This Strolling the Agora column is from the January 25, 2010 Issue of Shopping Center Digest
Lemme me know if this scenario sounds at all familiar. A retailer announces it will open, say, 50 stores the following year. Then its sales over the holiday season jump 20% over the previous year’s results and its same store sales are up 6%. Immediately after the numbers are in, said chain takes another look at its expansion plans and now says it will increase the number of new stores opening the following year to 75.
The other side of the coin, of course, is if the financials are not positive, the tenant is just as likely to cut back on its first projections on plans for new outlets for the next year.
So, based on historic precedent, how we’ve operated most of the time I’ve been a part of “our thing,” one would expect that 2010 would be a decent year for many dealmakers in the shopping center/retail industry, both landlords and tenants. Though by no means an across-the-board record breaker, this past holiday season was substantially better than expected for those looking at total sales and comparing same store sales.
However, concerning the second part of the scenario—increased expansion--it’s not gonna happen, unless there is a strong uptick within the next couple of months.
For one, same store sales for many retailers may be up over last year’s, but we’re comparing these numbers with those of a very down period. Then, in order to drive shoppers into the stores, retailers resorted to deep discounts, which for many did not translate into big profits. Many were content to increase their market share, with hopes that this will carry over to improved sales for the coming year.
And even if the top merchandisers were underwhelmed, it’s gonna have some impact.
C’mon, when even Wal Mart says it is closing Sam’s Club stores, it does attract attention and cause a slight clouding of many crystal balls-- and dilute the rosy glow in the eyeglasses of experienced forecasters.
Perhaps the most telling, after analyzing some of the sales results, is that consumers are nervous because of the depressing job market and still rising unemployment numbers. They identify with those checking the want ads and wondering if they may be next. They may bend a little here and there, but essentially they are opening purses and wallets for basics, value-oriented merchandise, and definitely not for luxury items—check out the numbers for high-end jewelry, Neiman Marcus, Saks 5th, Bergdorf, which either show a decline or a rise only when compared with the severe drop in 2008.
Of course if you’re one of those Wall Street bankers with the million-plus bonuses, forget everything above and below these comments.
If shoppers don’t buy, registers don’t ring, retailers don’t expand, landlords don’t build—or raise rent rates. Result, it won’t be a great year for dealmaking and leasing.
Which is not to say there won’t be some activity taking place, and I’m not referring only to renewals, re-negotiating leases, or replacing the many vacant stores with other tenants who are paying a lower rent than their predecessor.
The categories that are planning to open the largest number of new units are the dollar stores, discounters, fast-food and low-end restaurants, supermarkets, drug stores and other chains that benefit immediately from a rising population; consumers must still eat, must still go out, must replace worn out apparel, must still be entertained—only more carefully.
Though most of this growth is directed toward the low-end of shopping centers, with some discounters raising the quality of their merchandise because vendors to better stores are also selling to them, a small portion of their new stores will be in malls they normally would avoid. The rents are low, the demographics are good, and savvy shoppers can buy private label merchandise at discounted prices.
And to many who focus on predicting attitudes, the disparity between reality and illusion, and what is and will take place in the marketplace—the agora if you will—it could be a long haul before shoppers return to instant gratification over a more conservative use of their disposable income. They are still nervous about jobs.
New stores and new shopping centers are not likely to feed a renewed appetite for mass consumption, at least not in 2010. So it will be much like last year for most dealmakers: working a lot harder, a lot smarter, and getting a lot less.
In the long run, however, with all projections showing a future rise in population, and a need for food, apparel, and the like, the industry will continue to expand.
Further information regarding the twice-monthly Shopping Center Digest, the weekly Eflash, our associate publications as Expanding Retailers, Directory of Major Malls, and our other products may be obtained from our website, www.shoppingcenters.com .
Monday, January 25, 2010
Monday, January 11, 2010
With Landlords Strapped For Cash, "When," Many Ask, "Will The Dam Break And Result In A Flood Of Large Acquisitions Of Shopping Centers"
This Strolling the Agora column is from the January 11, 2010 Issue of SHOPPING CENTER DIGEST
For a year now, as vacancy rates have climbed to record levels and the true value of shopping centers has plummeted, several prominent landlords and numerous investors have been preparing to grab properties at bargain prices from financially-strapped owners. A number of projects, mostly strips and distressed, have changed hands due to foreclosures, and a number of others where both parties were not pressured and walked away satisfied with the deal.
But there have been, as yet, few large acquisitions, aside from Simon Property Group’s recent $2.2 billion buy of The Lighthouse Group’s Prime Outlets. The controlling word here is large.
Though lenders have given breathing room to such debt-heavy operators as General Growth and Centro Properties, many in the industry anticipate these landlords soon will be selling quality and trophy assets to retire billions of dollars in debt to stave off liquidation.
The big question is when will the dam break and start a flood of mergers and acquisitions of large and prime properties.
Substantial, But Minor, Movement
There already has been substantial movement as minor investors and medium-sized landlords have announced additions to their portfolios: RioCan and Cedar Properties partnering to acquire two Pennsylvania strip centers; Equity Investment picking up two strips in the Cleveland, OH, market; Pacific Retail Capital beating off other buyers to re-acquire for $15 million the West Oaks Mall in Houston it sold four years ago for $102 million; Dizengoff buying its second Florida center; Colonial selling off Winter Haven in Florida; Inland picking up Grafton Commons in Wisconsin; Equity One acquiring Westbury Plaza on Long Island and then an adjoining site for expansion; minor centers and single-tenant properties in 1031 exchanges in California. And the list goes on.
Also, there is no end yet to established companies establishing divisions, or forming REITs to acquire properties; the latest is Excel Trust which just filed an IPO and hopes to raise $300 million to acquire retail properties.
And here we get to the controlling word large, near the top of this column. It’s an interesting commentary on today’s attitudes that $25 or $30 million is no longer considered a large acquisition.
Part of this is due to the massive amount of money raised in 2009 by publicly traded REITs. They raised nearly $35 billion--$28.3 billion by another estimate--by selling unsecured debt and common equity and used most of it to pay off older debt that was to mature in 2009; according to one observer, that debt was reduced to about $2 billion in September [not counting GGP, whose $10.3 billion debt was extended].
He continued: “This puts several heavy-hitters in a great position to acquire,” and pointed to Simon “who has raised about $7 billion which could be used to opportunistically acquire properties domestically and globally.”
In Canada, some analysts say over $1 billion has been raised by REITs in the last year to improve their balance sheets and prepare for future acquisitions. Said Kim Reddington of AMP Capital Brookfield: “We think the next 18 months will be a very fruitful time…They [REITs] are one of the few investors in the world that have capital.”
Foreign Investors
According to Hessam Nadji of Marcus & Millichap Real Estate Investment Services, foreign investors are expected to buy some $2.5 billion of US real estate this year.
To Dan Fasulo of Real Capital Analytics, offshore buyers have never acquired more than 10% of annual real estate sales. “There’s no foreign invasion. There’s just enough capital to touch off a meaningful recovery.”
Ed Sonshine of Canada’s RioCan is enthusiastic, and especially positive about future expansion through more aggressive acquisitions. However, he sees most of the “steals” are in the US, so his company will be focusing much of its efforts south and is “feeling its way” through its partnership with Cedar Properties (See Above).
So, back to the question as to when the dam will break and major sales take place?
According to one VP of acquisitions, “The dam will not break until there is more pressure for sellers…or until they are in a position where they ‘have to’ sell. With ability to often extend/re-work debt terms, sellers are ‘hoping’ to ride out this storm; but last time I checked, ‘hope’ isn’t a strategy.”
Says Peter D. Morris of Greenstead Group, “The dam will not break but there will be cracks…more stringent underwriting wukk result in a cautious flow of money back into shopping centers as early as 2011 (not 2010). There are still too many ‘bad locations’ [which] will need to be repositioned or abandoned. Top flight properties may become available and that is where we will see strong action, but I think B and C property will be hard to move for years.”
Leo McKittrick of Drake Barber Realty ties sales to the unemployment rate and when it changes direction. “The big unknown is how much of a change in direction? My opinion is a .25 to .50 reduction in the unemployment will trigger the buying. Why will this trigger a buying spree? All companies will know that the worst has passed.”
An Abundance Of Capital
Another echoed a common refrain over the last few months regarding some sellers waiting for cap rates to drop and those with the cash waiting for sellers to get real regarding their perceived value of property. These are usually the smaller operators.
“Institutional owners have raised such an abundance of capital…[they’re not an active seller] unless they want to leave a market in its entirety. However, we have seen a large number of assets for sale from Centro, DDR, Inland, etc., but unfortunately, they have not actually executed sales due to property values being far below their basis.”
A number of those experienced in acquisitions and mergers note that there are many “lookers” examining large portfolios. “If they see signs that larger retailers are returning to an expansion mode, there is an incentive to make the deal before occupancy rates begin to rise across the board. This is an indication that values will go up and buyers may want to move before that begins.”
Another echoed that assessment. “Look for it to begin in early or late spring, with the first major sales triggering a rush of buyers to put their money where their mouth is.”
More information on SHOPPING CENTER DIGEST and its associate publications, the weekly Eflash, the annual EXPANDING RETAILERS, and the annual DIRECTORY OF MAJOR MALLS, may be obtained from our website, www.shoppingcenters.com .
For a year now, as vacancy rates have climbed to record levels and the true value of shopping centers has plummeted, several prominent landlords and numerous investors have been preparing to grab properties at bargain prices from financially-strapped owners. A number of projects, mostly strips and distressed, have changed hands due to foreclosures, and a number of others where both parties were not pressured and walked away satisfied with the deal.
But there have been, as yet, few large acquisitions, aside from Simon Property Group’s recent $2.2 billion buy of The Lighthouse Group’s Prime Outlets. The controlling word here is large.
Though lenders have given breathing room to such debt-heavy operators as General Growth and Centro Properties, many in the industry anticipate these landlords soon will be selling quality and trophy assets to retire billions of dollars in debt to stave off liquidation.
The big question is when will the dam break and start a flood of mergers and acquisitions of large and prime properties.
Substantial, But Minor, Movement
There already has been substantial movement as minor investors and medium-sized landlords have announced additions to their portfolios: RioCan and Cedar Properties partnering to acquire two Pennsylvania strip centers; Equity Investment picking up two strips in the Cleveland, OH, market; Pacific Retail Capital beating off other buyers to re-acquire for $15 million the West Oaks Mall in Houston it sold four years ago for $102 million; Dizengoff buying its second Florida center; Colonial selling off Winter Haven in Florida; Inland picking up Grafton Commons in Wisconsin; Equity One acquiring Westbury Plaza on Long Island and then an adjoining site for expansion; minor centers and single-tenant properties in 1031 exchanges in California. And the list goes on.
Also, there is no end yet to established companies establishing divisions, or forming REITs to acquire properties; the latest is Excel Trust which just filed an IPO and hopes to raise $300 million to acquire retail properties.
And here we get to the controlling word large, near the top of this column. It’s an interesting commentary on today’s attitudes that $25 or $30 million is no longer considered a large acquisition.
Part of this is due to the massive amount of money raised in 2009 by publicly traded REITs. They raised nearly $35 billion--$28.3 billion by another estimate--by selling unsecured debt and common equity and used most of it to pay off older debt that was to mature in 2009; according to one observer, that debt was reduced to about $2 billion in September [not counting GGP, whose $10.3 billion debt was extended].
He continued: “This puts several heavy-hitters in a great position to acquire,” and pointed to Simon “who has raised about $7 billion which could be used to opportunistically acquire properties domestically and globally.”
In Canada, some analysts say over $1 billion has been raised by REITs in the last year to improve their balance sheets and prepare for future acquisitions. Said Kim Reddington of AMP Capital Brookfield: “We think the next 18 months will be a very fruitful time…They [REITs] are one of the few investors in the world that have capital.”
Foreign Investors
According to Hessam Nadji of Marcus & Millichap Real Estate Investment Services, foreign investors are expected to buy some $2.5 billion of US real estate this year.
To Dan Fasulo of Real Capital Analytics, offshore buyers have never acquired more than 10% of annual real estate sales. “There’s no foreign invasion. There’s just enough capital to touch off a meaningful recovery.”
Ed Sonshine of Canada’s RioCan is enthusiastic, and especially positive about future expansion through more aggressive acquisitions. However, he sees most of the “steals” are in the US, so his company will be focusing much of its efforts south and is “feeling its way” through its partnership with Cedar Properties (See Above).
So, back to the question as to when the dam will break and major sales take place?
According to one VP of acquisitions, “The dam will not break until there is more pressure for sellers…or until they are in a position where they ‘have to’ sell. With ability to often extend/re-work debt terms, sellers are ‘hoping’ to ride out this storm; but last time I checked, ‘hope’ isn’t a strategy.”
Says Peter D. Morris of Greenstead Group, “The dam will not break but there will be cracks…more stringent underwriting wukk result in a cautious flow of money back into shopping centers as early as 2011 (not 2010). There are still too many ‘bad locations’ [which] will need to be repositioned or abandoned. Top flight properties may become available and that is where we will see strong action, but I think B and C property will be hard to move for years.”
Leo McKittrick of Drake Barber Realty ties sales to the unemployment rate and when it changes direction. “The big unknown is how much of a change in direction? My opinion is a .25 to .50 reduction in the unemployment will trigger the buying. Why will this trigger a buying spree? All companies will know that the worst has passed.”
An Abundance Of Capital
Another echoed a common refrain over the last few months regarding some sellers waiting for cap rates to drop and those with the cash waiting for sellers to get real regarding their perceived value of property. These are usually the smaller operators.
“Institutional owners have raised such an abundance of capital…[they’re not an active seller] unless they want to leave a market in its entirety. However, we have seen a large number of assets for sale from Centro, DDR, Inland, etc., but unfortunately, they have not actually executed sales due to property values being far below their basis.”
A number of those experienced in acquisitions and mergers note that there are many “lookers” examining large portfolios. “If they see signs that larger retailers are returning to an expansion mode, there is an incentive to make the deal before occupancy rates begin to rise across the board. This is an indication that values will go up and buyers may want to move before that begins.”
Another echoed that assessment. “Look for it to begin in early or late spring, with the first major sales triggering a rush of buyers to put their money where their mouth is.”
More information on SHOPPING CENTER DIGEST and its associate publications, the weekly Eflash, the annual EXPANDING RETAILERS, and the annual DIRECTORY OF MAJOR MALLS, may be obtained from our website, www.shoppingcenters.com .
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