Prying Properties Loose
Important for retailers to understand is that commercial real estate today is an industry in transition. Its landscape is littered with landlords, if not desperate, than at least strongly motivated to make deals work.
“Things are tight,” said George Anderson, vice president of market analytics for NAI Global in Princeton, N.J., “and when you are sitting on vacant real estate for two or three years, push comes to shove. Landlords are looking to different avenues to try and get space leased or owned or whatever.”
How to shake loose the maximum number of concessions once again begins with knowing the local market. “It’s telling landowners what is in the market,” said Anderson. “It used to be that c-store operators and really any retailers were not doing their homework—it was simply on a real-estate-by-real-estate basis. But what we’re finding is that with c-stores it’s about bringing the information back to the landlord to say, ‘Hey, there are 18 competitors in a mile radius, I’m not going to do quite as well as I think we should, therefore the rent is going to have to come down.’ You’re almost playing devil’s advocate, if you will.”
At the end of the day, Anderson concluded, it comes back to money. “Get concessions whether it’s three or six months free rent, a tenant-improvement allowance of $4 per square foot or whatever it happens to be—we’re seeing a lot of that giving and taking,” he said. “People want to get the space rented, and giving six months free rent or putting some sort of renovation clause in there is money back in the c-store’s back pocket.”
With commercial real estate prices having dropped to their lowest levels in a decade, c-store operators have plenty of leverage when it comes to acquiring good locations and gaining concessions from landlords.
Advertising Age reported earlier this year that while retail sales remained down nationally, according to the U.S. Department of Commerce, the upside for retailers of all kinds, and especially small marketers, is that they will be able to take advantage of less expensive leases.
“There’s going to be a lot of opportunity for retailers out there,” said Charles Wetzel, president and chief operating officer of market planning firm Buxton. Prime locations and enough control to negotiate stronger lease rates are empowering both national and regional retailers.
“It has been our recent experience that landowners are becoming much more realistic about the value of their land,” said Eric Zoph, vice president of construction for Thornton’s Inc. in Louisville, Ky. “It’s much more affordable than it was two or three years ago. That’s a big component.”
Thornton’s is most definitely in a growth mode. By mid-October it had opened two stores in just a few weeks, had three more in the cue for construction and several more slated for the balance of the year. The depressed real estate prices, naturally, help the bottom line. “Certainly it helps the return on investment when you get land at a reduced price,” said Zoph. “It allows us to be more aggressive overall.”
How big a dip in price real estate has taken, of course, depends on a variety of factors. Zoph said he has seen land that was selling for $1 million–$1.1 million going for as low as $700,000–$800,000, which he terms “a significant bump.”
Executives at the 163-store chain are also seeing less interest in new sites. “We’re not getting as much competition for those corner lots that we’re looking for, so that has helped reduce the price, as well,” Zoph said.
Over the last six months or so it has also become easier to obtain entitlements from municipalities. “A lot of that has to do with our industry: it’s a lot less susceptible to peaks and valleys in the economy,” Zoph said. “We’re a jobs producer. We are an industry that is heavily taxed by various jurisdictions. In many municipalities they’re beginning to realize—they’re sort of waking up to the fact—that we can help some of their local budgets.”
The lower cost of commercial real estate may also be responsible for an increase in acquisition activity.
“There are a number of factors that put pressure on our industry and certainly are facilitating the acquisition environment. Commercial real estate may be one of those,” said William Walljasper, senior vice president and chief financial officer for Casey’s General Stores Inc. in Ankeny, Iowa, whose company fended off a hostile takeover by Canadian marketer Couche-Tard.
At the same time, Walljasper cautioned, Casey’s market area is comprised of small town rural counties and demographics throughout the Midwest that did not see the kind of real estate appreciation experienced by more metropolitan regions. “Therefore they also didn’t see the declines that other parts of the country have experienced over the years,” he said. “And so other factors are probably a little bit more prevalent in looking at real estate at this point.”
Those factors that are putting pressure on individuals to sell their businesses include everything from increased credit card fees and working capital pressures to increased legislation and regulation of tobacco products, higher volatility in the gas environment and more. Real estate does play a role, Walljasper confirmed, but probably not one as prevalent as in some of the larger real estate markets.
By the end of its current fiscal year on April 30, 2011, 1,533-unit Casey’s is planning to increase the size of the chain by 4% to 6%, which will translate to roughly 60-90 locations. “Probably a third of those will be new store constructions,” Walljasper said. “The remaining ones will be acquisitions.”
The reason, Walljasper added, is obvious. “Pricing certainly seems to be attractive for us.”
There are a couple of different ways that c-store operators can take advantage of the realities of the real estate market, said George Anderson, vice president of market analytics for NAI Global in Princeton, N.J., a leading commercial real estate services provider. “Real estate is ripe for the picking—I don’t mean to sound cliché, but it really is.”
The best thing any retailer can do at first, Anderson insisted, is his homework. The goal is first and foremost about mitigating risk, not simply buying real estate. “It’s going into these markets and doing what we call ‘market discovery,’ really understanding the market first and foremost,” Anderson said.
For example, does a particular location even fit with the store’s consumer demographic? “It can’t simply be that they’ve got a great site at the corner of X and Y with great visibility and exposure and great rental rates,” Anderson explained. “That’s only a piece of the puzzle. The bigger piece that retailers are learning is how important it is to understand the market and to project. Is the market going to be just as good today as five years from now? That’s really where we’re seeing a big change.”
That change reflects a growing savvy when it comes to confronting the realities of the marketplace. “In the past, birds of a feather would flock together,” Anderson said, “and so wherever Wal-Mart was everyone would go so they could benefit from traffic.”
Increasingly today, however, retailers are choosing a different direction. “Even though real estate is there—obviously we all know that supply is abundant—they’re really taking a cautious approach, from the big box to the small convenience guy,” Anderson said. “From a c-store’s perspective: you might have the best site in the world with the best rates, but if you are the 18th c-store to go inside of a one-mile radius, you’re revenue expectations are going to take a beating. So we’re really seeing a much more cautioned, disciplined approach to looking at markets. They’re putting the customer before the real estate. That’s really what we’re seeing.”
Putting the consumers first in the decision-making process involves measuring what Anderson calls “share of wallet.”
“How much money do people have in a particular market area for any particular goods and services? You can’t just go on traffic counts and visibility anymore; it’s got to be share of wallet,” he said. “Types of people are more important than numbers of people in a market. They’ve really got to go beyond that picture.”
For the new fiscal year, which began on Oct. 1, Thornton’s is scheduled to open 8-10 locations—all through ground-up construction—and remodel several others. The company has paid close attention to the markets it’s building in and is indeed targeting markets with strong growth potential.
“We keep our eyes out for acquisitions,” Zoph said, “but 95% of our growth, historically, has been through ground-up construction. It’s land we’re buying, and if we can’t buy it we’ll lease it, but we like to have a purchase option.”
s management has seen some success on that front there the last couple of years. “We haven’t been able to exercise some of those purchase options because landowners have not been willing to sell,” Zoph recounted. “They want to continue to lease to us. But for a couple of years now we’ve had some success in getting some early buyouts.”