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INSTITUTIONAL INVESTORS 118 • SHOPPING CENTER BUSINESS • December 2016 tenant? Is it worthwhile to accept that rent reduction? After that, we look at who we want to replace that tenant. In a category like apparel, there are not a lot of good replacements out there. The industry is pretty much waiting to see which of these apparel tenants are going to be able to re- invent themselves and make it. Holden: Tenant mix and retention, ex- isting rents and sales are what we look at when underwriting new deals. We like tenants with credit or a guaranty behind the lease, but that is generally not the case anymore. We are focused on generating the right mix of entertainment, food and beverage, service uses like fitness or beau- ty and apparel and soft goods. Historical- ly, we would shy away from assets with a movie theater or a gym, based on the concern of backfilling the space. Now, we are leasing space to these uses. We want to keep the customer at the center longer. Creating a sense of place is very important today. Wheeler: We want to create more trips. We like the post office, dry cleaners and other services. Fryer: We are trying to extend the hours and days of visitation. We are using mer- chandise categories and specific retailer selection to drive performance. As we try to establish the most dominant competi- tive positioning for our centers, we now view tenant quality as the equivalent of tenant credit. Vittorio: Credit is definitely not the strong suit of retailers today. It is quality. If you are looking to invest in asset credit, unless it is a triple net deal, retail is not the place to look for it. Falatko: We look at tenant space require- ments and how the retailer is positioning itself overall in the market. When you look at the asset, you look at the rents and you look at the performance to get a better prediction of the future. We also look at what the tenant is doing globally. We try to get a projection on their size in other centers to see if, even down the road, we will have to divide their space and what the possibilities might be. Ragland: Splitting boxes or remerchan- dising, in the most dominant centers, you will often be able to find new tenants to come in with double digit leasing spreads. If you renew an existing tenant, often that spread will be in the mid-single digits. When those with dominant centers are losing an anchor and they reformat those boxes, you are seeing some 7 to 10 per- cent returns on cost. We see turnover of tenants as inevitable and we think that represents a great opportunity if at the right properties. Cooper: One of the biggest battles we face in the public scope is the low average base rent that we have compared to some of our peers. Analysts sometimes feel that this is indicative of a lower quality port- folio. We have always looked at low base rents as great opportunities. In the good times, we can push that on a mark-to-mar- ket opportunity. In bad times, there is a nice cushion, or spread, if market rents begin to fall. For us, the quality of the real estate and the ability to replace the rent is key when we look at who the current tenant is. Carty: I can think of some submarkets that we have where we can really push rents because tenants really want to be in that specific area. That goes to the quality and dominance of the real estate. We'd love to have low rents in theory, but if you are in the right places, the sales and visibility drive the outcome. The box rents are probably what we are most sensitive to. I'd say replacing a box is a more dif- ficult than an inline retailer in today's environment. Wheeler: Federal Realty is really a differ- ent animal when it comes to that. Carty: Some of our most significant proj- ects have been redevelopments in great locations where we have razed buildings and added density. That creates more fre- quent visits to the retail. Federal has a long history of creating those special places. If you worked with Federal 20 years ago, you heard that story. We worked on placemak- ing decades ago. It is the new thing for ev- eryone today, but we have thought about the right environment, the lighting, the landscaping, the seating areas for many years. That has partially translated to the rent growths we've seen. Dykstra: The best properties will secure the best tenants, and generate the most sales supporting the most rents. There is no avoiding the fact that the best prop- erties are located within submarkets that has the most people and those people that have the most money to spend. The best properties will see rents driven well past what was previously expected. I expect to see rents in B and C properties stagnating and even back sliding. SCB: Some markets you may see that turn because there is no available space in the market, so it is forcing B and C properties to reactivate. Murphy: The retail space supply curve tells an interesting and informative sto- ry. From 1976 to 2008, our industry on average delivered 150 million square feet of new retail space in each one of those years. From 2008 until today, we have de- livered on average 36 million square feet per year. When you look at the down- turns of 1981 to 1983, and 1991 to 1993, that number only dipped to 100 million square feet per year. This is a seismic change, and for good reason. Too much new space was being delivered based on the changes in how and what goods are being consumed. We believe owning solid grocery-anchored centers in key lo- cations and suburban submarkets will be a winning strategy for rent growth over the next decade due to muted supply. In our portfolio, an overwhelmingly high percentage of the net operating income comes from grocery, food-and-beverage, service, healthcare and fitness. Those are the drivers that create necessity and expe- rience-based trips. They are not impervi- ous to the internet, but they are certainly resistant to it. Nguyen: We look at tenants exiting as op- portunities. We strive to backfill those, as everyone does, with tenants who will pay more rent. When we have a retailer who comes to us with performance issues and requests a rent reduction, we will general-