Archive for July, 2009

What Will Ignite Commercial Real Estate?

MIT Real Estate Professor David Geltner–one of the developers of the Moodys/REAL Commercial Property Price Index–earlier this week talked with Fox Business on the state of the commercial real estate market.

Distressed Assets; Vornado Next Up For TALF; GGP’s Extension (Wednesday’s News & Notes)

Here are some news and notes on retail and retail real estate from around the Web today.

  • NAI Global asks, “Will Distressed Assets Cause Rental Rates to Plummet?” That’s a great question. And the post does a good job starting the discussion.
  • Fresh off Developer Diversified tapping TALF for some funding needs, Vornado Realty is reportedly following suit. It is said to be planning on raising between $550 million and $600 million through a bond sale that would be eligible for TALF.
  • Supervalu has agreed to sell 36 stores in Utah to Associated Food Stores.
  • Each day we seem to get a little more information on Microsoft’s brick-and-mortar stores. Today we found out where the first two stores will be located. It’s opening stores in California and Arizona. In one project it will go head-to-head with an Apple Store. Frankly, that makes sense to me. Why not compete head to head? It gives people a chance to comparison shop. It’s kind of like bunching up auto dealerships. It also indicates that Microsoft is pretty confident in its concept. The L.A. Times also chimed in on this latest development.
  • You’ve been warned. Apparently, Goldman Sachs has been dumping its commercial real estate holdings. It did the same thing on the residential side before the bottom really fell out of the market and fared much better than its competitors. Will lightning strike twice?
  • I haven’t seen a case of this in a while. But it’s something that happens from time to time. An owner of an existing center is trying to block the construction of a new center. This case is playing out in Westford, Mass. There, Westford Valley Marketplace Inc. has filed an appeal challenging the Planning Board’s approval for construction of a project called Cornerstone Square.
  • General Growth won a six-month extension in its bankruptcy filing.
  • New data from Real Capital Analytics indicates that up to $2.2 trillion worth of commercial property is at risk of default.
  • Our July cover story, judged KKR’s buyout of Dollar General as one of the most successful private equity takeovers in the retail sector in the last few years. It’s worked out so well, in fact, that now KKR is reportedly considering taking Dollar General public again.

Zell: Real Estate Bottom Will Turn Around Economy

Sam Zell was on CNBC for a lengthy interview yesterday afternoon. CNBC posted a recap of the discussion. Here is a key quote and you can watch the entire clip below.

“The key to everything is single-family housing because that’s where consumption comes from,” Zell said. “If people don’t have confidence in their biggest asset, they won’t have the confidence to spend.”

PREIT Embraces YouTube in Back-to-School Campaign

For the back-to-school shopping season, regional mall REIT PREIT has created a Web site, BacktoSchoolValu.com, that includes a cute little video of kids using last year’s back-to-school purchases in some unconventional ways.

I like the creativity. The company is trying something different to generate some buzz and get attention. The video is clever. And it’s not the only thing the company has tried lately. PREIT’s also been active on Twitter. In all, the company is trying something different to boost sales at its properties. It will be interesting to see how it all plays out for them.

CMBS Delinquencies; Consumer Confidence; Yellen Warns on CRE (Tuesday’s News & Notes)

FT Alphaville looked at the latest data from Realpoint that showed a large jump from May to June in CMBS delinquencies. The post includes some interesting commentary. The data from RealPoint is charted below.

(click for larger image)
realpoint

Meanwhile, Research Recap summarizes a recent Fitch report showing that roll rates from from June to July on delinquent loans moving from 30-days to 60 days in Fitch-rated transactions were 54 percent, marking the tenth straight month that over 50% of the 30 day delinquencies moved to 60 days delinquent.

Here are some other news and notes on retail and retail real estate from around the Web today.

Thoughts from the SADI Judging

Yesterday I was in Chicago for the judging of our 20th Annual SADI Awards. (The winners will be announced soon and our supplement published in the September issue.) We’ve worked with the American Institute of Architects’ Retail and Entertainment Knowledge Community for the past few years on this. The knowledge community has provided us with some of the judges and given us feedback on improving the process and tweaking the categories. As a result, I believe the SADI Awards get stronger each year.

This year’s discussion was extremely interesting and swerved into some unexpected territory. For example, the reality that there may be too many malls in this country was a point of conversation. With the number of stores closing and the drop in consumption, it seems likely that some retail properties will fail in the coming months and years. So as judges evaluated some of entries in the “renovated enclosed center” category, the question that crept up was why aren’t owners being bolder when they tackle these projects? Rather than merely updating a center’s look—which is what many of the designs appeared to do–perhaps owners could have taken the opportunity to add density to dated enclosed centers and diversify uses. It’s not time to back away from mixed-use. America’s enchantment with regional malls may be at an end. Even if it’s not, we simply may not need as many as we have today. It’s time to accelerate the trend of creating mixed-use environments. In the long term, the judges felt that projects that bring residences, offices and retail together stand a better chance of surviving.

Another theme that came up often was the idea of respecting context. Too many designs appeared to have no connection to the region in which the centers were located. The designs instead emulated other projects. A common refrain was, “I look at this project and I have no idea where in the country it is located.” As a result, projects that appeared more integrated into their surrounding communities were recognized for awards, even if the designs themselves didn’t appear as flashy as others. A premium was not put on whether a project was handsome architecture, but on whether it was successful retail architecture. That is, judges wanted evidence that the architect was tying the project into its regional context and creating an environment that created a memorable space, showcased retailers and showcased merchandise. It’s about striking a balance between form and function.

Most importantly, the judges made a statement this year with some of the selections, including the Grand SADI winner. I can’t divulge which project won, but it will be a real shocker. It had one thing in common with several other category winners and honorable mentions. Many of the projects that were recognized showed that it doesn’t take a huge budget to create a memorable design. It’s not just the projects that cost hundreds of millions to build that are worthy of good architecture. And it’s not just the most well-heeled customers that want a pleasant environment to congregate and go shopping. Therefore, the judges rewarded a couple of efforts to turn what could have been hum-drum projects into something much nicer. It will be fascinating to see the reaction when we do unveil the winners in a few weeks.

What Happens When Your Landlord Defaults?

Check out a Webinar we’ll be hosting next Thursday:

In the face of the biggest financial crisis and deepest recession since the Great Depression, retail landlords are increasingly falling behind on mortgage payments or defaulting entirely. Owners are facing great difficulties refinancing debt. One major source of financing—commercial mortgage-backed securities—is no longer available. And the lenders that are still in the market have dramatically tightened underwriting standards.

This is happening at time when other pressures are mounting. Vacancy rates are rising and retail sales are suffering. Faced with all these pressures, more and more properties will end up distressed. Commercial mortgage defaults are at a 17-year high and still rising. The current volume of distressed retail assets on the market at the end of April reached 1,276 properties valued at $30.6 billion, according to Real Capital Analytics—accounting for 38 percent of the total value of distressed assets.

So what happens when the landlord can’t pay the mortgage? Tenants might be left in the dark. Retailers may not know if their landlord is working out a solution or if the bank will be the new, permanent owner. If the latter is the case, new questions emerge. Is the bank equipped to conduct day-to-day management of a shopping center? If not, who might the lender turn to help deal with these issues? And while this all playing out, who is communicating with the tenants about what’s going to happen next?

This webinar will examine questions including:

* How can you tell if the owner is in trouble?
* How do you protect yourself for the term of your lease term? How does it affect CAM auditing and renewals? How does it affect any reductions you’re working on?
* What are a tenant’s rights when a landlord defaults? What are they entitled to know? How does an owner defaulting on its mortgage affect leases?
* What lease clauses does a tenant have to be careful about?

Thoughts on Cap Rates; a Sneak Peek at Microsoft’s Stores (Tuesday Morning Roundup)

I was in Chicago all day yesterday for our annual SADI Awards judging. I will post some thoughts on that later. It was an interesting day.

Here are some news and notes from yesterday. I will do another roundup this afternoon of today’s news.

Target’s Renegotation Requests; AIA Index (Weekend Roundup)

It’s been a few days since I posted. Here are a handful of notable posts and news stories from the past few days.

S&P Restores Top Ratings to CMBS Bonds

In a surprising about face, Standard & Poor’s has restored the AAA ratings to three CMBS bonds sold in 2007 that it had cut last week. This is a short story. The key paragraph is the last and I’ve bolded it below.

The securities, restored to top-ranked status, had been downgraded as recently as last week, making them ineligible for the Federal Reserve’s Term Asset-Backed Securities Loan Facility to jumpstart lending.

S&P lowered the ratings on a class of a commercial mortgage-backed bond offering from AAA to BBB-, the lowest investment-grade ranking, on July 14. The New York-based rating company reversed the cut today, S&P said in a statement. In a related report, S&P said it adjusted assumptions on the timing of projected losses on the mortgages.

“It is a stunning reversal and certainly raises questions concerning the robustness of their revised model,” said Christopher Sullivan, chief investment officer at United Nations Federal Credit Union in New York. “It may engender further uncertainty with respect to ratings outlooks.”

Debt rated below AAA isn’t eligible for the Federal Reserve’s TALF. Investors sought $668.9 million in loans from the Fed to purchase so-called legacy commercial mortgage-backed bonds on July 16, the first monthly deadline to finance the purchase of the securities.

Bonds rated below AAA are not currently eligible for the Federal Reserve’s TALF program. S&P’s rating cuts, therefore could have reduced the pool of eligible assets. S&P first began talking about downgrades in April. This triggered some rancor in early June. There was an excellent viewpoint from HousingWire on this around that time. There as another good look on June 29 at the implicatiorns of the move.

Meanwhile, S&P’s rivals made a point of coming out and saying they would not emulate the move. On June 8, Fitch issued a release saying it expected super senior CMBS to hold onto ‘AAA’ ratings. (Although in late June, Fitch said it expects 2006 through 2008 vintages of commercial mortgage-backed securities (CMBS) to “substantially underperform” earlier vintages.) On June 15, Moody’s affirmed its Aaa ratings on CMBS bonds. Meanwhile, there are smaller up-and-comers that are trying to compete with the major rating agencies including Realpoint LLC and Dominion Bond Rating Service and other Nationally Recognized Statistical Rating Organizations.

There’s something that could make the rating agency jockeying moot, however. Speakers from commercial real estate trade organizations during hearings at Congress on July 9 suggested that CMBS that had received AAA after origination–even if downgraded later–should be eligible for the TALF program. That would widen the universe of eligible bonds substantially. It remains to be seen if that will occur.

Naked Capitalism also has an interesting post on this move by S&P.