Replies to post #108049 on ajtj99's Market Pulse

[dec212012]

Shopping Centers Begin to Feel Ripples of Housing’s Ills

By TERRY PRISTIN
Published: September 12, 2007
Not long after the dot-com industry collapsed a few years ago, retailing became the hottest sector in commercial real estate. Online shopping was no longer viewed as a threat to bricks-and-mortar stores, and rising housing values made it easy for people to borrow more money — and spend it. Shopping centers began changing hands at ever-escalating prices.

Skip to next paragraph

Tami Chappell for The New York Times
Fritz McPhail says he sees more chances for his Atlanta firm to buy shopping centers.
Two years ago, retail real estate began losing some of its allure for investors as the condo conversion craze took over. More recently, investors have gravitated toward office buildings and hotels.

Now many people in the retail real estate industry are bracing themselves for a slowdown in spending as the subprime mortgage crisis and the decline in housing values continue to send ripples through the economy.

And shopping centers have been caught in the credit squeeze that has transformed the capital markets. Private buyers, who were once able to finance 95 percent or more of the cost of a transaction, are being driven out of the market because such high leverage is no longer available.

According to investors, brokers and analysts, deals are taking longer to complete, and prices — at least for the second- and third-tier properties — are declining by as much as 10 percent.

“What we have seen is a lull in the market, what you might call the calm before the storm,” said Fritz McPhail, the owner of Blue Ridge Capital, an Atlanta real estate company that specializes in acquiring troubled strip malls. “We are seeing prices change. We are seeing deals blow up. People are calling us back a second time to see if we want to consider another offer.”

About 80 percent of the choice regional malls in the best locations are owned by publicly traded real estate investment trusts. Not surprisingly, they are expected to withstand the credit squeeze better than older shopping centers in less desirable settings.

But even top mall operators are being affected by the tightening lending standards.

Two real estate investment trusts, the Simon Property Group and Macerich, agreed this year to sell three malls they have jointly owned for nearly a decade — Lindale Mall in Cedar Rapids, Iowa; NorthPark Mall in Davenport, Iowa; and SouthPark Mall in Moline, Ill. — to a private company that relies on a high degree of leverage. But the buyer was unable to complete the deal.

The current debt market could be an obstacle for the Pyramid Companies, the owner of 20 shopping centers in New York State and Massachusetts, including Palisades Center in West Nyack, N.Y.

The company announced in April that it was exploring “strategic alternatives,” including a sale. Publicly traded companies, which limit the leverage they use to 60 percent, are not likely to be interested in Pyramid because most of the company’s properties — unlike the Palisades Center — are in “low-growth or negative-growth markets,” said Arthur M. Coppola, the chief executive of Macerich.

While demand for space remains strong at the high-end regional malls, the average vacancy rate at strip malls, which are generally anchored by supermarkets, has been creeping up for more than two years, even though relatively little new space has been developed, according to Sam Chandan, the chief economist for Reis, a New York research company.

Mr. Chandan said the vacancy rate stood at 7.3 percent at the end of June and was expected to rise to 7.6 percent by the end of the year, its highest level since 1995.

In the second half of the year, he said, about 26.2 million square feet in strip malls will be completed, which would contribute to an oversupply. “That’s the highest level of completions we’ve seen in many years, and it coincides with the slowdown in the underlying drive for space,” he said.

The strip mall vacancy rate has accelerated sharply in some metropolitan areas, including Trenton, Dallas and Oakland, Calif., according to Abigail Marks, an economist at Torto Wheaton Research, a Boston company owned by CB Richard Ellis.

In metropolitan areas with strong population growth, like Phoenix and Orange County, Calif., new shopping centers are easily attracting tenants, according to a report by the CoStar Group, a research company in Bethesda, Md. But new centers in several other metropolitan areas — Memphis, Cleveland, Indianapolis, Tucson, Southwest Florida and Nashville — are having trouble leasing space, CoStar said.

And retail chains are closing stores faster than they did in 2005 and 2006. During the first half of this year, Merrill Lynch counted 6,126 closings, an 11 percent increase over the period a year earlier. Store closings are not necessarily bad news for shopping center operators, who are often able to find a new tenant for a space at higher rent.


Many retail specialists draw a distinction between shopping centers that cater to lower-income shoppers, who are more likely to lose their homes through foreclosure, and centers that serve more affluent customers. “The upscale mall guys, while not completely insulated, should be better than the lower end,” said Steve Sakwa, Merrill Lynch’s analyst for real estate investment trusts. “I don’t think the credit crunch is really killing the people of Boca Raton.”

Donald C. Wood, the chief executive of Federal Realty Investment Trust, a Rockville, Md., company that specializes in strip malls in inner-ring suburbs, where there is little land to be developed by competitors, said his company had not experienced an increase in vacancies. The future is likely to be less rosy for property owners in areas “with less people, with less money and less barriers to entry,” he said.

Similarly, retail space in New York and other densely populated cities has continued to command high prices because “you can’t build very much of it,” said Robert M. White Jr., the chief executive of Real Capital Analytics, a New York research firm.

With some big-box retailers like Home Depot reporting declining sales, shopping centers with such stores, known in the industry as power centers, may take a bigger hit than those whose tenants sell food and other necessities. “The power centers are seeing the impact directly,” said Jim Sullivan, an analyst at Green Street Advisors. “There may be a perception that power centers are riskier than they had been.”

Like residential mortgages, commercial mortgages are pooled, sorted into risk categories and sold as bonds.

In the past several weeks, demand for these bonds has weakened, with investors demanding to be paid more for the risk. As a result, said Pete Bethea, a principal at Burnham Real Estate, a brokerage firm in San Diego, lenders are changing the terms of deals. “Even if people thought they had their deal locked, there’s no such thing,” he said.

Small-scale investors are being shut out, Mr. White of the New York research firm said. “The trouble in the debt market is having an immediate impact on them,” he said.

As buyers are required to use more of their own equity, prices could fall as much as 15 percent but are not likely to slide much further, said Matthew Ostrower, a senior analyst for real estate investment trusts at Morgan Stanley. He said private equity funds had raised tens of millions of dollars to spend on real estate but were waiting for the gap to narrow between what sellers are asking and what they are willing to pay. “Where that price is will be the collective decision of all these buyers,” he said.

http://www.nytimes.com/2007/09/12/realestate/commercial/12mall.html?_r=1&ref=business&oref=s...

[michael03332002]

GM Buddy

well it looks like they are playing the shorts for what appears to be a possbile rate cut and moon shot market reaction

I have the current FRL off the recent 2 highs on the Q's at about 49.80ish today and slightly falling

I know you play the SPY so not sure what that area may be, but sure looks like they are gunning this and that may be what they are shooting for IMHO

hope all is well on your end

beginning this sunday, flying out to Shreveport LA on business and FUN lol

playing golf Monday and doing some buying for next year Tues/Wed

and oh yea, will prolly drop a coin or 2 on the slots/cards/roulette, etc....

just for fun

M

[finally]

I agree with you.

Various things I'm following are showing big money positioning for down. A lot of whipsaw action lately, I think most are thrown off the trail of the short term direction. Once we get a break it should be a strong move.

Still sitting on my hands but not for much longer.

A cross down on the 15-minute SPX 65,90,12 MACD will get me into my positions.

[ajtj99]

LG, my NDX intra-day indicators show most in overbought range with the exception of some of the longer term ones.

Typically when this happens there is some sideways re-cycling that enables those longer indicators to keep climbing while the shorter ones re-set. We may consolidate for a couple hours below 2010 NDX while that happens.

If the triangle theory is playing out, 2025 NDX should be a barrier.