German immigrant Emil Gottschalk, who described his business as “the store that cares”, founded the Gottschalks department store chain in California in 1904. Gottschalk’s principally operated in small and middle markets in California and the western U.S. California is struggling with 10% unemployment and some of Gottschalk’s markets in the interior of California are amongst the hardest hit housing markets in the country (i.e., Sacramento, Stockton). Gottschalks also operated in such notable markets as Moscow, ID and Wasilla, AK.
Today, Gottschalk’s announced the closing and liquidation of all 58 locations.
Mall REITs impacted by these closings include General Growth Properties, Macerich and Simon Property Group. In most instances these 58 locations already contain units of JC Penney, Macy’s and Sears and thus won’t make sense for them. These locations are also not a good fit for luxury department stores and they have their own struggles of late.
In short, these are going to be very difficult anchor boxes to fill with a replacement department store. Mall redevelopment by the owner is not a likely option either given these mostly small market locations and the current capital markets environment. This is first wave of more department store closings that will also have an impact on the major mall REITs.
Posted March 31st, 2009
by John Fox
Posted in Department Stores, Mall REITs
Retail vacancy continues to push higher and this situation is driven by a deteriorating economy and rising unemployment. As I forecast earlier this month, retail vacancy will rise to double digit levels this year and will be well over 10% by late 2009/early 2010. Now Marcus and Millichap is forecasting nearly a 200 basis point rise in vacancy based on their index to over 10% as well. The steep incline that vacancy is climbing is directly related to the unprecedented ramp up in unemployment. If unemployment reaches 10% as some are forecasting, retail vacancy could rise to as high as 13%-14% shortly thereafter.
In the capital markets arena, retail vacancy is starting to impact CMBS delinquencies. Many of the big box stores (Circuit City, Linens n Things and Office Depot) are going to remain vacant throughout 2009 and into 2010. This situation is weighing heavily on CMBS which saw a sharp rise in delinquencies in February. Adding insult to injury, tenants who are looking at these spaces are asking for market rents 25%-50% below 2006 levels and they are also asking landlords to fund a “turn key” store for them. These kinds of terms were unheard of even a year ago but are going to be the norm for the next two years as the negotiating pendulum has clearly swung in favor of the tenant.
Posted March 24th, 2009
by John Fox
Tags: retail vacancy rate, shopping center vacancy Posted in Big Box, Retail Real Estate, Shopping Center REITs
The DJIA and the stock market in general have both been swinging up over the last week, but on the retail real estate front the bad news keeps pouring in daily: tenant’s seeking relief or concessions from landlords, bankruptcy rumors swirling around retail industry icons such as Saks Fifth Avenue, vacancy and cap rates both set to rise and capital markets showing little thaw. My hedge fund friends tell me everyone is waiting for the next shoe to drop in retail as well as for the next round of dividend cuts.
The fundamentals of retail real estate provide much in the way of guidance to see where we are going and when we will get there. Looking out into the future requires consideration of more than just the next two months, rather at least the next two years. 2009 should be a breakout year as the losers stay beaten down and the winners begin to emerge.
Posted March 19th, 2009
by John Fox
Posted in Department Stores, Retail Real Estate
It’s a return to the due diligence economy and rightly so. Forget being able to sluff off responsibility to third parties. Unless you are a titan deemed too big to fail (and we know who those are) you are going to have to take responsibility for your own actions and investments. The Wall Street Journal correctly points out that those who invested with Bernie Madoff should have been doing their own due diligence. Hindsight is 20/20.
Regardless, going forward in this era of shifting and general falling real estate valuations, doing your homework, aka due diligence, is going to be even more critical, and here’s why. For many asset classes growth has been reigned in for the time being. Developers aren’t going to be able to “build it and they will come” and you aren’t going to be able to “grow out of it”. Rather the fundamentals of the property will determine the ability to stabilize, grow and take market share from competitors, the later of which is going to become increasingly important in this cut throat environment. So let’s talk about fundamentals and they are,
- Location
- Market
- Physical Plant
- Physical Attributes
- Cash Flow
- Financing
Sounds simple enough but those who focus on these keys to success in real estate acquisition and investment are going to be prospering in the coming years because there are now and there are always going to be opportunities in real estate. Understanding the location and what makes it viable both today and tomorrow is going to reign supreme. Those who are positioning themselves for the future based on the fundamentals are going to be the real winners.
REITs as a class have seen their share prices fall 70% over the last year vs. the S&P which is ownly down 41%. However, within that same class of companies there are going to be winners and losers. This principal applies to individual properties. There will be survivors, there will be winners and there will be losers. I welcome the return to due diligence.
Posted March 17th, 2009
by John Fox
Tags: Add new tag, due diligence, real estate fundamentals, reits Posted in Commercial Real Estate, Shopping Center REITs
The U.S. Treasury Department is readying $1 trillion for asset backed loans (TALF) which appears to support commercial real estate but in reality is a backstop for banks, again. $300+ billion in real estate loans are coming due this year. TALF or no, banks and other investors are going to find themselves unwelcome owners and operators of real estate, so-called real estate owned (REO).
Posted March 11th, 2009
by John Fox
Tags: cmbs, Commercial Real Estate, talf Posted in Commercial Real Estate, Mall REITs, Retail Real Estate, Shopping Center REITs
