MetroWireKC sat down with (above) Dan Lowe, managing partner, and (below) Dave Claflin, vice president of marketing, over at RED Development, LLC, to get their take on the commercial real estate market and to hear about projects and developments RED is working on. Both Lowe and Claflin said though times weren’t exactly easy at RED Development that the company stayed strong through the past couple of years.
“The main thing is that we persevered through the downturn in 2008 and 2009,” Claflin said. “That’s a big deal because we were caught with a few projects at very vulnerable stages. Adam’s Dairy Landing, Summit Fair and Cityscape, in downtown Phoenix, a very expensive project, all had to find financing, not many development companies would have been able to pull off the feat of completing these projects during a year like that.”
Claflin added that they have seen nice activity out at Summit Fair where they opened with a Macy’s, a JC Penney and a couple smaller shops.
“In 2009, which was the year that banks turned off the spigot on financing all together, we were able to close on $200 million in project financing,” Lowe added. “We were relatively successful in 2009 when most developers were kind of on the sideline.”
RED has two headquarters, one here in Kansas City and one in Phoenix. How does that impact the structure of the company?
Claflin: “The offices mirror each other in some ways and provide complimentary support functions in others. Each office has development teams that are lead out of that specific city. Then things like administration, accounting, human resources, construction and design will be managed out of one office or the other.”
Do your different offices focus on different aspects of development?
Claflin: “Each of the development partners has their own unique flair and sense of a project, but up until two years ago, we tended to focus on lifestyle and power centers. As tastes have evolved we’ve become more involved in hybrid and now office/retail towers. We traditionally have focused on the same kinds of projects. If something catches Dan’s fancy, and he thinks he can make it work, he’ll bring powers of RED to bear on solving that problem. We also have done a lot to create a new category of projects called destination retail. These projects will combine entertainment, value and full-priced retail into a unique environment. An example of this is the Legends at Village West in Kansas City, Kan. These projects do a great job of targeting tourists.”
With some pretty rough years just past us, how is the future looking at RED?
Claflin: “We’ve seen an upturn both in Phoenix and Kansas City. With Phoenix projects, the majority of the space is office, and with the projects here it is retail. Up until 2008, for at least the previous five years, every major national retailer looked at business in a macro-view, they would concoct a plan in fall of that year and say they want to do 65 deals or so in the next year; then they would go out and find the best 65 deals to do. Compare that to these national retailers now and a lot of them said, ‘We’re not doing any deals,’ or maybe they said, ‘We’ll do two,’ so we had to really look hard at strategies and overall objectives and, just like a lot of people, get really creative. We made up our mind early on not to lower standards and compromise the success of the centers. Filling in some space looks good on rent roll for a few months, but if it’s a sub-par tenant, it affects everyone’s business, and it brings everyone down. Top-notch tenants contribute to the overall success of a center.
Lowe: “For the foreseeable future there will be an increased focus on infill opportunities. Go to the suburbs and try to build a new retail project, you’d have to have $280-220 per square foot to do that deal. We’re finding that lenders are not interested in those kinds of numbers and contrast that with infill deals where we can do the same kind of project for $75 per square foot. The lenders’ focus, thus developers’ focus, is on more infill-type opportunities. The barriers for entry are higher and we’re not seeing a lot of these distressed sales happening. I think infill development would be a second to acquiring viable, but distressed assets at discounted prices. What we’ve found is, for the most part, the money that’s chasing these assets is all funds, groups that have gone out and raised a million dollars to buy a property, and there is no developer expertise. We’re getting attention from sellers, because the offers we’re making are legitimate and well underwritten. Sellers want to avoid that retrade at the closing table and our offers are educated and won’t be retraded.”
How did RED find retailers?
Claflin: “Creativity really came in to play. We had contacts and successful business history with almost all the nationals that we would, of course, leverage, and we also found new creative national retailers. For example, Charming Charlie is lower cost fashion and accessory store that has been coming on gang-busters. It carries some clothing, but focuses on lots of accessories. You can go in find what you want and still walk out without thinking you’ve ruined your life or impacted your children’s future college fund. We found some newer, or more creative-thinking, national retailers. We have also spent a lot of time and effort finding some local retailers that were really successful in the local market and were looking to expand and move locations.”
Can you talk more about the positive change you mentioned earlier?
Claflin: “There has been a change at the retail level, starting with the consumer. We have all been chastened a bit, there was a lot of spending that was done almost in an artificial bubble, and was based on leveraging home equity. Kansas City is somewhat immune to the big up and down national swings– our real estate tends to stay nice and steady, no high-highs or low-lows, but that’s not the case in markets like Las Vegas. The source of ready cash was fueling a lot of retail somewhat artificially. Consumers are a little more cautious with spending now. Retail was the first aspect of our business to come back. The centers that were open and already leased started performing not too far below their highest levels not too far into 2009 and many are now back at full tilt. There is some new focus on value, new focus on different kinds of tenants: not a Gucci or Rolex, they’re about value and going in there with $20 and being able to walk away with something cool — like a Charmin Charlie’s kind of thing. The rest of it is cyclical. Our population is not decreasing, our population continues to grow, and cities are growing. Commercial real estate is fine and will remain a solid investment over the long-term. Retail as a vital segment of commercial real estate is going to be fine.”
Can you tell us about some projects the company has worked on?
Claflin: “The Legends at Village West development is an example of how things are adapting to meet the changing global economy and now has an increased refocus on outlet. The 119 development in Leawood is a very interesting kind of lifestyle center. It takes advantage of a great demographic out there at 119th Street and Roe by finding really unique restaurants and retailers to fill the space. La Bodega is opening up out there. I think a lot of other companies, looking at the last couple years, might have been a lot more eager to just fill up space there, and if we had wanted to just fill up space we could have done it. Instead, we waited for the right tenants to come along. It’s important to waiting for your pitch, and stay true to your vision overall strategy for the project.”
What about projects you’re working on now?
Lowe: “We’re under contract to purchase Woodbury Lakes Shopping Center, a project in a Minneapolis, St. Paul development. It was built as a joint venture with Opus Northwest in 2004-2005, we sold the project in 2006. We’re now buying it back at a third of the price we sold it for. These are the types of opportunities we’re looking for. There is no real action in the historically suburban, retail development. Our MO for a while is to pick up projects like the Woodbury project where we can buy at 30 cents on the dollar.”
“The fact that we were able to come out of 2009 and 2010 with our development and leasing group in tact means we’ve had the opportunity to see deals that a lot of other groups aren’t seeing. For example, the Ward Parkway Center project, when the lender backed out, the project came to us and asked for our help on the viability for redeveloping that deal to assess additional public financing on the project.”