TUSTIN, CA—A lot has changed in the retail realestate market since Chris Hite, president ofTustin, CA-based real estate services firm CorelandCos. founded the firm with PatrickGalentine in the spring of 1990. Walmart rose todominance, recessions have come and gone, and the Internet is now adriving force in the industry. Throughout that time, the commercialreal estate services company has served clients throughout greaterSouthern California. With the annual RECon show inLas Vegas only a few weeks away, we spoke with Hite about thetrends he is sees in the current market and how things have (andhaven't) changed in retail real estate.

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GlobeSt.com: You guys have been in thebusiness for about 25 years. How has the industry changed? I assumeyou've seen a lot of shifts in retail realestate?

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Chris Hite: Back when westarted, perhaps with the exception of some larger dominant mallproperties, neighborhood-community strip centers were all verycookie cutter. It was typical to have a white stucco grocery- ordrug-anchored center with shop space and uninspired red letteringfor signage… that was the extent of the design quality.

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By early 2000s, you started to see developers andarchitects focus on creating new retail "places." It became morethan just about getting in and getting out. It became about gettingpeople to stay for an experience. You started seeing expanded foodcourts, fountains, stone, and all of the related embellishmentsthat really created a community environment. That has all evolvedand provided a unique experience that you can't get on theInternet. It has fostered a lot of creativity which has been betterfor retail as a whole.

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GlobeSt.com: So you think thebrick-and-mortar retailers have adapted well to e-commercecompetition?

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Hite: It's an ongoingevolution. The unfortunate thing is that retail has faced a doublewhammy—the evolution of online retailing and the downturn in theeconomy. This crushed a lot of retailers. Now we're coming out ofthis recessionary period and the focus is all on positioning ourcenters to remain competitive with the Internet. If you're sittingin a lifestyle center with a bookstore next to an electronicsstore, next to an office-supply guy, you really have to askyourself what you're going to do when these spaces becomeavailable.

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GlobeSt.com: I have heard some peopletalk about concerns in the apparel sector, especially with theColdwater Creek news. Do you share those sameconcerns?

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Hite: Some of theold-guard retailers that have not adapted to this post-recessioninternet environment have struggled, but that has also createdopportunity for new retailers. Even as I read about retailers likeColdwater Creek, one of our brokers is now representing anew-concept Japanese apparel retailer looking to make a strong pushinto the Southern California market. There is always a new breed ofretailer looking to break in, so while one concept is on the wayout, others like Aki Home and Daiso are just getting started.

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GlobeSt.com: Due to a lack of newdevelopment and retailer demand, do you think a lot of vacanciesout there now will become backfilled?

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Hite: It depends. Thecore centers, by and large, are doing very well. They have beenable to backfill vacancies and sales are trending upward. Butoperators of 'B' centers dealing with vacant boxes have realizedthat they might not be able to fill a 30,000-square-foot space andwill have to subdivide it. They might add a popular fitness tenant,like Planet Fitness or UFC, and fill the other half with a valuechain, all at lesser rents.

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Overall, owners are continually adapting. Forexample, there are many 'C' centers being repurposed because theyprobably should not have been built as retail. This is where youare seeing some conversion to medical-office or housing.

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The Tenant-OperatorRelationship

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GlobeSt.com: How is all of thischanging how operators lease and manage their centers? Are theymore aggressive or creative than before?

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Hite: We are seeing themost dramatic shift in 'B' and 'C' centers where owners are gettingout of “safe mode.” Through the downturn you might have beencoddling a tenant with short-term or month-to-month renewalsbecause you needed the cash flow. But finally, leasing demand isstrengthening and owners are realizing they have the ability topush. An owner who is not highly leveraged now has alternatives.They might take some risk and lose a tenant, but they'll likely beable to backfill closer to market rent.

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GlobeSt.com: What kind of due-diligenceservices are you providing now to potentialbuyers?

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Hite: There's a setprocess that a client would engage us in for due diligence, such asabstracting leases, building budget models, and CAM (common-areamaintenance) models through which we forensically try to understandthe operation of the center. We look at prior years to identifyareas where there might be efficiencies or inefficiencies thatmight indicate there was a problem operationally. Our brokeragegroup also contributes and consults with clients so they get aclear understanding of the market we're seeing.

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We're working with a variety of institutionalowners located throughout the U.S. who want to get into the marketbut are hesitant because California is so segmented. This is wherewe can be of greatest service. The local expertise of our brokerageand management teams can assist an owner navigate through thisprocess. We adapt to the client's needs, remain flexible, and fillin the gaps, while looking out for the best interest of theproperty.

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GlobeSt.com: Is flexibility the key tobeing successful in shopping center operationsnowadays?

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Hite: It's an importantcomponent. You have to be able to listen and really understandyour client's goals. A number of buyers that came into the marketover the last couple of years are now turning around and sellingproperties. They weren't interested in 10-year roof and parking lotplans. They basically came in wanting to lease a space or two andexit. That's a very different owner than an institutional ownerthat wants to hold an asset for 10 years, and really understand howto operate it over that time.

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You have to adapt your management and leasing planto meet the objectives for the property, and you also have to bewilling to be realistic. We had a client that was dealing with alot of vacant shop space in a difficult center. In our opinion,they weren't going to lease it at the rates they were asking. Werecommended an alternative solution and the client appreciated it.In this particular case it meant recommending another specialtybrokerage team. If we aren't the right company to execute, we don'thesitate to bring in firms that might be a better fit.

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GlobeSt.com: So how do you see SouthernCalifornia retail holding up compared to the rest of thecountry?

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Hite: My general guttells me that Southern California is certainly stabilized. Overall,vacancy rates are shrinking. Our brokers are as busy as they'veever been and we've had an exceptional first quarter… and mycolleagues and competitors are all saying the same thing. It's thebroader institutional CRE segment that's finally finding favor. Nowpension-fund advisors have been instructed to start buying retailas an allocation to balance their overall portfolio, and Californiais seen as a core, stable market. That's an encouraging thing tosee.

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Everyone talks about interest rates going up andhaving a polarizing effect on values, but if you look at comps,pricing is still very strong on retail assets. Jury's out on CMBSmaturities. We'll see if the market provides a lift for therefinancing of the huge tranche of loans maturing in 2015, '16 and'17.

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GlobeSt.com: We started thisconversation with how the industry has changed over the last 25years. How has your business changed specifically over that timeperiod?

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Hite: My business partnerPat and I started the company based on a business plan we draftedin our apartment back in April of 1990. We hired someone to createa name and a logo, charged everything on our credit cards, anddrove to our first ICSC conference to meet people. We walked aroundwith a stack of business cards so poorly printed that the ink wasrubbing off as we handed them out. Obviously we have evolved fromthat two-person bootstrap entity!

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We have made a conscious decision to stay focusedon retail, and we intend to maintain our expertise in thisdiscipline. Despite the industry's dramatic evolution, there isstill no substitute for old-school blocking and tackling. Even withall of the advancements in technology to market properties, ourbrokers remain market experts who focus on maintaining strongrelationships that allow them to be successful year-after-year. Ourmanagement teams remain focused on engaging good vendors, keepingcosts down, analyzing expenses regularly and making sure that CAMreimbursements are as efficient as possible. Our focus andcommitment to each property remains the same and with every year weadd another level of experience.

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