There are over 1,400 retail properties in distress totaling some $31 billion according to Real Capital Analytics. Retail is the leading distressed property type by almost double the value when compared to every other property type. Even without the General Growth Properties (GGP) bankruptcy, retail still led the distress pack in 1Q 2009 with over $16 billion of properties in distress and the highest number number of properties. Even so, where does it hurt? “Everywhere”, states Real Capital Analytics.
There is more news each and every day, and most of it not good.
Yet, we have a “leading” industry publication, Retail Traffic reporting Commercial Real Estate Debt Won’t Be the Next Shoe to Drop …? The commercial real estate debt fear is misplaced?
Huh? What?
Well, the shoe is already dropping and set to drop further. This kind of talk is a genuine disservice to those in and outside of the industry. It is all about jobs, jobs, jobs. Commercial Real Estate 101 goes like this:
Job Creation –> Demand for Office and Industrial space –>
Demand for Housing –> Demand for Retail Space
This is not rocket science, just simply economics. Job losses continue to mount and the political uncertainty is not helping. Small businesses are the greatest job creators of our economy and they are paralyzed due to mounting costs, looming taxation, a health care fiasco, lack of credit and a host of other issues — none of which are being address on any serious level by any branch of government. Until we are able to start creating some serious jobs things are going to get worse, not better in commercial real estate.
And now we have the Capmark bankruptcy to contend with brought on in part by the fact that commercial real estate properties are not worth a sufficient amount to cover or service debt.
Here is a slide from my latest Retail Real Estate Presentation to investors that subjectively shows where we are right now in the Retail Real Estate. My biggest concern is about underestimating where we are in the cycle.
Yet, what does this mean for savvy investors in the future? Perhaps the greatest opportunity in our life time to acquire real estate assets below replacement cost, below net asset value, below ridiculous debt levels, and basically below everything that matters. This will require due diligence and patience. Things are not going to turn around quickly but the buying opportunity over the next several years will be unprecedented for well located, cash flowing properties that have unique qualities and characteristics that stand the test of time. In short, places where people want to be. As we have seen, ridiculous debt levels combined with places that people really don’t want to be — like commodity tract housing and commodity big box retail — have little lasting value. The true value is in the places where people do want to be, now and in the future. Well-conceived and well-located mixed-use projects that offer unique characteristics such as water views, water access, higher education and the like continue to be the places where people DO want to live, work, play and learn. This bodes well for the coasts, and university towns. Now, let’s do some due diligence and seek out those opportunities.
Posted October 28th, 2009
by John Fox
Tags: commercial real estate distress, jobs, mixed use, sense of place, unemployment Posted in Commercial Real Estate, Retail Real Estate, Shopping Center REITs
There is a report out on Bloomberg that FDIC bank regulators are in the process of issuing guidelines on commercial real estate loan workouts for banks. Is this the moment we’ve all been waiting for? Probably so, and I am looking for 2010 to be the year of commercial real estate REO as there was a lot of talk about REO in 2009 but it never really materialized, save some of the single and multi-family residential.
Bridgewater Falls in suburban Cincinnati, Ohio may be a shade of things to come. Bridgewater Falls is a 600,000 sq. ft. “power town” originally developed by the now defunct Premier Properties. The center is basically a hybrid, something of a cross between a traditional power center and a lifestyle center. Believe it or not, this center had an $80 million dollar loan on it and entered foreclosure in early 2009. The lender, Wachovia, sold the property to itself for $33 million, or a whopping 59 percent less than the original loan, after no higher bids emerged at an auction back in March of 2009.
Just last week this center traded hands again. The buyer, a distress/opportunity fund operated by Phillips Edison, paid $43 million for the center in an all cash transaction. My sources tell me the cap rate was in the range of 10%-11%, thereby raising the bar for these types of transactions. The tenants are basically a who’s who of retail survivors that you want in a power center project – JC Penney, Target, Dick’s, TJ Maxx, Best Buy, Bed Bath & Beyond and PetSmart. This type of project could have easily traded in the 8%-9% range just a few short years ago. Clearly this sets a new lower level of value for power/big box centers. This segment is where notable distress exists in retail real estate given the rampant overbuilding throughout this decade (almost 50% of new space constructed was in power center/big box retail), and the fallout from the bankruptcies of Circuit City, Linen’s N Things. I look for many more of these opportunities to become available and I strongly feel 10% is the new cap rate floor in these types of transactions. REO buyers take heed.
Posted October 15th, 2009
by John Fox
Tags: commercial real estate loan, phillips edison, power centers, premier properties, reo properties Posted in Big Box, Commercial Real Estate, Junior Box, Shopping Center REITs
There is a lot of talk about rent relief and rent concessions in the current environment and how this is impacting shopping center landlords and publicly traded REITs. Hardly a day goes by without another article or news report talking about retail tenants asking for and in some cases getting rent relief. Is this happening? In fact it is happening. It is completely a function of the local market situation, the particular tenant and the level of pain for the landlord (or lender in some cases). Is it widespread? No, it is not. Some landlords who are strapped themselves are telling tenants to pound salt. While retail sales are down almost everywhere, quality shopping centers and malls won’t even consider rent relief. Consider a typical A class mall with pre-recession sales of $500 PSF. If sales are down 10% right now from peak to trough, the average sales $PSF is still $450 and tenants are absorbing some of the resulting higher occupancy costs and also dealing with it by cutting expenses. There was a great deal of “fat” that built up for landlords and tenants alike in this decade and much of it has now been trimmed off. If sales drop precipitously from this point, we are going to have a problem, but the economic and retail signs are pointing towards a bottoming out and leveling off.
Rent relief is taking several different forms:
- Early renewal at the existing rent or in some cases even a slightly lower rent, to lock in the rate for the tenant and get more term for the landlord (a popular strategy with private companies with little access to capital themselves).
- Rent deferral – reducing current rent but backloading it onto the end of the lease (a popular strategy with publicly traded REITs). While this reduces cash flow in the present, it attempts to preserve the income stream over the life of the lease.
- Reduced rent in exchange for little or no tenant allowance. Landlords are willing to exchange rent for tenant improvement dollars and this is happening in some instances. However, the tenant needs to then be in a position to fund their own store build out and this does not work for many tenants because of credit availability – especially mom and pop’s in the current environment.
- Asking rents are simply down, almost universally and especially in the off-mall environment. There are some tenants active in new store development that are getting rent relief in the form of reduced market rents and landlords are willing to do deals at ~25% less (than peak rents) in some cases for the right situation.
- Move down the road. Anecdotally, I have seen some tenants move down the road from their existing location and get “rent relief” by simply dealing with a more aggressive landlord in another shopping center.
Rent relief is going to be with us for some time and it will continue to be a renters market in the foreseeable future . Tenants with a smaller footprint have the best opportunity to exploit the current market by significantly reducing their occupancy costs in new store locations. Existing leases are best reduced when the end of term is close at hand.
Posted October 8th, 2009
by John Fox
Tags: rent concessions, rent relief, shopping center landlords, Shopping Center REITs Posted in General Retail, Mall REITs, Retail Real Estate, Shopping Center REITs
If this article is any indication, new retail tenants are still very hard to come by for shopping center and mall owners. While the re-leasing market continues at a reasonably healthy clip for quality shopping centers (in particular, quality regional malls), there are few new retail deals being done beyond a handful of active restaurant chains, some auto stores and dollar stores. Of the nine tenants mentioned in the article, five are food tenants and the others consist of a used book store, a Halloween shop, a refurbished computer store and a children’s hair cuttery. Hardly the stuff that erases retail gloom and doom or revitalizes a entire portfolio. That said, creative leasing with “mom and pop” operations, non-traditional tenants and the like are where the market is right now, and for the foreseeable future. Simon is to be commended for pulling off any new deals in the current environment but this clearly illustrates the lack of new or exciting retail concepts as well as the difficulty of increasing occupancy in an overbuilt retail market struggling against the excesses of an entire decade.
Posted October 6th, 2009
by John Fox
Tags: Leasing Environment, New Retail Tenants, Simon Property Group Posted in General Retail, Mall REITs, Retail Real Estate, Shopping Center REITs
Woodbury Lakes in Woodbury, Minnestota (a suburb of Minneapolis-St. Paul) is headed for foreclosure and possibly a Sheriff’s sale after the owner defaulted on a $65 million first mortgage. The open-air center was originally developed by Opus Northwest and opened in 2005 at the height of the lifestyle center boom. This same site was long thought of as a potential location for the next regional mall in the Twin Cities but never could gain sufficient traction from department stores given the low sales potential. This did not prevent an eager developer from plunging in with an uninspiring design and layout. Unfortunately, many developers with limited experience in shopping center development, as well as lifestyle development, have created projects that lack the necessary appeal with shoppers to make these center’s sustainable over the long haul. Adding insult to injury, Woodbury does not have a single restaurant — and it opened in 2005! Restaurants are a key anchor component of any lifestyle center that create evening traffic flow and appeal to higher income shopper groups. Woodbury Lakes is reportedly 75% occupied and thus was never able to gain enough tenants at high enough rents to service the debt. Given the prevalence of uninspiring lifestyle centers across the country including those in extreme northern climates such as Minneapolis-St. Paul, there is more distress to come in the lifestyle arena.
Posted August 26th, 2009
by John Fox
Posted in Big Box, Commercial Real Estate, General Retail, Retail Real Estate, Shopping Center REITs
