Strolling the Agora column for the July 20 edition of SHOPPING CENTER DIGEST
For months now, we and a multitude of very experienced people in the real estate industry have been directing our attentions to high-profile activity offshore—especially those larger landlords and tenants with the financial capabilities to grow and expand their brands. No question, it was a lot sexier to talk of building in China, Brazil, Russia, and the like--when we could all see that no new development or retail expansion of any note was taking place here--and that numerous projects announced just months ago have now been placed on the back burner.
Right now, the opportunities domestically have been limited due to the economic crisis, said these senior sages, consultants, investors and developers.
However, that does not mean that many of them are not now positioning themselves to take advantage of these falling values when “all the ducks line up.”
In fact, one investor, Tom Shapiro of Golden Tree InSite Partners, classifies the US as the new emerging market. Moody’s/REAL National All Property Type Aggregate Index states that the value of real estate domestically has dropped to levels not seen since September 2004. And others are predicting that these prices could be 50% off the values established just before the economy tanked.
The latest of the heavy-hitters entering this now crowded field is Vornado Realty, which expects to raise $1 billion to fund distressed real estate acquisitions in New York and Washington, DC.
Based on their record-breaking, positive performance over the second quarter, the larger, established REITS are expected to lead the way in aggressive acquisitions [Simon, Macerich, Developers Diversified, CBL]. Granted these funds with their returns of well over 100% have achieved these levels because they were among the hardest hit when stocks plummeted; but by refinancing and reducing their debt, they are now in a good position to buy for cash and avoid the trap of chasing properties using highly leveraged instruments.
And numerous others have formed new companies or divisions for this purpose. According to one marker, some $13 billion has already been raised in the stock market since March just for this purpose.
Financing new projects, said Simon Ziff of Ackman-Ziff Real Estate Group, is still a major challenge. Two years ago, he continued, the average loan his company made was $75 million; today it is $15 million, “and you have to go to 100 lenders to get a deal done.”
To this mix, now, add the foreign investors who are beginning to consider shopping centers ripe for investing and acquisitions, with most of their attention being directed at strips, mainly those that are anchored by financially sound, chain supermarkets, and with high occupancy rates.
The biggest obstacle right now, though, is that despite all the talk of substantial vacancies, foreclosures, distressed properties and the like, there really isn’t that much in the shopping center/retail industry that is available right now for these buyers-in-waiting. Lenders have been easing payment requirements to numerous strapped landlords, many through short-term extensions; but with increasing vacancies in these properties, and the rent decreases being demanded by retailers, landlords may still not be able to service these loans.
Many anticipate, therefore, that even these loans that have been re-negotiated may be in trouble unless the economy begins to pick up. The more conservative are estimating that it could take three years; most, however, are hopeful that activity will begin to improve later in the year or by early spring.
What most, however, are in agreement on is something we noted earlier (See Agora, May 11, 2009, P. J385): The landscape is changing and as it contracts more shopping centers will be controlled by fewer and larger owner-operators.
So, those with the cash are facing off against those who need it, and the question is who’s going to blink first? There’s little question that the more financially sound companies can afford to wait and have no reason to open their wallets until they think the price is right.
More information on Shopping Center Digest “The Locations Newsletter” and our associate publications, Expanding Retailers and the Directory of Major Malls, may be obtained from our website, www.shoppingcenters.com.
Wednesday, July 22, 2009
Monday, July 6, 2009
Cash Is King, As Dealmakers Say The Biggest Obstacle To Making A Deal Is The Lack Of Financing
This column of Strolling the Agora appears in the July 6 issue of Shopping Center Digest
Whether you want to build a shopping center or expand it, grow your retail empire by entering a new market or open another store or two, cash is king. Without it, forget it. Nothing new here. We’ve been hearing this refrain from many dealmakers around the country: “It’s the economy, stupid.”
It’s the main reason, for months now, dealmakers have been complaining about the lack of movement and deals are being frozen, even those that “were made” just recently at the Las Vegas RECon. And few of them are optimistic about the freeze lifting in the near future—though we are now in summer and there are many economists and mavens in and out of the administration who are pointing to positive signs.
“Even if there are some convincing signs,” said one investor, “these have not filtered down yet to commercial real estate such as shopping centers and retailing. First there has to be enough positive movement in other areas to be considered a trend, and that will have to take place primarily in a reduction in unemployment, and an uptick in residential values.”
The biggest obstacle to moving forward?
To Kenneth Roosth of Roosth Construction: “I am finding that Financing is the biggest hurdle right now.”
To Ira Meislik of Meislik & Meislik: “…the most common barrier is the inability to obtain financing. Principals are calculating ROIs based upon leverage, and it seems that the numbers don’t work without leverage.”
To Mary Farwell of Noteworthy Investments and Managemednt: “Financing, financing, financing. Working on now that is less than 50% LTV with perfect credit and clean environmental but they still have taken excessive time and, just today, hit my client with an extra point. Now is definitely the time to be creative in our financial side and specialize in exchanges, owner-finance, lease purchase, etc.”
In addition to financing problems, Alan Smith of Bourn Partners cites issues of co-tenancy, terminations, and the demand to "make it worth my while." And, "impact fees are raising the barrier as ...we are faced with $4.00 and to $5.00 of fees to obtain approvals from the municipalities."
One financial maven stressed that lenders are reluctant to lend without a strong cash flow and excellent sponsorship. “They are trying to make agreements more creative and more palatable, but they are becoming difficult for borrowers to accept. Some are putting points up front, or perhaps even trying to reduce the amount of the financing it is willing to provide.”
One national chain which has cut back on the number of new stores it plans to open this year attributes the decision to developers who have halted or delayed building plans. “We haven’t seen such a lack of new projects in 20 years,” he said.
“It’s hitting the smaller operators especially hard,” said another dealmaker, “especially those who have been using credit cards and have depended on long-standing credit lines to keep their business afloat. Some banks have arbitrarily cut back on these credit lines, especially over the last six or seven months.”
It’s much worse than in the early ‘90s when traditional financing “froze up completely,” said a senior dealmaker. “Then, to get the ball rolling, many turned to Wall Street and IPOs as owner-developers re-invented the REIT (real estate investment trust) industry, which had never established a foothold in the shopping center/retail chain industry, except for several owners of strip centers.
Some in the industry say REITs are expected to lead the rebound in commercial real estate, mainly because they have the ability raise money by selling securities; the IPOs are the example they cited when shopping centers became an important part of this niche. Such companies as Simon Property Group, Macerich and Kimco Real Estate have already re-financed much of their debt.
“Now,” he continued, “these landlords—and tenants—are directing their attention offshore where there are less hassles, easier deals, a more welcome environment, and the opportunity for joint ventures and partnerships.”
[We had discussed this in earlier columns, and the fact that some foreign investors—in development and in retailing--were beginning to fill the vacuum here by expanding into North America.]
Perhaps another deterrent to making a deal today can be the local laws, codes, zoning and the like, especially in those markets where retailing is considered to be saturated, and over-stored.
Said Jeffrey Evans of Intertech Design Services: “It seems as though tighter restrictions have been made on what is and what is not allowed in regards to signage and trade dress. Certainly I understand that there needs to be restrictions, but how far do companies need to go in diminishing their brand[?]”
It can be simplistic to base most of the gridlock on just one aspect, lack of funding. However, this is the main cause that many dealmakers point to.
More information on Shopping Center Digest and our associate publications, Expanding Retailers and Directory of Major Malls may be obtained from our website, www.shoppingcenters.com
Whether you want to build a shopping center or expand it, grow your retail empire by entering a new market or open another store or two, cash is king. Without it, forget it. Nothing new here. We’ve been hearing this refrain from many dealmakers around the country: “It’s the economy, stupid.”
It’s the main reason, for months now, dealmakers have been complaining about the lack of movement and deals are being frozen, even those that “were made” just recently at the Las Vegas RECon. And few of them are optimistic about the freeze lifting in the near future—though we are now in summer and there are many economists and mavens in and out of the administration who are pointing to positive signs.
“Even if there are some convincing signs,” said one investor, “these have not filtered down yet to commercial real estate such as shopping centers and retailing. First there has to be enough positive movement in other areas to be considered a trend, and that will have to take place primarily in a reduction in unemployment, and an uptick in residential values.”
The biggest obstacle to moving forward?
To Kenneth Roosth of Roosth Construction: “I am finding that Financing is the biggest hurdle right now.”
To Ira Meislik of Meislik & Meislik: “…the most common barrier is the inability to obtain financing. Principals are calculating ROIs based upon leverage, and it seems that the numbers don’t work without leverage.”
To Mary Farwell of Noteworthy Investments and Managemednt: “Financing, financing, financing. Working on now that is less than 50% LTV with perfect credit and clean environmental but they still have taken excessive time and, just today, hit my client with an extra point. Now is definitely the time to be creative in our financial side and specialize in exchanges, owner-finance, lease purchase, etc.”
In addition to financing problems, Alan Smith of Bourn Partners cites issues of co-tenancy, terminations, and the demand to "make it worth my while." And, "impact fees are raising the barrier as ...we are faced with $4.00 and to $5.00 of fees to obtain approvals from the municipalities."
One financial maven stressed that lenders are reluctant to lend without a strong cash flow and excellent sponsorship. “They are trying to make agreements more creative and more palatable, but they are becoming difficult for borrowers to accept. Some are putting points up front, or perhaps even trying to reduce the amount of the financing it is willing to provide.”
One national chain which has cut back on the number of new stores it plans to open this year attributes the decision to developers who have halted or delayed building plans. “We haven’t seen such a lack of new projects in 20 years,” he said.
“It’s hitting the smaller operators especially hard,” said another dealmaker, “especially those who have been using credit cards and have depended on long-standing credit lines to keep their business afloat. Some banks have arbitrarily cut back on these credit lines, especially over the last six or seven months.”
It’s much worse than in the early ‘90s when traditional financing “froze up completely,” said a senior dealmaker. “Then, to get the ball rolling, many turned to Wall Street and IPOs as owner-developers re-invented the REIT (real estate investment trust) industry, which had never established a foothold in the shopping center/retail chain industry, except for several owners of strip centers.
Some in the industry say REITs are expected to lead the rebound in commercial real estate, mainly because they have the ability raise money by selling securities; the IPOs are the example they cited when shopping centers became an important part of this niche. Such companies as Simon Property Group, Macerich and Kimco Real Estate have already re-financed much of their debt.
“Now,” he continued, “these landlords—and tenants—are directing their attention offshore where there are less hassles, easier deals, a more welcome environment, and the opportunity for joint ventures and partnerships.”
[We had discussed this in earlier columns, and the fact that some foreign investors—in development and in retailing--were beginning to fill the vacuum here by expanding into North America.]
Perhaps another deterrent to making a deal today can be the local laws, codes, zoning and the like, especially in those markets where retailing is considered to be saturated, and over-stored.
Said Jeffrey Evans of Intertech Design Services: “It seems as though tighter restrictions have been made on what is and what is not allowed in regards to signage and trade dress. Certainly I understand that there needs to be restrictions, but how far do companies need to go in diminishing their brand[?]”
It can be simplistic to base most of the gridlock on just one aspect, lack of funding. However, this is the main cause that many dealmakers point to.
More information on Shopping Center Digest and our associate publications, Expanding Retailers and Directory of Major Malls may be obtained from our website, www.shoppingcenters.com
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