 billion in debt it has amassed puts completion in jeopardy. Even considered large by Las Vegas standards, CityCenter is simply the latest in a long line of “all in” bets by developers, who for more than three decades have gambled successfully on the town’s unprecedented and consistent growth. Based on that track record, it is easy to see why rampant speculation enjoyed so little scrutiny by bankers, developers, investors, and retailers. The accompanying map of the strip lays out some of the recent projects that have fueled the large-scale condominium development boom over the last few years. Continues on page 38 >

MADISON MARQUETTE

MARKET WATCH THE RECENT LAS VEGAS STRIP CONDO BOOM Because this period is a significant barometer for Las Vegas’ future, these projects may be key to the city’s fate:

GREATER LAS VEGAS

Allure Las Vegas Developer: Residential Units: Completion Date:

Fifield 430 2008

Developer: Residential Units: Completion Date:

Turnberry 1,340 Tower 1 — 2007 Tower 2 — 2008

TURNBERRY TOWERS

Trouble closing units has forced unusual marketing strategies. Ran its first auction to move units in mid-April.

Turnberry Towers

ALLURE

515

TURNBERRY PLACE

15 AREA OF DETAIL

CIRCUS CIRCUS FOUNTAINEBLEAU

With the 2nd tower being delivered, resales in Tower 1 are selling for $100,000 less than preconstruction prices.

115

VD Turnberry 880 2006

THE MIRAGE

Rumored that developer may not be able to make payments given current condo pricing.

ST. REGIS RESIDENCES THE VENETIAN

Trump International Tower Trump 660 2008

Sold out but has only closed on 23% of the units. Second tower postponed.

St. Regis Residences

HARRAH’S

CAESARS PALACE

FLAMINGO HILTON

PALMS

Las Vegas Sands 400 2010

BALLY’S

Construction halted in November.

BELLAGIO

Palms Place Developer: Residential Units: Completion Date:

Maloof 620 2008

Only 60% of units sold through March. Units resold a year after purchase at a 10–12% loss.

Cosmopolitan Developer: Residential Units: Completion Date:

COSMOPOLITAN

PALMS PLACE

CITYCENTER

PANORAMA TOWERS

3700 Associates 2,000 Late 2009

Project may become part of CityCenter.

CityCenter Developer: Residential Units: Completion Date:

MGM Mirage 2,800 2010

Key investor dropped out. Potential bankruptcy by developer.

Panorama Towers Hallier Properties 1,030 Tower 3 — 2009

MONTE CARLO NEW YORK NEW YORK EXCALIBUR

LUXOR

FLAMINGO AVE

PARIS PLANET HOLLYWOOD

LAS VEGAS BLVD

Developer: Residential Units: Completion Date:

WYNN

Turnberry 1,000 Fall 2009

FASHION SHOW MALL

Fontainebleau

Developer: Residential Units: Completion Date:

LAS VEGAS CONVENTION CENTER

Some owners walking away since views are blocked by Fontainebleau.

Developer: Residential Units: Completion Date:

TRUMP TOWERS

Developer: Residential Units: Completion Date:

RIVIERA

Turnberry Place

MGM GRAND

TROPICANA AVE TROPICANA MCCARRAN INTERNATIONAL AIRPORT

Sales well below expectations.

Sources: LasVegasCondoScene.com, Madison Marquette Market Research

PLACES MAGAZINE

MARKET WATCH

“All In” in Las Vegas

by 2008 gross gaming revenues of $9.8 billion — just $1.1 billion shy of the 2007 peak. For the majority of 2008, hotel occupancy remained strong, underscoring a market whose economic engine remained well-primed when many other parts of the country witnessed unprecedented decline. The accompanying charts highlight these long term growth trends in tourism and gaming revenues.

> Continued from page 33

Tourism — A Steady Driver

Anecdotal stories abound that ‘no one is gambling,’ ‘tourism has tanked’, and that ‘hotels are giving away rooms.’ While grounded in some fact, these observations do not paint the complete picture. At least through the end of 2008, Las Vegas tourism remained strong. To put the situation into clearer perspective, 37.5 million visitors came to Las Vegas in 2008. Although oﬀ its 2007 peak, Las Vegas remained one of the most popular tourist destinations in the world. These visitors were also still spending in the casinos as evidenced

VEGAS TOURISM

The problem today is that the region’s unchecked optimism has created a serious disconnect between Las Vegas’ monolithic plans and the realities of a slowing economy. In the past, the city was continually reinvented through the development of these large-scale projects — which spurred further tourist gains as visitors ﬂocked to the area to see the new sights. During these times, the worst that ever happened was that too many rooms and casinos were added. Demand, however, always quickly grew to accommodate the new rooms and Las Vegas’ life blood, gaming revenues, never really showed any decline. For example, while national travel patterns dropped precipitously after the terrorist attacks of 9/11 and the tech bust — Las Vegas visitation, occupied room nights, and gaming revenues all grew.

LAS VEGAS VISITORS (in millions) 40 35 30

This Time is Different — A War on Two Fronts

25 20

The slowing visitor market — Las Vegas’ principal economic engine — is moving negative for essentially the ﬁrst time in 40 years. This is happening at a time when 8,700 hotel rooms came on-line in 2008, with another 18,000 rooms poised to be added by 2010.

15 10

2008

2004

2000

1996

1992

1988

1984

1980

1976

1972

GAMING REVENUES (in $ billions)

12 10

In the past, the Las Vegas economy functioned relatively independently because its drivers — tourism and gaming — were unique and insulated from other parts of the macro economy. In some ways, it could have been called recession proof. This time, however, the far-reaching eﬀects of the housing bust have linked Las Vegas to the broader economy — signiﬁcantly impacting its domestic and international customer base. The Local Housing Bust

What led Las Vegas into the slowdown was the extreme speculation in housing — not unlike the speculation on the gaming front. Las Vegas is, unfortunately, a case study for many of the most troubled markets across the U.S. As such, Las Vegas’ current economic downturn is related not only to its own housing bust, but to the national and global repercussions.

8 6 4 2

2008

2004

2000

1996

1992

1988

1984

1980

1976

1972

Sources: Las Vegas Convention and Visitors Authority, Madison Marquette Market Research

The ﬁrst part of 2009 shows that there has been some recent slippage in these year-end numbers. As of February, total visitors are down 10% and gaming revenues have declined 17%. Hotel occupancy also declined to 81.5% versus 90.6% the pervious year.

It is important to remember that Las Vegas was one of the first markets to show extreme weakness in the housing market — evident as early as 2006. In a nutshell, speculators came into the market to make a fast buck. The home flipping strategy they employed drove prices up (in what had been a very affordable market). Their investment activity also created housing demand that was unreal and unsustainable.

The National Association of Realtors (NAR) reported that the median home price in Las Vegas rose from $132,000 in 2000 to $321,000 by mid-year 2006. This equates to an annual appreciation rate of 15%. Today, NAR estimates that the median home price has fallen to $183,000 — an extraordinary decline of 43% from its peak. What is, perhaps, even more dramatic is the level of overbuilding that took place. While a variety of methodologies exist to estimate home demand, we looked at the relationship between residential permit activity and employment growth. Quite simply — new jobs create demand for new homes. In looking back, Las Vegas clearly shows a boom-bust cycle in home construction since the 1980s. As in many markets, home building periodically gets ahead of demand and then slows to fall back into balance.

As of ﬁrst quarter Las Vegas ranked at the top of U.S. metro areas, with over 35,000 foreclosure ﬁlings. For example, looking at the economic expansion of 1993–2000, the region generated 214,500 building permits and added 309,000 jobs. This translates into a ratio of one new building permit for every 1.44 jobs. In comparison, between 2000 and 2007 the region issued 256,100 housing permits on a base of 266,000 new jobs a ratio of almost one permit for every one job. This recent one-to-one ratio was clearly not supported by real housing demand, but rather by extensive speculation from outside the market. Assuming the 1993–2000 ratio of one permit for every 1.44 jobs is about right for the market, Las Vegas was overbuilt between 2000 and 2007 by as many as 100,000 homes. Magnitude of the Distress

RealtyTrac reports on home foreclosures nationally. Their data shows that as of ﬁrst quarter Las Vegas ranked at the top of U.S. metro areas, with over 35,000 foreclosure ﬁlings. This equates to almost 4.5%, seven times higher than the U.S. average. As could be expected, the top 10 zip codes with foreclosures in Las Vegas were in the expanding suburbs to the northwest, southwest, and southeast parts of the metro area. (See accompanying map.) For example, the top ranked zip code (89108) is located in north Las Vegas and has had over 2,200 homes fall into foreclosure since January 2008. Currently, the median existing home value is $132,000 — down 32% in the last year. Retail has been especially hard hit by the downturn; particularly so in the greater Las Vegas area. Although

MADISON MARQUETTE

MARKET WATCH the pullback in consumer spending is to blame nationally — the over-speculation in Las Vegas housing has exacerbated the problem because retail tends to follow the rooftops. Many Las Vegas homes were purchased by investors who hoped for a quick flip. As such, many were never occupied or occupied only for a short period as the investor moved on to other speculative properties or walked away from a losing bet. In this way, the driver of retail demand — new households and their shopping needs — became uncoupled from normal market dynamics. Troubled shopping centers can be difficult to identify. While percent leased or occupied is easy to track, it is more difficult to uncover centers or retailers within a center that are under-performing or have an unprofitable rent to sales ratio. Recognizing these issues, Madison Marquette analyzed CoStar data and found that Las Vegas is at the top of our list for potentially distressed retail assets, just behind Phoenix. We have included our list of the markets most likely to see distress on this page. Our market review underscored that the principal drivers that put Las Vegas in this position were the sudden increase in vacancy during 2008 — when the market moved from 4.7% at the end of 2007 to 7.6% by the end of last year. At the end of the first quarter, this rate increased to 9.3%. In addition, although Las Vegas experienced good net absorption during

POTENTIALLY DISTRESSED RETAIL MARKETS

the period, 7.8 million square feet of space had been delivered or was under construction. Importantly, this continued development was taking place in a market with weak demand fundamentals — as evidenced by a low pre-lease rate in the space under construction.

Rank

City

Phoenix, AZ

171

Las Vegas, NV

145

Kansas City, MO

142

Atlanta, GA

140

Birmingham, AL

140

Indianapolis, IN

138

Memphis, TN

138

Detroit, MI

135

The Future

Sacramento, CA

134

Many observers speculate that commercial property defaults will be the second shoe to drop in the recession. In Las Vegas, the ﬁrst shoe, the housing market collapse, was so acute it is easy to understand why investors and developers there are extremely worried.

10.

Providence, RI

134

11.

Houston, TX

128

12.

Dayton, OH

127

13.

Dallas/Ft Worth, TX

127

14.

Chicago, IL

136

15.

Inland Empire, CA

136

16.

Tucson, AZ

125

17.

Jacksonville, FL

121

18.

West Michigan, MI

118

19.

Broward County, FL

116

20.

Columbus, OH

116

At this time, a closer look at property-level data shows that much of the disconnect has occurred in the smaller centers. Based on our review, there are 64 centers in the area (over 50,000 square feet) with occupancies less than 80%. While some of these centers may still be in lease-up, the overall retrenchment of retailers, combined with the tough Las Vegas market suggests that many of these centers are now experiencing stress.

Earlier bets on Las Vegas’ continued growth have always been rewarded. It remains to be seen whether another rescue will come or whether a slowdown in growth is inevitable because there is a limit to the demand for the entertainment capital of the world. Walter Bialas (walter.bialas@madisonmarquette.com) is VP, Research in our Washington, D.C. ofﬁce. P

Distress Index

MOST DISTRESSED ZIP CODES 89131

89110

Total Homes in Foreclosure. . . . . . . . . . .1,940 Households in Foreclosure . . . . . . . . . . . .13% Avg. Price Decline — Last 12 Months . . . -31% Average Foreclosure Price . . . . . . . $223,000

Total Homes in Foreclosure. . . . . . . . . 2,160 Households in Foreclosure . . . . . . . . . . 14% Avg. Price Decline — Last 12 Months . -36% Average Foreclosure Price . . . . . . .$96,000

89131 215

Total Homes in Foreclosure. . . . . . . . . . . 1,810 Households in Foreclosure . . . . . . . . . . . 10% Avg. Price Decline — Last 12 Months . . . -32% Average Foreclosure Price . . . . . . . $156,000

89129

89122 Total Homes in Foreclosure. . . . . . . . . .1,790 Households in Foreclosure . . . . . . . . . . 21% Avg. Price Decline — Last 12 Months . .-37% Average Foreclosure Price . . . . . . .$113,000

LAS VEGAS ST R

SUMMERLIN

89148

89121 89122

MCCARRAN AIRPORT

115 515

215

HENDERSON 160

89178 Total Homes in Foreclosure. . . . . . . . . . 1,840 Households in Foreclosure . . . . . . . . . . . 24% Avg. Price Decline — Last 12 Months . . .-36% Average Foreclosure Price . . . . . . . $195,000

Total Homes in Foreclosure. . . . . . . . . 1,490 Households in Foreclosure . . . . . . . . . . 12% Avg. Price Decline — Last 12 Months . .-32% Average Foreclosure Price . . . . . . . $117,000

89110

515

89148 Total Homes in Foreclosure. . . . . . . . . . 2,000 Households in Foreclosure . . . . . . . . . . . .19% Avg. Price Decline — Last 12 Months . . . -33% Average Foreclosure Price . . . . . . . .$191,000

89121 NELLIS AFB

89108

89108 Total Homes in Foreclosure. . . . . . . . . . .2,210 Households in Foreclosure . . . . . . . . . . . .12% Avg. Price Decline — Last 12 Months . . .-36% Average Foreclosure Price . . . . . . . . $95,000

NORTH LAS VEGAS AIRPORT

89129

89178

89123 215

89183

89123 Total Homes in Foreclosure. . . . . . . . . . 1,770 Households in Foreclosure . . . . . . . . . . . 11% Avg. Price Decline — Last 12 Months . .-27% Average Foreclosure Price . . . . . . $166,000

89183 Total Homes in Foreclosure. . . . . . . . . 1,350 Households in Foreclosure . . . . . . . . . . 15% Avg. Price Decline — Last 12 Months . . -31% Average Foreclosure Price . . . . . . $134,000 Sources: RealtyTrac, Madison Marquette Market Research

PLACES MAGAZINE

TOOLBOX Apple

Courtesy of Apple

Sydney, Australia

Seeking Expansion Overseas U.S. Retailers Find Growth in New Markets

By Stephen Stephanou

merican retail concepts are blessed with having a home in the largest, most affluent consumer market in the world. Yet many of these retail brands have saturated their home turf and see overseas markets as the primary growth driver. A retailer can spend years rolling out a brand in the largest U.S. metro markets and then several more years penetrating smaller markets before looking overseas. Today’s globalization, however, makes moving internationally sooner a much more attractive opportunity. American Apparel is a great example of a brand that has moved aggressively overseas while still exploiting tremendous growth opportunities domestically. The concept’s rapid expansion began in 2004 with 23 new locations in the U.S., nine in Canada, and three internationally. Between 2005 and 2008, U.S. store growth was 250%; internationally it was 400%. Many observers suggest that the synergies among shoppers in international cities are greater than the synergies within any particular nation. American Apparel’s urban brand is particularly wellsuited to this phenomenon. A recent report from PricewaterhouseCoopers and TNS Retail Forward predicts that “barriers to global trade will

continue to come down” and that “developing markets will continue to phase out restrictions on foreign retailer operations and liberalize regulations of direct foreign investment.” They call global expansion a key source of revenue and a necessity, not an option, for retailers. They also see the growth of middle class consumers around the globe as a key driver of these international opportunities.

Retail Sales Growth 2006–2011 Russia Nigeria Turkey Indonesia Vietnam India Philippines Argentina China S. Africa Thailand Mexico Malaysia Brazil Spain Australia US

15.4% 12.8% 11.2% 10.6% 10.4% 10.4% 9.7% 9.6% 8.9% 7.9% 7.7% 7.2% 7.1% 6.6% 6.0% 5.7% 5.2%

MADISON MARQUETTE

TOOLBOX

Next Generation Retailers Select U.S. Retail Concepts Opening Stores Internationally GUESS

BEST BUY

AMERICAN APPAREL

Currently Guess has 425 stores in North American and 690 stores internationally. The economy is forcing Guess to curtail its growth plans both domestically and abroad, but international expansion is clearly a top priority. Of the 72 store openings last year, 57 were outside of the United States. Current plans call for 126 news stores throughout Asia and Europe. In addition to the traditional Guess store concept, Guess Inc. also operates Guess Factory, Guess by Marciano, G by Guess, and Guess Accessories. Both the Guess stores and G by Guess target 4,500 square foot locations.

Best Buy continues its U.S. expansion with plans for 90 to 100 new stores this year — longer range forecasts target an additional 500 locations within the U.S., on its way to 1,400 total units. The liquidation of its main rival, Circuit City, has opened opportunities. Best Buy, however, is also aggressively expanding penetration in Canada and China, adding 40 international locations this year. The company faces its stiffest competition in Europe, where UK-based Tesco and German retailer Metro are preparing for battle. Best Buy recently delayed its UK launch to reevaluate its competitive approach.

First entering Canada and Europe in 2004 and Asia in 2005, American Apparel expanded into six new countries last year, including China, Brazil, and Austria. They now operate in 29 countries and see their edgy, urban brand ﬁnding more synergy between international cities than with particular nationalities. Their target audience embodies globalization and their international teams are noted for their passion to build brand loyalty in the local markets. American Apparel has one of the few concepts weathering the economic downturn. Their international same-store-sales last year grew a remarkable 19% versus just 1% in the U.S.

www.guess.com

www.bestbuy.com

www.americanapparel.net

ABERCROMBIE & FITCH

STARBUCKS

APPLE

The company began its global push 3 years ago when it established a group to oversee international development. A&F’s first international stores opened in Toronto and Edmonton, Canada that year. Further expansion took A&F to the UK last year with its first London location, followed by the first Hollister Co. in the UK earlier this year. A&F will be debuting new locations in Copenhagen, Tokyo, and Milan and the company recently received approval to open along Paris’ famed Champs-Elyseés in 2011. They continue to eye Europe and Asia for expansion.

While Starbucks is closing some U.S. locations, it is shifting its focus to international growth. The company sees China as one of its top priorities. It opened the ﬁrst Starbucks in China in 1999, where its total store count is now 350. In an interview with Reuters, Starbucks Coffee International President, Martin Coles said the company’s ambitions for expansion in China could rival its penetration of the United States. In addition, Starbucks has moved into eastern Europe, with new stores in Moscow and a 2009 expansion into St. Petersburg and Poland, with the Ukraine to likely follow.

Of Apple’s 247 stores, non-U.S. locations represent 42, or less than 20%. Notoriously tightlipped about its plans, Apple’s stated goal for opening retail businesses is to expand its customer base through sales to consumers not currently owning the company’s products. Apple’s international market share has historically lagged its domestic presence, suggesting that international expansion could be fertile territory. Their focus on urban street retail and large regional malls is also in sync with most international markets. Apple typically takes 3,500–5,000 square feet, with ﬂagships of 15,000–20,000 square feet that offer special services.

www.abercrombie.com

www.starbucks.com

www.apple.com

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TOOLBOX

Next Generation Retailers Select U.S. Retail Concepts Opening Stores Internationally

TIFFANY & CO.

GAP

FOREVER 21

Of 114 of 184 stores, more than 60% of Tiffany & Co.’s store count is international. Tiffany & Co. announced it will open its ﬁrst location in Amsterdam later this year and called it another indication of their optimism about long term growth potential in Europe. At 54% of sales, domestic stores generate a greater share of revenues. The 17% decline in same-store-sales last year among U.S. stores will only further erode Tiffany’s domestic expansion. The company’s new international plans include seven new stores in Asia and single new units in Canada, Mexico, and Europe.

As Gap closes some U.S. stores, it is opening 25 new international Gaps and 25 outlets. Many of the new outlet stores will be in Canada and Japan, while new Gaps and Banana Republics will open in the UK, Ireland, France, and Japan. One growth strategy is Gap’s franchise efforts in emerging markets. Through a joint venture with a local partner, Elbit Imaging Ltd., Gap will debut in Israel this fall, with Banana Republic to follow spring 2010. Gap president Stephen Sunnucks said, “we believe that international growth remains an opportunity for our brands.”

Forever 21 launched its first store in Los Angeles in 1984. Since then the brand has grown to over 430 stores. The bulk of these stores, however, remain in North America. As Forever 21 continues to evolve its brand domestically, it is moving aggressively into China, South Korea, and the Middle East. In late April, Forever 21 will have launched its first Japanese location. The 18,800 square foot, five-level store will have one level below grade and be located in Tokyo’s trend-setting Harajuku retail district near name-recognized giants H&M and Gap.

www.tiffany.com

www.gap.com

www.forever21.com

KRISPY KREME

PAYLESS SHOESOURCE

SKECHERS

Krispy Kreme has 449 stores, with 75% operating as franchises. Their domestic expansion and evolving consumer preferences are forcing Krispy Kreme to look overseas for growth. By the end of 2009, the majority of openings will be outside the U.S. Recent ﬁnancials show a 23% rise in revenue from overseas, while domestic revenues are down 8%. The franchise has now entered 15 countries and expects to open 50 locations this year, targeting 75 locations by 2013 in China, Malaysia, and Turkey alone. The company is also tailoring its offerings to appeal to local tastes.

With 4,500 stores, Payless is the largest footwear retailer in the Western hemisphere. In 2008 Payless expanded its South American presence by entering Columbia with 10 stores in a venture with local retail partner, Samuel Azout. Recently, the company made headlines by opening its ﬁrst Middle East locations, including Kuwait and Saudi Arabia. Under a franchise agreement with Middle Eastern retailing giant, M.H. Alshaya Co., Payless has an opportunity for more than 200 stores in the region. Expansion plans are on the horizon for the United Arab Emirates, Oman, Bahrain, Qatar, Egypt, Jordan, and Lebanon.

Skechers operates 250 stores globally and another 100 stores through various distribution partners. The company manages its brand under a variety of regional subsidiaries and has an extensive wholesale network that places its products in department and specialty stores in over 100 countries throughout Canada, Asia, Europe, and South America. This reach helps to expand brand recognition as new retail operations are opened globally. Recently, the company announced that it assumed the distribution of its brand in Chile and will take control of the 10 Chile retail stores directly through its 10th Skechers subsidiary.

www.krispykreme.com

www.payless.com

www.skechers.com

MADISON MARQUETTE

NEW YORK CITYâ&#x20AC;&#x2122;S PREFERRED RETAIL REAL ESTATE CONSULTANTS We provide strategic retail leasing and tenant representation services in major metropolitan markets throughout the United States. We value the long-term success of our clients and take a thoughtful, strategic approach to every assignment. We enjoy long-standing relationships with many top urban storefront owners, retail chains, institutional landlords and developers.

The New York office is headed by Virginia Pittarelli and Stephen Stephanou, Principals of Madison Retail Group.

212-255-2900 | www.madisonretailgroup.com Licensed Real Estate Broker

461 Fifth Avenue | 12th Floor | New York, NY

Q&A

DON DORCHESTER

RICHARD WINCOTT

Cushman & Wakeﬁeld

PricewaterhouseCoopers

Property Valuation: Addressing Transparency T

he accounting, appraisal and financial reporting worlds have come under scrutiny this year as property values fall, sales slow and accounting methodologies shift. As cap rates continue to rise and underlying property fundamentals continue to erode, these pressures will only intensify. Marius Andreasen, Director & Financial Reporting Practice Leader of Cushman & Wakeﬁeld described the current state of the industry by saying, “We’re leaving a period in which there was virtually no risk premium priced into commercial real estate relative to alternative, ﬁxed income investments. While the increased availability of data over the past decade may have somewhat mitigated risk by reducing some information asymmetries, as a by-product of this ‘credit crisis’ we will likely be moving back to a period of risk premiums which appropriately price the risk associated with commercial real estate.” Adding to the confusion and volatility is the implementation last year of a new accounting standard, FAS 157, which establishes a framework for measuring fair value and expands disclosures about fair value measurements. The standard impacts companies that

are required or permitted to apply fair value measurements. The new rule has been criticized by those who say it is forcing ﬁnancial and other institutions to price investments, such as mortgage-backed securities, in frozen markets. In response, regulators have recently made changes to the standard.

To get a better appreciation for how the appraisal community is reacting to changes in the industry, we spoke to Cushman & Wakeﬁeld’s Senior Director of Dispute Analysis & Litigation Support, Don Dorchester. Q:

Have the new account rules under FAS 157 had an impact on your appraisal process or in the information you provide to clients?

DD: The appraisal process has not changed, but there is greater emphasis on three key areas: market

participant information, use of price and other market information, and the development of a highest and best use opinion. We are conducting primary market research that involves not only known buyers and sellers, but owners of competing properties or other real estate in the vicinity of properties we appraise. This information is used to better understand market participant perspectives and behavior, identify methods they use to decide whether to sell/buy or not, develop information about attempted transactions that were not formalized or completed, and the like. We try to identify who the market participants of relevance are and something about them. The primary market research is used along with interviews with buyers and sellers to better understand diﬀerences between “price” and “market value” so that fair value determinations can be made. Sometimes not fully apparent from other sources is the existence and level of duress, or the absence thereof, in transactions reported from secondary data sources.

MADISON MARQUETTE

FEATURE We’ve found that owner models are a good starting point, if they exist, but to adapt them to market participant expectations, or for an owner to have the inputs for Level 3 determinations. Q:

Today, non-transactional market participant information is especially important, particularly for real estate which normally has a dramatically longer expected marketing period than organized securities markets. The volume of sales which is abnormally low usually signals potential for duress and/or diﬀerences between sales prices subject to duress and those that would occur in keeping with the fair value deﬁnition. The same can be true on the other end of economic cycles when abnormally high volumes of sales occur. The key in any market, as the Financial Accounting Standards Board (FASB) has pointed out and is deeply rooted in generally accepted valuation principles (GAVP), is to understand the behavior and pricing of relevant market participants and apply market information, not judgment, guesses, or inferences from secondary data. What recommendations do you have to improve the quality of your source information in commercial real estate?

DD: As implied, if not said, above it is necessary to go behind the numbers of market transactions. The numbers reflecting the price of a transaction under GAVP are important only after, and not until, the facts, circumstances, motivations, duress or absence thereof, terms and conditions, and other elements consistent with market value or fair value have been fully developed, analyzed, and understood. For competent real estate appraisers, FAS 157 is mostly business as usual. So the source information should be focused on the market participant information developed by independent, competent real estate valuers. Q:

How is the absence of trading volume impacting your valuation process?

DD: While transactions can be very important, and should be understood in any stage of market conditions, transactions can also be misleading if not fully researched and understood. It is reasonable to believe that distressed transactions will occur when distressed economic conditions are prevalent. This does not mean that all transactions are bad indicators, but that in any type of market cycle they must be fully researched and understood.

about time and cost can be mitigated while the services and eventual goals are enhanced.

What tips do you have for ways in which clients can better interact with you?

DD: It’s actually a two way street. Open and frank discussions and disclosure by clients need not violate the independence of professional valuers. Transparency in financial reporting means that everyone must deal with factual information. The appraiser should be considered one of the legs of a three-legged stool: one is the client, one is the appraiser, and the other is the auditor. By open communication among the parties, concerns

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What are the biggest changes in the industry you have witnessed over your career?

DD: With nearly 60 years under the belt, this is a tough one. But I’d say that one of the biggest is that the notion of real estate as an investment form being completely different from securities markets has succumbed to transformational effects. CMBS is hardly a small house in rural Kentucky these days when the mortgage is owned by people across the globe. However, what markets still do not understand is the time disintermediation (my term) between marketing periods for securities and those for most real estate. Thus, risk adjusted discount rates, IRR calculations, prices vs. market/fair value, and other areas of potential comparison fail to recognize the relative illiquidity of real estate compared with the more usual liquidity of securities. Q:

What other issues are you seeing as a result of FAS 157?

DD: During FASB’s deliberations and study regarding fair value leading to FAS 157 there were a number of questions raised about what appraisers call “limited market” or “non market” properties. These are often confused with “special purpose” properties which are defined as those defined for a specific use, and which may or may not have limited marketability. A property which is normally marketable within a time frame that is understood by the market may be sold in an overheated market in record time, sometimes without even being exposed for sale. Conversely, as is sometimes true today, the marketing time becomes much longer than typically expected, and sometimes there is little if any cohesive view of market participants about when reasonable marketability will return. This is an area in which key participants from the real estate valuation community can assist FASB, other regulators, Congress, and the nation in today’s economy.

liquid nature of the market and the requirements of FAS 157 to use market quoted prices. A recent amendment to FAS 157 is intended to address this issue. Q:

What are the signiﬁcant differences in valuation techniques under FAS 157 than under the traditional appraisal process?

RW: Appraisers have typically used the market, income or cost approach to determine fair value of commercial real estate and FAS 157 does not depart from this established practice. FAS 157 does not prescribe which technique is most appropriate, however, the method chosen should maximize the use of “observable” inputs into the valuation process. Q:

Are you seeing substantial changes in the reporting of real estate asset values as a result of FAS 157?

RW: Since real estate investment funds already reported fair values, overall, the adoption of FAS 157 is unlikely to have had a significant impact on values. However, managers have had to review methodologies and make changes as appropriate which may impact some asset valuations. For example, some managers may have adopted a pure discounted cash flow approach assuming current use, but FAS 157 requires consideration of a highest and best use concept which may be different to current or intended use. Also, the definition of “fair value” under FAS 157 assumes disposition in the principle market for the asset of the owner or in the absence of a principle market, the most advantageous market for the asset. Apart from the difficulty some firms may have in identifying “principle market” this concept may not have been considered in prior estimations and my impact the fair value estimated under FAS 157. Q:

Are there changes that you would recommend be made to FAS 157 that would make it better suited to commercial real estate?

RW: The issue of debt valuation as a liability appears to be the most discussed and controversial. Hopefully this will get resolved in the near future. Q:

To further understand how FAS 157 is impacting ﬁnancial reporting and valuation issues, we spoke to PricewaterhouseCoopers’ real estate expert Richard Wincott. Q:

What is the primary impact of FAS 157 on retail real estate? Is there signiﬁcant impact outside of CMBS-related issues?

In general, how well is the commercial real estate industry doing in their transition to FAS 157?

RW: For those firms impacted by FAS 157, the transition has been relatively smooth, primarily because fair values have been adopted for many years. The real challenge for real estate funds going forward will be the potential adoption of International Financial Reporting Standards. P

RW: Real estate investment funds have been required to report the fair value of property holdings for many years. The FAS 157 definition of fair value is generally consistent with definitions used for valuation purposes and adopted by appraisers. Determining the fair value of publicly traded CMBS assets has been problematic due to the il-

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with budgets totaling more than $265 million and is an active member of ICSC.

degree from Randolph-Macon College and an MBA from The George Washington University.

ULI and The National Trust for Historic Preservation.

PHIL AKINS

ERIC HOHMANN

JAY LASK

Chief Financial Ofﬁcer

Managing Director

Phil is the Chief Financial Officer and is responsible for corporate finance, accounting and Fund administration activities as well as growing the company’s existing network of banking and financial relationships. He has extensive financial reporting and system implementation experience and over 10 years of “Big 4” audit and consulting experience. Phil earned a Bachelor of Commerce degree from the University of Melbourne and is a Chartered Accountant (ACA).

Eric is Managing Director of Investments and is responsible for sourcing, negotiating and closing property acquisitions in Northern California. With over 20 years of real estate investment experience, he has completed real estate transactions with an aggregate value in excess of $1 billion. Eric has a Bachelor of Science from Vanderbilt University and an MBA in Finance from John Anderson Graduate School of Management at the University of California, Los Angeles.

Jay is a Managing Director and is responsible for sourcing, negotiating, and closing property acquisitions in the Midwest and Northeastern regions of the US. He has over 22 years of experience in real estate investment and has completed real estate transactions with an aggregate value of $1.5 billion. Jay holds an MBA from Emory University and a Bachelors degree in Urban Planning from the University of Cincinnati.

KURT IVEY

WHITNEY LIVINGSTON

REYNOLDS ATKINS VP, Human Resources Reynolds is Vice President, Human Resources where he is responsible for human capital management, compensation, employee beneﬁts, and training and development. He has 25 years of experience directing the human resource function for a variety of government, technology, and professional services ﬁrms. Reynolds has a Bachelors degree from the University of Kansas and a Master’s degree from The American University.

AMER HAMMOUR

WALTER BIALAS VP, Research Walter is responsible for overseeing Madison Marquette’s research needs. He has over 25 years of real estate market research experience. Walter received his Bachelor’s degree in Urban Studies from Albright College in Reading, Pa. and his Master’s degree in City and Regional Planning from Catholic University. Additionally, he serves as chair of ICSC’s North American Research Task Force.

DENISE BROWNING Director of Leasing Denise is the Director of Leasing and oversees redevelopment and leasing eﬀorts for multiple projects in the southeast region. She is a Senior Certiﬁed Marketing Director (SCMD) with a Real Estate Broker’s license in North Carolina, South Carolina, and Louisiana. Denise graduated with a Bachelor of Science degree in Fashion Merchandising and Design from Virginia Polytechnic Institute in Blacksburg, Virginia.

Chief Executive Ofﬁcer Amer, founder and Chief Executive Oﬃcer of Madison Marquette, is responsible for leading the company’s investment policy and operating strategy. He has over 22 years of experience in institutional-grade real estate investment and has completed real estate transactions with an aggregate value of $2.5 billion. He holds a Master of Science degree in Management from MIT. Amer is a board member of the Association of Foreign Investors in Real Estate, as well as a member of Marché International des Professionnels de L’immobilier (MIPIM), and ICSC.

SVP, Corporate Marketing and Communications

DAVID BRAINERD Managing Director David is Managing Director of Investments, responsible for sourcing, negotiating, and closing property acquisitions. He has over 13 years of industry experience, and has been involved in real estate investment transactions with an aggregate value of $1.5 billion. David holds a Master’s degree in Management from the Sloan School of Management at the Massachusetts Institute of Technology and a Bachelor of Finance degree from the University of Massachusetts at Amherst. He is a member of ULI and ICSC.

CHAD EISENBUD Director of Investments

PAUL HARNETT

Chad is responsible for sourcing and overseeing acquisitions for the West Coast with emphasis on Seattle, San Francisco and Southern CA. Chad has a Bachelor of Arts degree in Economics and an MBA from The Haas School at University of California– Berkeley.

SVP, Asset and General Management Paul is responsible for the company’s southeastern portfolio and possesses over 25 years of experience including more than 15 years in commercial real estate management, leasing, marketing, and development. Paul is a graduate of James Madison University where he also earned his M.B.A. degree. He is a member of ICSC and possesses a CSM (Certiﬁed Shopping Center Manager) designation and certiﬁcation in asset management through ICSC’s joint Wharton Business School program.

Kurt is responsible for all branding, corporate identity, public relations and corporate communications functions. He has over 16 years of experience in the real estate industry. Kurt has a Bachelor of Science degree from Texas A&M University and is member of ICSC, ULI, and frequently serves as a guest speaker at industry events and universities.

PETER JUN GREG BERGAN

TOM GILMORE

EVP, Operations

SVP, Investments

Greg is the Executive Vice President, Operations Management, responsible for the business operations of all shopping centers and client relations portfoliowide. Greg has over 28 years of real estate experience including managing over 18 million square feet of shopping center renovation/redevelopment projects,

MERLE BRANN Director of Investments Merle is responsible for sourcing and overseeing acquisitions for the East Coast including 770 M Street, University Mall and the redevelopment of Monroe Crossing. Merle has a Bachelor of Arts

Tom is responsible for identifying and managing investment projects and has extensive experience overseeing the development of trend-setting “mainstreet,” resorts, and leisure-based retail and mixed-use projects. Tom attended Towson State University and the University of Baltimore. He is a member of ICSC, The

Chief Operating Ofﬁcer Peter is responsible for determining the company’s strategy and organization, managing the execution of the company-wide initiatives for achieving strategic growth, and overseeing the overall corporate operations and administration. Peter holds an MBA from the Yale School of Management, a Bachelor of Arts degree from Cornell University and is a member of ICSC.

Marketing Director Whitney is Marketing Director and is responsible for developing and implementing strategic marketing plans at Madison Marquette’s owned and managed properties on the West Coast. In addition, she provides marketing support to the leasing teams and executes the company’s presence at key industry trade shows. Whitney has a degree from Nebraska Wesleyan University.

ZAID A MIDANI Director of International Business Development Zaid is involved in acquisitions, corporate planning and strategy for Madison Marquette. He has over 6 years of investment and commercial real estate experience including due diligence, underwriting and project leadership. Zaid attended Indiana University and earned a Bachelors degree in Economics and Political Science.

MADISON MARQUETTE

PLACES CONTRIB UTORS

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He is a member of Arab American Bankers of North America (ABANA), ICSC, and ULI.

dustry representing a number of national and international retailers. She is a graduate of Brooklyn College and is a licensed New York Real Estate Broker. She is a member of the Stores Committee Real Estate Board of New York, Inc., The Association of Real Estate Women and ICSC.

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Madison Marquette’s operations across the country, including acquisition, leasing, and property support. Bryan has a Bachelor of Arts degree in Economics from the University of Virginia and a Master’s degree in City Planning from the University of North Carolina at Chapel Hill. He is also a member of ULI’s Young Leaders Group and ICSC’s Next Generation.

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CHUCK TAYLOR SVP, Leasing Chuck is Senior Vice President, Leasing responsible for leasing the Southeast retail portfolio. He has over 25 years experience in national retail operations and real estate. Chuck earned his Bachelor’s in Business Administration from Appalachian State University in Boone, N.C. and is a longtime member of ICSC.

JOE MORRIS SVP, Leasing Joe is responsible for Madison Marquette’s portfolio in the Northeast including, Montgomery Promenade, Richwood Village, and the redevelopment and revitalization of Asbury Park’s historic boardwalk. During his 16-year career he has created and managed the leasing departments for two portfolios of owned and managed real estate in excess of two million square feet.

ERIC RUBIN Principal, MRG DC Eric is a Principal of Madison Retail Group based in the Washington, D.C. oﬃce and a founding member of Madison Retail Group. He has over 19 years experience in the commercial real estate industry representing both landlords and tenants. Eric’s area of specialization in landlord representation is mixed-use projects, urban storefronts, and development sites throughout the Washington, D.C. region.

STEPHEN STEPHANOU Principal, MRG NY Stephen is a Principal of Madison Retail Group New York with extensive experience in tenant/ landlord representation, retail real estate development and contract negotiations for owners, developers and retailers across the country. He is a member of ICSC and the Stores Committee of the Real Estate Board of New York. Stephen graduated from the University of California at Los Angeles and received his JD from Loyola University of Los Angeles.

GARY MOTTOLA President, Property Investments Gary is responsible for all investment activities including sourcing and deal selection, underwriting, structuring, portfolio management, and dispositions. He has over 20 years experience specializing in real estate, including representing numerous ﬁnancial institutions, joint ventures, and real estate companies in equity and debt ﬁnancings, real estate development and acquisitions. Gary received his degree from Harvard College and a JD from the University of California–Berkeley.

JONATHAN SHARTAR Investment Associate Jonathan works to source, underwrite, close and manage the various retail acquisition and development opportunities undertaken by Madison Marquette. He earned his MBA from Goizueta Business School at Emory University, after graduating Magna Cum Laude from Amherst College with a Bachelors degree in Economics. Jonathan is an active member of ICSC and ULI.

VIRGINIA PITTARELLI COO and Principal, MRG NY Virginia is Chief Operating Oﬃcer and Principal for MRG, New York. She has over 20 years experience in the real estate in-

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BRYAN STEFFEN Research Associate Bryan joined the company in 2008 as a Research Associate. He provides research support for

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MICHAEL WALKER Creative Director Michael has over 20 years experience in the luxury retail sector and has worked for Barney’s, Dolce&Gabbana, and Escada. Michael works at the property level to oﬀer design direction during development renovations as well as aide in event planning. He also works closely with retailers to improve their merchandising strategy and overall success. Michael holds a Bachelor of Fine Arts from Catholic University.

our passion for transforming retail real estate. Madison Marquette offers meaningful work opportunities, career development possibilities and an environment that recognizes and balances personal and work needs. For more information regarding Madison Marquette and immediate open positions, feel free to contact a human resources representative or visit our website at: www.madisonmarquette.com/careers.

ANGELA SWEENEY

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VP, Marketing Angela is responsible for providing strategic marketing direction to Madison Marquette’s project teams with an emphasis on growing new business and driving sales. She has a Bachelor of Science in Business Administration with a Marketing Concentration from Towson University and a Master’s degree in Organizational Management from the University of Phoenix.

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JOAN WOODS Director of Specialty Leasing Joan is responsible for handling Madison Marquette properties such as Anaheim GardenWalk in Anaheim, CA, Bayfair Center in San Leandro, CA and Bay Street, Emeryville, CA and has over 15 years experience within the Specialty Leasing industry, generating over $10 million in revenue. Joan holds a Bachelor of Science in Fashion Merchandising and Marketing from Iowa State University.

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Q&A

Rent Relief: MERLE BRANN

PAUL HARNETT

Director of Investments

SVP, Asset Management

Navigating Options & Alternatives term assistance that will not penalize the landlord in the event a tenant posts strong sales. Accordingly, the structure is set up where the tenant will pay the landlord the greater of two scenarios: (A) a predetermined percent of sales; or (B) an amount equal to dividing sales for a current month during the relief period by the same month prior year multiplied by tenant’s regular rent and extra charges. To further protect the landlord and tenant a predefined floor (minimum rent regardless of sales) and ceiling (normal rent and extra charges) are established in the rent relief amendment.

Beginning in late 2008 landlords began receiving an inﬂux of requests (or demands) from tenants to negotiate some form of rent relief. These situations allow experienced asset and property managers to play a vital role in negotiating terms that focus on maximizing long term property valuation and success. Q:

What makes a retailer a good candidate for rent relief?

MB: The rationale for providing rent relief at all is to maintain the stability of the property. In its best form, it’s a way to give retailers enough breathing room to survive a temporary economic downturn. The best candidates are historically strong performers that are clearly suffering from the drop in overall consumer spending. PH: My experience with large scale tenant rent relief requests began following the 9/11 attacks in New York City. As the manager of a project located near Ground Zero the economic impact following the attack was devastating with the majority of retail tenants experiencing sales declines up to 90%. Although tenants were required to carry business interruption insurance, which made them eligible for reimbursement, the level of sales decline necessitated an immediate need to offer rent relief. Q:

What retailers are not good candidates?

PH: Generally I do not offer national tenants rent relief. It is difficult to see how short term relief at one property will keep an entire national chain afloat. Local merchants as well as franchisees may be good candidates; however, in the case of a franchise operation I first want to understand what the franchisor is doing to help their franchisee. Specifically, I want to know if royalties have been lowered or eliminated as well as what additional support in the form of marketing is being offered. MB: From a leasing perspective, any retailer that doesn’t significantly add to the appeal of the center’s merchandising mix and whose space can be re-leased quickly is not a great candidate. Unfortunately, in these times, the phrase “quick leasing” is an oxymoron. There are also some tenants that are too far gone. Many of these candidates were barely hanging on before the downturn and no amount

Sharper Image, New York, NY of rent relief will likely change their circumstances now or in the future. Q:

What’s the ﬁrst step in the negotiation?

MB: It’s really important to first understand the numbers. How much have sales fallen off? Have total occupancy costs as a percentage of sales gone above a certain level yet? What is the personal financial situation of the owner? When times are especially good tenants don’t volunteer to pay more rent, so when times are bad there needs to be a compelling reason for landlords to lower rent. If an owner can personally fund the temporary relief of the business, we need to understand that. PH: Our rent relief process also includes gathering complete profit and loss information. There’s often a situation where payroll is too high or the owners are taking too much out of the business. We also need to know what the owner has already done to try to keep sales up or what is their plan to invest the cost savings they are requesting?

It’s also important to walk the store. Often this exercise is where you ﬁnd underlying merchandising or inventory management problems that can’t be ﬁxed by rent relief alone. We don’t want to simply be an enabler of bad operating habits. Q:

What are primary structures for rent relief?

MB: The ideal circumstance is a temporary reduction in rent per square foot that lasts 6–9 months. At the end of the period, the retailer will either repay the discounted amount in one payment or pay over time. Under this situation, funds are made available for the retailer to keep operations going while the landlord maintains in-place net operating income for the property. Moving to all percentage rent deals are often complicated by reporting issues and can be a major hit to a property’s valuation. Q:

What alternative relief can you provide to retailers?

MB: Identifying ways to help retailers without providing rent relief is where a good management team can shine. One commitment that management can make is in the area of individualized marketing support. A $5,000 investment in a marketing program can sometimes make a real difference and boosts sales to a level where relief is unnecessary. PH: Bringing in outside consultants who have expertise in various retail categories can also add tremendous value. In many cases, local and regional operators have system inefficiencies that experts can fine tune and adjust. In the long run, addressing these underlying financial leaks is far more valuable to a retailer than temporary rent relief. Merle Brann (merle.brann@madisonmarquette. com) is Director of Investments in our Washington, D.C. ofﬁce. Paul Harnett (paul.harnett@ madisonmarquette.com) is SVP of Asset Management in our Charlotte ofﬁce. P

PH: There are many options for structuring rent relief; however, my preferred approach is to offer short

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