Most of us are very familiar with the trials and tribulations of the big three U.S. automakers: Chrysler, Ford and GM. The downsizing of the dealer networks of the big three has serious implications for commercial real estate in the coming years. The National Auto Dealers Association (NADA) is projecting a whopping 3,500 car dealerships will close over the next 4-5 years. This will have a negative impact on commercial real estate by flooding the market with a very large number of challenging sites to deal with for owners, brokers and developers. The NADA is projecting only 25% of these dealerships have the potential for car-related reuse. This means roughly 2,600 do not have a car reuse and will fall into the commercial real estate market. At roughly 10 acres per dealership, this means some 26,000 acres across the country will become “available” for redevelopment.
The anatomy of a car dealership is such that these sites are challenging to redevelop:
- They are often highly competitive with retail and shopping center sites in the area since dealerships are typically located in high traffic, high visibility retail corridors, down the road from the mall or power center.
- Car dealership sites are disjointed with multiple buildings across the entire acreage.
- They often have environmental issues.
- Existing zoning does not lend itself to redevelopment without changes.
- A shuttered dealership suggests a blighted area that does not “show well”.
These and other challenges suggest a long road to redevelopment and recovery. Prices for commercial acreage have already come down substantially in the last two years and adding another 26,000 acres to the supply is only going to depress prices even further. This is especially true for retail sites since car dealerships will prove to be a suitable alternative for some users such as a discount store, home improvement center or warehouse club.
Posted August 31st, 2009
by John Fox
Posted in Big Box, Commercial Real Estate, General Retail, Retail Real Estate
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
Macerich has sold a 49% interest in Queens Center to Cadillac Fairview in exchange for equity and assumption of debt, totalling $317 million. The reported cap rate is much lower than was previously being discussed publicly. Macerich and other analysts were talking about cap rates in the 8.0%-8.5% range, and lo and behold Macerich is reporting in their second quarter conference call that cap rate is just north of 7%. Trading debt for equity is a viable strategy in the current environment and this is the tip of the iceberg for Macerich since they have three-fourths of their debt expiring between now and 2012.
At the end of the day the 7% cap rate is a mixed bag. High quality “A” malls could have easily traded 100 or more basis points lower in the last few years and this deal is a clear indication of where are today — even on quality assets. However, this cap rate is still considerably lower than what was being bandied about publicly. Macerich should hurry because these cap rates are almost certain to be inching higher next year due to retail climate and sentiment.
Posted August 5th, 2009
by John Fox
Posted in Mall REITs, Retail Real Estate, Shopping Center REITs
