MELVILLE, NY-The grocery sector is a tough place to be right now. When it comes to commercial real estate dispositions, DJM Realty, A Gordon Brothers Group Co., (RECon booth S289) is at the forefront of the industry. The firm is a GlobeSt.com Thought Leader during the month of May in conjunction with the RECon show. DJM's chief executive Mark Dufton talked to us about what is happening in the grocery sector as well as what else is happening that is keeping the firm busy these days.
GlobeSt.com: There is a lot of activity in the grocery arena. What is happening there and how are you involved?
Mark Dufton: There are market factors in the grocery business. Walmart, Target, Sam's Club, and other larger-format grocers have taken an increasing share in the market. That's been taking away from the middle-market folks, which are getting attacked from all angles. They have the big-box guys, who are taking a bigger share of the pie. Then you have Whole Foods and the like that are taking away from the top end. Then there are the dollar-store guys with their increasing food selection. The guy in the middle is getting caught from every angle. It's really been a wake-up call for them, some of the regional players especially. It's making it difficult for them to survive. They're doing everything they can, whether it is real estate or operationally, to get through this period. What we're doing for a number of them is holistically working through their real-estate portfolio and doing a ground-up valuation where we look at each individual store and explore all of the market factors and come up with a strategy, whether they are selling the store to another grocer or a non-grocery replacement. Maybe it's just a matter of renewing the lease and trying to restructure the lease in conjunction with that, or maybe it's a situation where you close a store.
It's just a specific strategy for each location. Real estate is such a big line item that they want to have a strategy for each store that is well thought out. We step back and look at the portfolio. If it is a situation where they can sell it, we give them an idea of who the potential buyers might be and see if we can get the kind of proceeds they want generated. If it's a situation where the leases need to be mitigated, we can give them an idea of the cost and how long it will take. We're in about nine or 10 of those situations right now. We have two guys who are former vice presidents of grocers who are so deep in the sector and understand the real estate and operations. We're taking a hybrid investment-banking approach to it. We're looking at grocers that can replace locations, but we're also looking at non-grocer replacements as well.
GlobeSt.com: Are there any other sectors you're involved in that have a lot of activity right now?
Dufton: Not-for-profit education has been a busy sector for us. They do have some retail locations. Princeton Review is a good example of that. That's been an interesting sector. Obviously there are some situations in the office-products sector, and we do some Office Depot work. We also do a lot of work in the restaurant sector.
GlobeSt.com: You do a lot of lease restructuring. Can you explain how that process is changing?
Dufton: It has changed pretty dramatically. There was a period when everybody was trying to gratuitously restructure their leases. That just doesn't exist any more. Unless you're encumbered with a really distressed default and trying to avoid insolvency or bankruptcy, it's probably not worth trying that restructuring.
We're really focused on lease-renewal work on entire portfolios. A lot of corporate real estate departments have scaled back. We're certainly not trying to replace those folks, but with the limited resources they have, it's a lot of work. That's when it makes sense to try to understand what the market is and what your situation is and try to implement a restructuring that is conjunction with a renewal. I caution clients not to just renew the lease. Find out if you have some leverage points in the market or your current situation and try to extract some savings.
GlobeSt.com: Auditing has become a larger part of your business. Why is that?
Dufton: We have a partner who we joint venture with on auditing services, and we've tried to re-orient our business to reducing occupancy expenses, lease restructuring, auditing expenses or negotiating leases for closing locations. We're trying to take a reduction-expense approach to leases. That's been very well received in the marketplace, offering a simple solution. If a retailer wants to close a store, we have been providing, at no charge, a mitigation analysis to help them look at it strategically and know in advance what it could potentially cost.
GlobeSt.com: Are lease renewals the biggest aspects of your business that you are promoting at RECon?
Dufton: Lease renewals and looking at your entire portfolio from the ground up, as well as rethinking your location and having a real estate strategy and having an execution strategy going forward.
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