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TRC Blog

November 09 , 2011

Collaboration Overcomes Crazy

Collaboration Overcomes Crazy

By David Wilson | President | Connected Development Services Our theme for this newsletter is collaboration. Although it is being emphasized in this publication, it is a practice we have followed since the very beginning of The Retail Connection. It is the reason that I decided that TRC is where I wanted to work. Being a part of a team that has the developer, brokers and retailers working together to meet everyone’s needs seemed to me to be the best way to build projects that work for everyone. On all of the TRC/Connected Development Services developments and redevelopments, we have worked closely with brokers to identify the best group of retailers for the project we had in mind. Additionally, we have worked very closely with retailers to make sure that, to the best of our ability, we were delivering a product that provided the opportunity for them to achieve maximum sales. From center layout and colors and signage to the merchandising mix and location of the different uses, we have unashamedly gone to these retailer friends for their guidance. We can’t do everything that is suggested all the time, but we certainly glean from them what we can so that our centers, as a result, are better. I think we do collaboration well and we intend to keep reaching out and paying attention to what our friends have to say. Now, based on collaboration, here is my opinion on this market. I think that the worst is over for retail. I read an article recently about speakers at a seminar who said with unemployment where it is, downgraded debt, the poor housing market, and weak consumer credit that the outlook is uncertain. I disagree with this. Those are all issues that need to be improved upon, for sure. And, I am not saying that the rebound will be quick, but we have hit bottom and we are headed up from here. Here is my chronology for how we arrived at where we are and why I think we are poised for the next step. It doesn’t fit every project and probably misses the overall situation for other states, but I think this is it for Texas and the surrounding states. The consumer has settled in. They have either kept their job, gotten a job they wanted, taken a job they didn’t want but had to have for money reasons, or resigned themselves to living the best they can on what resources they are going to receive from whatever sources they have. The tenants who have survived are for the most part by now making money. Many are making good money and many have been expanding or are looking to expand and increase their market share. This has been a good market for the healthy ones to really take advantage. This stabilization of the existing tenants and expansion flurry by some has filled up quite a bit of the vacant space hangover we have had. With this, the existing landlords, developers or investors who made it through the downturn or lenders/servicers for those who didn’t, have been the beneficiaries of this tenant stabilization and expansion flurry. Their spaces are getting filled up. They have also benefitted from the wonderful gift of low interest rates that we have had for some time now. With the lease up and low interest rates, many are getting healthy enough to turn down the tenants who want too much of a bargain. Many are even raising their rental rates. The tenants who are renewing or are looking for new space are still fighting a good fight, but if the center is full or filling up, and since there is no new space coming onto the market, there won’t be much give by the landlord to the demands of the tenant. So, the project owners are getting healthier and the returns are improving. As the banks see this, they, who have also gotten a good bit healthier of late, are opening up to new lending for acquisitions of projects that have established cash flow and just need to be fixed. And, the investors are into the acquisition game in a big way. Now that the risk level has come down, the investors are choosing to step in and compete for the deals. Their required IRRs have dropped of late. Connected Development Services has ridden the roller coaster. We got hit with the surprise of the market collapsing. We worked with tenants on rent relief when they really needed it and when we could. We received relief from a tenant friend on a co-tenancy default. We continued to lease our spaces at lower rates where we didn’t have as strong of a lineup of quality tenants and at pro forma where our lineup was solid. We didn’t need to work out anything with our lenders and we were able to refinance when we needed to. We benefitted significantly from the very low interest rates. And, although the final outcome is still in the future, I don’t foresee our investors losing money on any of the projects we did since the inception of the company. Now I see us entering a different phase in our economic cycle. This is the time that the bold, capable, and hardest working will make their best deals for some time to come, and this includes everyone involved. Some will say that I am crazy, but we have gotten to a point in certain situations where new development makes sense. I know this because my collaborators tell me so. My broker friends identify locations that their tenants need and my retailer friends agree with them. It won’t be easy. The investors are very proud of their money. The banks will be hard to satisfy. Both will require more in terms of preconstruction prove up and assurances. The retailers will have to pay more than they have recently been used to because the existing space bargains are gone and construction costs aren’t down, they are up. But, given all of this difficulty, for the developer who has and exercises the ability to collaborate with his team, it will be happening soon.
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