ICSC's Michael Kercheval

The International Council of Shopping Centers’ RECon, the largest retail real estate convention in the world, is taking place this week in Las Vegas. Of course, the past 12 months have not been the retail industry’s best. Linens ‘n Things, Circuit City and some large regional chains are out of business. Once-stable retailers are seeing sales plummet. Developers aren’t able to complete their construction pipelines due to a lack of financing. All of this–and the fact that Simon Property Group and Westfield Group have pulled out of leasing convention space–RECon has led to a lot of chatter in the retail real estate world, debating what the conference would be like this year. ICSC is expecting 30,000 to 35,000 attendees this year, down from more than 50,000 two years ago. But this year’s projected number still exceeds what some have predicted. Michael Kercheval, president of ICSC, recently spoke with GlobeSt.com, shared his perspective on these developments and gave us a peek into what has changed this year at RECon.

GlobeSt.com: How will people do business differently this year than compared to previous RECon events?

Kercheval: In years past, and up through last year, it was all about leasing rollover space. Now the major emphasis is on the quality of tenancy, both from the landlord side and the expanding retailers that are looking to shore up the quality of their store portfolios. It really is all about quality and not quantity, and that will be different. It will be positively different because the discussions will be more sincere and robust because there will be more time to carry on those conversations. The frenzy of using RECon to grip and grin and see as many people as you can was kind of like Facebook, having as many friends as you can but not going very deep.

That’s what it was for some people, a great way to cast a net and bring in thousands of contacts. You can still do that, but this year in particular people who are going have been there before, and it is more focused on meaningful discussions that are going to cement relationships. Probably the worst deals are done during good times, so I supposed some of the best deals will be done during these times. There are so many signs that we are at or near the bottom, it reminds us that there may be an upside, so now is the time to put together those relationships that are going to be meaningful when the economy turns around.

GlobeSt.com: Are there any different programs that ICSC is highlighting at the convention this year?

Kercheval: When people take a step back and look at the program, they will see a very definite picture. That picture is: It’s all about retail and the retailer. We’re opening the program this year with a retailer runway, and that’s different. It’s really focusing on what’s going on from a retailer perspective. That’s of interest, first–to landlords, second–to investors, and third–maybe, to consumers.

The last big blockbuster program is at lunch on Tuesday. Historically, we’ve had a retailer speaker on Tuesday at lunch, and that may or may not have been of interest to a lot of people. What we’ve decided to do this year, is to take our hot retailer awards and make the luncheon our awards program. We always get several thousand people who want to hear those awards. It will allow even more to hear about those retailers, and it’s entertaining as well. We think it will help reinforce the notion that we are focused on the retailer as a key component to our industry. It’s not just about brick and mortar and dirt. It really is about the retailer. You’ll see those events bookending the whole event.

In the middle, we’ve completely revised our program. We put this together about 12 months in advance, and 12 months ago, the world looked very different. The guts of the program have a lot more hands-on, how to, knowledge sessions. They’re dealing with tough times, troubled times and opportunities down the road. Another component is about people. There are lots of sessions on how to improve yourself professionally, find opportunities and close the deal. The Reconnect Pavilion, which is new this year, is a reflection of that. It’s exclusively focused on the people in our industry. It’s for people who are looking to improve their job, keep their job or find a job. We have professional management coaches who are providing sessions, one-on-one private mentoring sessions and recruiter companies are there looking for people. There is a series of skills-development and training programs for people in their current jobs and a section on how to start your own company. We’re teaming up with the Franchise Association and a banking group that will play into that. Our theme is that while companies lose employees in this recession, we don’t want to lose people in the industry. We don’t want to have to go through a whole recruiting and retraining when we come out of the recession and need these people. That mistake was made 10 years ago when we lost a lot of people and faced a severe shortage for years.

GlobeSt.com: You’re offering a lot of convention discounts as a result of the recession. What has been the response?

Kercheval: We’ve had overwhelmingly positive responses on a number of levels. First, you have those people who would not have gone had it not been for the package. We offered 63 full-paid grants to people who couldn’t afford to go who had gone in the past and really needed to go. On one extreme, we paid for everything, and it was funded by money from ICSC that went to our foundation, and we distributed the grants.

There were others who said that they were going, and with the money they were saving, two people could go. With companies that have been laying off people, we reached out to their HR directors and told them we would build an outplacement package for their employees for $972 or less that could get them to RECon and give them the best chance at finding another job.

The other aspect has been the positive response from members in general who are saying: “I always stay at the Bellagio and fly American Airlines, so it’s not for me. But it’s really good to see the association making the effort.” The association this year is going to run at a small deficit, which means that it is subsidizing every single thing that it does for its members this year. You have people feeling good about what ICSC was able to do with these packages.

GlobeSt.com: There has been a lot of talk about two larger REITS [Simon Property Group and Westfield Group] no longer leasing space in the leasing mall. Has that caused a lot of problems for you or is it overblown?

Kercheval: The perspective is out of line with the reality. Two big REITs who have historically been in the leasing mall and for years had worked to move their locations and get more space, this year, for whatever reason, decided not to be in the leasing mall. The combined space that those two companies took was less than 2% of the total GLA. People were saying that there’s going to be a big hole, but it’s less than 2% of the two million square feet. These companies were in prime locations, so that space was so quickly snapped up because we had a waiting list. People said years and years ago, “If they ever decide to move, we’d like to have their space.” People are just rushing to take that space, so it enabled us to make some people very happy. And it’s had a trickle-down effect. Since those people who are moving into that space have been around a long time, other people moved into their spots. So most of the exhibitors have felt like it was a lucky break because there was an opportunity to move up.

It has no material financial impact on the show or event. If you’re a member of ICSC and leasing in the leasing mall, what you pay is less than what ICSC pays. We lease the convention center, we hire GES, and charge $6 per square foot to the exhibitors. What we pay is even more than $6 per square foot. So there’s no loss of money–at $6 a square foot it wasn’t very much.

Those companies have beautiful booths, and the expenses that they incur in storing, shipping, setting up and tearing down, are significant. Any company, public or private, has to justify any expense this year, and these companies made the decision that this wasn’t an expense that they could incur this year. I respect that. The disappointment is that the leasing mall is very convenient for everyone who is there. Given the critical mass of the leasing mall, if you’re not there, you lose out on business opportunities.

Related to this is another thing that we’re doing called the Retailer Pavilion. Not all of the retailers who come to the leasing mall have booths. A lot of them don’t need one and have meetings at the developers’ booths. So this year we created the Pavilion, providing free space to retailers who want to hold meetings. If there is a developer who does not have space or is located away from the convention center, there still is an opportunity for the retailer to meet with them–and we do their appointments and booking–without them having to leave the convention center.

GlobeSt.com: On the flipside, are you seeing any different types of firms attending that weren’t before?

Kercheval: In the leasing mall we have 129 new companies exhibiting this year. In 2008 we had 786 companies. This year we have 819. In the trade expo, in 2008 we had 189 companies and this year we have 193. Even with a couple major REITs moving out, we have a lot more companies exhibiting. Who are these new exhibitors? Of the additional leasing mall companies, one third are owner/developers and 27% are from the public sector. Another quarter are retailers. In the public sector, I think that’s stimulus funds coming to cities. For a lot of them it’s about jobs, and they know retail is a great job stimulator. We have a number of new cities trying to rejuvenate themselves with the stimulus money out there. The owner/developers that haven’t gone before are there because previously there wasn’t any space. And this year they felt that there wasn’t as much competition in the leasing mall, and this is a great, inexpensive way to concentrate all of your business trips into one economic trip. The fall-off primarily is in the investment side, that’s where the drop-off is.

GlobeSt.com: Have you seen evidence of things starting to turn around in the sector, or will it take more time?

Kercheval: The industry, broadly speaking has two components, the development side and the portfolio and asset-management component. Both of those tended to go hand in hand particularly when there was a lot of capital flowing into the industry.

When I look out in the future, it’s hard to see a flicker of recovery on the development side. While there is more of a willingness amongst communities to allow development, the capital flows aren’t there. But from the asset-management side, there are quite a few positive signs. The first sign is that the consumer has so much pent up demand that traffic at centers didn’t drop off. People didn’t buy as much, but the traffic is there. The pickup in consumer confidence, some of the stimulus money flowing in the hands of consumers and the jobless claims leveling off has the possibility of sending a little bit of optimism on the side of consumer spending.

At shopping centers, rents continue to go up because they were contractual. Retailers are clearly being squeezed because sales are down and prices are down dramatically. When you look at year-over-year sales, if you don’t adjust for inflation, it’s negative. What’s happened is that their margins have been squeezed, but not to the point where they can’t pay rent. The retailers have done a very good job. So when you get to the property level, you see, surprisingly to many, NOI, returns and cash flow are all pretty strong and even rising in some portfolios.

There are a number of signs out there, starting with consumer sentiment and a diminished fear of losing jobs. There is a little bit more confidence that we’re going to get through this. And having not spent any money in such a long time, the consumer has been on a hunger strike. We’re almost there. We’ve got the customers as an industry, they’re just not feeling comfortable spending. But if they didn’t want to spend, they wouldn’t be out there. Once the confidence flips, we’ll begin to see that come nicely back into the industry. 2010 could look very different and very positive at RECon.