Interview...
Mark Borsuk
The Real Estate Transformation Group

PikeNet 2000 / Apr 5-7, 2000 / San Francisco

Background... Mark Borsuk, managing director of The Real Estate Transformation Group in San Francisco, CA, responded to three e-mailed questions on December 8, 1999. Below is an edited version of the interview. Full disclosure: Some have called Borsuk a "fringe visionary" for his sharp views on how geocentric shopping habits will spur retailers to change their space needs and store leasing strategies. He has spoken to ICSC, NAIOP, ULI and the NRF (National Retail Federation). For a weighty exposition of his thoughts, check out www.mihalovich.com/columns/nowhere.htm.

Pike: If e-commerce is so threatening to shopping center owners, why have we not seen a substantial reduction in the value of retail properties?

Borsuk: The securities market already discounts retail properties. The retail REIT total index return is negative when you combine dividends with stock price changes. ... Negative symbiosis and price declines will shortly manifest themselves at the transaction level. I use the term to highlight the schism between mass merchandisers and retail property investors over the value of location. "Negative symbiosis" means that the store is no longer the primary focus of retailing. Formerly, the merchant and landlord had parallel goals of selecting the best location to generate the highest sales to pay the most rent. The online sales channel turns this symbiotic relationship on its head. Now cyberspace competes with location for the merchant's attention and capital.

Pike: Does e-commerce threaten suburban retail more or less than city center retail?

Borsuk: Marginal sales analysis is the next step in understanding online buying's impact. Marginal sales analysis examines sales cannibalization on store profit. For example, if a retailer places a new store too close to an existing one or the competition moves close by, store sales are likely to decline. Cannibalized sales hurt stores financially. PricewaterhouseCoopers found a five percent decline in sales caused profits to drop by twenty percent. Another analysis presented several years ago at the ICSC Research Conference found a seven percent shift in sales could cause profits to plunge by fifty percent. ... The point of the analysis is to illustrate that even a small shift to online buying by profitable customers can negatively impact an individual store.

Pike: What arrangements should shopping center owners and tenants seek in lease negotiations?

Borsuk: If you own a property with tenants subject to online cannibalization, prepare to sue for peace. When shopping no longer needs a shop, there is a fundamental shift in negotiating leverage. Landlords should prepare to make substantial concessions. ... Soon tenants will demand leases with a two to four-year initial term and multiple short-term options, downsizing and relocation rights, and an ongoing exit right at minimal cost.

--Peter