Tuesday, June 2, 2009

Fear and Loathing (At The Global Retail Real Estate Convention) in Las Vegas?

By: Jonathan Hipp & Patrick Nutt

Comments by Jonathan Hipp: Let’s set the scene: We are at The Global Retail Real Estate Convention, hosted at the prestigious Las Vegas Convention Center. It’s a huge building, 3.2 million square feet of space, ready to receive a massive migration of retail real estate people from all over the country. The center is composed of over 2 million square feet worth of exhibition space and 144 meeting rooms (totaling 225,000 square feet) entrenched throughout the facility. It is here one of the largest conventions will take place; 50,000 thousand people will be packed in for four days to see and hear the latest from industry experts. Thousands of booths and tables will be set up, creating a maze of lights, sights, sounds and people that would send the unprepared into a daze. For four days, this place will be the central hub and nexus of retail real estate for the entire globe.

At least, that’s how it’s been for years past. Word on the proverbial street is that this year may be different. The new notion sweeping through offices and conference calls is that only half as many people will show up this year. Now, that is still 25,000 people, but in the context of the massive convention center, there’s no doubt people will notice the absence. Perhaps whole sections of the 2 million square feet of exhibition space will lie vacant; maybe the doors won’t be opened on 72 meeting rooms. What really should strike people is simply where did all the people go? If anyone is looking for a test of health for the industry this may be it. How bad has this recession really hurt people? If it’s to the point that half the attendance of this conference is gone, it will be a striking indictment.

This is not just some party in Vegas where people come to have fun. In the realm of business there may be no better opportunity than an industry convention to meet and gain new clients. Where else can you meet thousands of potential leads face to face, many of whom are actually decision makers at their respective companies? That’s why so many have traditionally made the pilgrimage; it literally pays off. One wonders what the attitude will be at this year’s convention; people there to look and not to buy? Let’s hope not. Hopefully the people there this year are at least viable players, ready and willing to conduct some business.

With all the supposed negative news, there are also some positive signs. Recent news may point to a healthier market for commercial real estate than some had previously thought. According to the new stress test, baseline losses for office, industrial and retail properties were projected to be 4%-5% with worst case scenarios between 7%-9%. Construction loans had baseline losses projected at 9%-12% with a worst case of 11%-15%. Multifamily housing fared a little better with projected baseline losses of 3.5%-6.5% and a worst case of 10%-11%. All told, worst case scenarios have banks loosing around $53 billion from commercial real estate loans, which pales in comparison to projected residential losses of $185.5 billion. From these numbers there is no doubt that commercial/retail real estate is healthier than it’s counterparts, hopefully that luck won’t change in Vegas.

Comments by Patrick Nutt: As I sat in the Houston airport on my way home from the annual Las Vegas ICSC convention I was thinking back over the entire experience, the meetings I had, the follow ups I needed to make, and how I felt about the whole experience. As I was “enjoying” my one-hour layover, I was informed that it would now be two hours. While I immediately regret having saved $100 on my flight in exchange for having a layover, I realized this might actually work out pretty well, as I now had time to have a decent dinner rather than surviving the entire day off tiny packets of peanuts and 5 oz glasses of the airlines best water. Over my dinner, I realized that this year’s ICSC convention was a very similar situation; I left home thinking I was wasting my time and returned realizing it was one of the most productive 2 days I’ve had in my professional career.

As I started the process of booking meetings weeks before my departure, I quickly realized I was in the minority, as it seemed no one was going to be attending. I had a high level of uncertainty going into it, wondering if the annual trek would be worth the time and effort, but once I arrived in Las Vegas and met some friends and colleagues, the small talk quickly turned to business and I realized that there really are some glimmers of hope. There were developers with new sites actively being approved by national retailers, brokers with recent closings, clients with specific AND realistic property needs, and even sellers with appropriately priced deals that made sense when evaluated based on their credit and real estate.

I’m not saying there wasn’t any pessimism at the conference, as clearly a walk around to see who was present, and more importantly, who was not present, served as a cold reminder of the times we are in. General Growth Properties booth sat in the middle of the convention, as the proverbial 1000lb gorilla, fresh off their bankruptcy announcement, it seemed as though their booth this year came complete with an erie reminder that in the world of real estate, there is no such thing as “too big to fail”. In contrast to GGP’s booth, the complete absence of America’s largest retail real estate owner, Simon Property Group was a constant discussion point among attendees.

All that being said, I was able to arrange meetings with top level decision makers, people that may have been either out of my reach or just simply too booked to make time in years past. Every meeting consisted of a similar tone: “The attendance is down and I couldn’t be happier”, “the people here are the one’s I want to do business with”, and even a slightly bitter “Good riddance!” were just a few of the comments I heard. I quickly realized, that the older generations of real estate professionals that I was meeting with have weathered the cycles, paid their dues during the down times in order to prosper in the good times. These veterans watched as the industry swelled like GGP’s debt over the latest boom, with everyone just trying to get a piece of the action, make a quick buck, while often not fully understanding what they are dealing with, and more times than not causing more harm than good over the course of a transaction.

If there is a lesson or overall sentiment to take away from this event, I would say that the show’s attendees were overwhelmingly resilient, realistic about the state of the industry, and are dedicated to a long career in retail real estate. While we may have to work twice as hard for half the number of transactions these days, if you are dedicated to being in this field, the knowledge you will learn, opportunity that will be presented, and relationships that are created through the tough times will carry with you over the lifetime of a career.

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