They Said It Couldn't Get Worse But They Were Wrong, It Did
I was speaking to a friend who's vice president of acquisitions for a decent sized shopping center company and his lead statement when we got on the phone was: "I didn't think the pricing of shopping centers could get worse than last year, but I was wrong." I'm hearing these identical comments more every day. A year ago, everyone complained about 7% CAPS, now they're being offered centers at an 8% CAP based ON PROJECTIONS. And, what makes matters worse, some investors are buying into projections that, to say the least, are overly optimistic. On the other hand, where it's really nuts, I read recently of the sale of one center at a 4.5% CAP; I'm getting that return on my savings account.
I don't know what the future holds for the sale of centers, but I do know that right now there's a slowdown in leasing, overall which in the long run has a major impact on the value of a property, so the income of centers is slowing down but the price of a center is going up. Doesn't make sense. There are too many "syndicators " who take 10% to 20% of a deal, then raise millions from eager/desperate investors to acquire a center at 8% to 9% PROJECTED returns based on one or two of the anchors NOT renewing their lease and then being able to lease out the property at three or four times the current rate. I saw one projection that shows leases in the future commanding rents $8 to $12 psf higher than the current center is getting. Whatever they're smoking, I'll buy two ounces. Reminds me of the dot.com "boom" when profits didn't count. Yeah, right.
"Flippers" are still very active in our industry even if they are dropping out of the residential market. I spoke to one person who bought a closed Kmart center for $9.6 million and flipped it three months after closing for $14.2 million, and that's without leasing one foot of space.. God bless America.
On a similar note, Loopnet (loopnet.com) just started a service that's basically says "Are you undervaluing your properties?" They're offering regional or national reports on what specific centers are selling for and their CAP rate. This service provides insight into recent sales of commercial and retail properties sold with a price of $5 million or more, including CAP rate, sales price, etc. It's not the gospel on the value of property, it's another tool to try and determine how high high really is. The 4.5% CAP I saw, in theory, has upside and that's why the CAP was paid. What's really important in evaluating a center are quality and future growth, the key factors, and IMHO few buyers really take that into account. The only "good" news for buyers of retail real estate is the stock market appears to becoming back to life again, so some of the investment dollars used to skyrocket shopping centers is going back into the market. Thereby, maybe, prices will stabilize. Some of the "better" centers are being offered with no asking price, they then get 10 or 20 bidders for the property in a "mini auction" and when they're down to two potential buyers, they nickel and dime both sides; great for the seller, but they buyer is a fool.
From a leasing aspect, not only do I see a slight slowdown but the competition from bankruptcy sales and excess space is having a bigger impact on leasing than ever before.
I had a deal almost completed with one "urban" chain that died because they are taking over leases from closed Toys "R" Us stores, bankrupt United Factory Outlets and some closed Kmart locations. All were acquired with rents for under $6 psf and candidly, was better real estate than my deals, so I don't blame 'em; they are taking advantage of opportunities. Another trend I've noticed is that a lot of the "bottom feeders" are not as aggressive as they were last year. The good news is that "urban" development is getting hotter than hot, with almost every major and minor city willing to use eminent domain and Tiff money to get retail and mixed-used developments started. We're slightly involved in one urban development project and Tiff money appears to be no object; we can practically throw it at the tenants. In fairness, tiff money is necessary to turn around some of the ghettos that are under consideration, otherwise no retailer with an IQ above 12 would be interested. Tiff SOMETIMES is good, but I hate to sound like a conservative, but use of public money for private developments should be limited. Some retailers are now even complaining that cities shouldn't be providing tiff money because it makes it unfair competition to the retailers that don't receive it and I agree.
While "urban" retailing is hot, so is upscale retailing, both in outlet and lifestyle centers. The more upscale the better. So while the high and low end are doing great, it's the middle class merchant that's having problems, and that also doesn't make sense; because it's the middle class that spends the most money. My only conclusion is most are rotten merchants and have no idea how to satisfy today's consumer.
Another "trend" I've noticed is that there's a lot of activity on the acquisition of closed Kmarts. Usually they are repositioned into a strip center of three to 10 retailers instead of big boxes, but in several of the cases I've seen the buyer is wanting the outparcels more than the building. On one property we're involved with, the buyer paid $3.5 million for a freestanding closed Kmart and then leased out three outparcels (which were not allowed when Kmart controlled the property) for $265,000 a year; so whatever they get for the closed Kmart is their profit.
Changing topics (but tied into the slowdown of leasing) is the slowdown of not only getting deals done, but also responses from anyone on anything. Compared to 10 to 15 years ago, the typical deal today probably takes twice as long to get done as it did in the "good old days" and I thought that was bad then. But since the beginning of the year, everything seems to be slowing down, which makes no sense. Why? The great unknown. It will take a month AFTER the tenant says that they want a site to get an offer and then another month for the owner to respond to the offer. Both, I assume, are hoping for something better to pop up. In many cases, after the tenant enters into a lease negotiation, they back out after a month and then come back in 90 days, saying they "missed you" and want to get together again. Yeah, or their other deal died.
Now from a positive point of view, while there's a slowdown going on in existing property, new development appears to be going as strong as ever. Almost every developer I speak to who's developing from scratch is a very happy trooper, with most of their centers 75% to 85% preleased. You can't ask for more than that. I think one of the reasons is in new development, most retailers can get a turnkey since the developer is doing 90% to 100% financing, and therefore there is less out of pocket expense for the tenant and that looks better on their books, especially if they're public; another reason a lot of the new developments are either "urban" or "high end" (usually lifestyle centers) and because that's the vanilla of the day most retailers want in.
I don't know what the future holds for the sale of centers, but I do know that right now there's a slowdown in leasing, overall which in the long run has a major impact on the value of a property, so the income of centers is slowing down but the price of a center is going up. Doesn't make sense. There are too many "syndicators " who take 10% to 20% of a deal, then raise millions from eager/desperate investors to acquire a center at 8% to 9% PROJECTED returns based on one or two of the anchors NOT renewing their lease and then being able to lease out the property at three or four times the current rate. I saw one projection that shows leases in the future commanding rents $8 to $12 psf higher than the current center is getting. Whatever they're smoking, I'll buy two ounces. Reminds me of the dot.com "boom" when profits didn't count. Yeah, right.
"Flippers" are still very active in our industry even if they are dropping out of the residential market. I spoke to one person who bought a closed Kmart center for $9.6 million and flipped it three months after closing for $14.2 million, and that's without leasing one foot of space.. God bless America.
On a similar note, Loopnet (loopnet.com) just started a service that's basically says "Are you undervaluing your properties?" They're offering regional or national reports on what specific centers are selling for and their CAP rate. This service provides insight into recent sales of commercial and retail properties sold with a price of $5 million or more, including CAP rate, sales price, etc. It's not the gospel on the value of property, it's another tool to try and determine how high high really is. The 4.5% CAP I saw, in theory, has upside and that's why the CAP was paid. What's really important in evaluating a center are quality and future growth, the key factors, and IMHO few buyers really take that into account. The only "good" news for buyers of retail real estate is the stock market appears to becoming back to life again, so some of the investment dollars used to skyrocket shopping centers is going back into the market. Thereby, maybe, prices will stabilize. Some of the "better" centers are being offered with no asking price, they then get 10 or 20 bidders for the property in a "mini auction" and when they're down to two potential buyers, they nickel and dime both sides; great for the seller, but they buyer is a fool.
From a leasing aspect, not only do I see a slight slowdown but the competition from bankruptcy sales and excess space is having a bigger impact on leasing than ever before.
I had a deal almost completed with one "urban" chain that died because they are taking over leases from closed Toys "R" Us stores, bankrupt United Factory Outlets and some closed Kmart locations. All were acquired with rents for under $6 psf and candidly, was better real estate than my deals, so I don't blame 'em; they are taking advantage of opportunities. Another trend I've noticed is that a lot of the "bottom feeders" are not as aggressive as they were last year. The good news is that "urban" development is getting hotter than hot, with almost every major and minor city willing to use eminent domain and Tiff money to get retail and mixed-used developments started. We're slightly involved in one urban development project and Tiff money appears to be no object; we can practically throw it at the tenants. In fairness, tiff money is necessary to turn around some of the ghettos that are under consideration, otherwise no retailer with an IQ above 12 would be interested. Tiff SOMETIMES is good, but I hate to sound like a conservative, but use of public money for private developments should be limited. Some retailers are now even complaining that cities shouldn't be providing tiff money because it makes it unfair competition to the retailers that don't receive it and I agree.
While "urban" retailing is hot, so is upscale retailing, both in outlet and lifestyle centers. The more upscale the better. So while the high and low end are doing great, it's the middle class merchant that's having problems, and that also doesn't make sense; because it's the middle class that spends the most money. My only conclusion is most are rotten merchants and have no idea how to satisfy today's consumer.
Another "trend" I've noticed is that there's a lot of activity on the acquisition of closed Kmarts. Usually they are repositioned into a strip center of three to 10 retailers instead of big boxes, but in several of the cases I've seen the buyer is wanting the outparcels more than the building. On one property we're involved with, the buyer paid $3.5 million for a freestanding closed Kmart and then leased out three outparcels (which were not allowed when Kmart controlled the property) for $265,000 a year; so whatever they get for the closed Kmart is their profit.
Changing topics (but tied into the slowdown of leasing) is the slowdown of not only getting deals done, but also responses from anyone on anything. Compared to 10 to 15 years ago, the typical deal today probably takes twice as long to get done as it did in the "good old days" and I thought that was bad then. But since the beginning of the year, everything seems to be slowing down, which makes no sense. Why? The great unknown. It will take a month AFTER the tenant says that they want a site to get an offer and then another month for the owner to respond to the offer. Both, I assume, are hoping for something better to pop up. In many cases, after the tenant enters into a lease negotiation, they back out after a month and then come back in 90 days, saying they "missed you" and want to get together again. Yeah, or their other deal died.
Now from a positive point of view, while there's a slowdown going on in existing property, new development appears to be going as strong as ever. Almost every developer I speak to who's developing from scratch is a very happy trooper, with most of their centers 75% to 85% preleased. You can't ask for more than that. I think one of the reasons is in new development, most retailers can get a turnkey since the developer is doing 90% to 100% financing, and therefore there is less out of pocket expense for the tenant and that looks better on their books, especially if they're public; another reason a lot of the new developments are either "urban" or "high end" (usually lifestyle centers) and because that's the vanilla of the day most retailers want in.
posted by tedkraus at 6:04 AM
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