ACRE SoCal’s Annual Developer Summit Recap
The importance of “timing” takes center stage at this year’s ACRE SoCal Developer Summit
Long Beach, CA – November 8, 2016 – ACRE hosted a panel of top Southern California commercial property developers to gain their insight in the state of the industry.
Tuesday, November 8th, at the Grand Events Center in Long Beach, five of Southern California’s most active and successful developers ascended the dais for a highly informative panel discussion on the current state and coming trends in the retail property development. Sandy Yavitz, President of the Yavitz Company, moderated a panel that included Patrick Cox, ValueRock Realty Partners; Scott Fawcett, Marinita Development Group; Bob Lewis, Pacific Development Group; Mark Schurgin, Festival Companies; and Arturo Sneider, Primestor Development.
Moderator Sandy Yavitz opened the discussion asking the panelist to share some of their biggest challenges…
What Are the Biggest Challenges in Retail Development Today?
Scott Fawcett of Marinita Development Group noted “Time and timing” as his firm’s most harrowing challenge in today’s market, a sentiment universally echoed by fellow panelists. Municipalities and utilities are slow to act, and simply gaining an audience with these organizations is more difficult than ever. Developers are struggling to secure entitlements and necessary infrastructure, particularly utilities, which often creates ongoing and difficult to resolve delays. And these delays result in penalties for failure to meet construction delivery dates.
“Start early,” advises Patrick Cox of ValueRock Partners, “begin with utilities, then secure entitlements, and finally move on to construction,” Patrick says in describing what he considers the most effective workflow in the current development climate.
“Tenants are analyzing and over-analyzing projects, final approval often takes six months to a year,” says Bob Lewis of Pacific Development Group. And with tenants slow to make firm commitments, kick-out clauses embedded in lease agreements, and slow-moving infrastructure further complicating the entire process, developers are in a “constant struggle to ensure all the ‘dominos’ fall in place at the right time.,” Lewis adds.
How do Developers Address Penalties?
“Just say no to risk,” Scott Fawcett advises in simply denying the inclusion of delayed delivery penalties. And be willing to “call their bluff,” Fawcett adds in dealing with tenants who threated to walk away from a deal over a penalty clause.
“Fight for a ‘reset date’” in the lease agreement, and “calendar that date” counsels Patrick Cox. If a project is not on track to meet the original delivery date, use the “reset date” clause and “seek to extend the delivery date,” Cox adds.
But with many tenants, timing is an issue developers absolutely must be sensitive to says Mark Schurgin: “Ross, Marshalls and other similar retailers purchase goods, pay for advertising, and hire staff on a seasonal basis (the holidays being a common example),” and failure to meet a delivery date that coincides with seasonal expenditures grossly impacts these retailer.
Where is The Retail Development Industry Headed?
“Online sales account for 10% of all retail sales. And the retail market MUST adjust accordingly,” Bob Lewis notes. With “three major sporting goods retailers closing” consolidation is a key concern. As is “showrooming,” with stores, like Restoration Hardware, that maintain retail outlets primarily for display and marketing purposes, an approach that yielded a “20% increase in annual sales for Restoration Hardware” Lewis further notes.
“Hope Hospital administrators predict 50% of children born today will live past 100. And a large scale elderly population will seek the type of convenience mixed use developments offer,” Lewis also says of the growing mixed use development trend.
As matter of practicality, “European cities long ago adapted to the mixed use model” Arturo Sneider observes. This growing trend, however, requires communities to “monitor density” and “plan for change,” Sneider adds.
“We’ve always had good luck with small strip centers,” Say Scott Fawcett, adding “10,000 SQFT neighborhood centers [populated with community service oriented businesses] just don’t lose tenants.”
Q & A Session
Question: How much does water matter?
Answer: Increasingly, communities are requiring “retention and detention” Lewis says of a practice that obliges commercial properties to retain waste water on-site instead of dumping into sewers or the ocean.
Q: When do you make your money, when you buy or when you sell?
A: Panelist universally agree – If you plan correctly, it’s when you buy.
Q: Biggest unexpected windfall + biggest unexpected cost?
A (Patrick Cox): Biggest unexpected cost was a redevelopment project that required additional utilities installations and a far larger investment in infrastructure than ever expected. Hidden costs are often the bane of redevelopment projects.