Here’s a pleasant thought to take with you into 2011–in spite of sluggish pace of economic growth, Americans’ penchant for shopping is back and in robust health. The New York Times reports that, according to preliminary figures, retail spending rose 5.5 percent in the months leading up to Christmas, representing the highest increase since 2007. National Retail Federation forecasts that total holiday sales will reach $451.5 billion in 2010, outpacing the past three years. Back in October, NRF was projecting total holiday sales of $447.1 billion.
Even this week’s massive blizzard might not put much of a dent into retailers’ holiday sales. Though the snow has stopped many shoppers from visiting the mall on what is one of the more critical days of the season, analysts expect it will only serve to extend holiday shopping into January.
It looks like Xanadu Meadowlands, North Jersey’s ill-fated retail/entertainment complex has finally found the right developer. Over the weekend, Triple Five Group, the owners of the Mall of America, signed a letter of intent with Xanadu’s lenders to take over the project. Given Triple Five’s experience with venues of this kind (in addition to retail, Mall of America features a movie theater complex, an amusement park and other entertainment components), this seems like a step in the right direction. For more on retail and retail real estate follow the links below:
Corrected at 6:46 PM Update 1 on Dec. 22, 9:18 AM Update 2 on Dec. 22, 2:43 PM
Click for full-size image.
Indexes designed to gauge commercial real estate values have been around for a few years now. The original intention was that creators of various indexes were competing to create the benchmarks around which commercial real estate derivatives could be created. Pros had a vision that it would give investors an alternative to buying and selling actual real estate and REIT stocks in playing in the commercial real estate space.
The 2008 financial collapse and the subsequent leeriness about derivatives pretty much killed that idea (at least for now), but the desire to design the best commercial real estate index remained. The original players in the market were Standard & Poors, the Chicago Mercantile Exchange and Global Real Analytics; Real Capital Analytics and the Massachusetts Institute of Technology Center for Real Estate; and the Rexx Real Estate Property Index, which includes backing from Cushman & Wakefield and Newmark Knight Frank.
But the landscape has changed. Today, the first and third ventures are is now defunct. Correction: The Rexx index still exists. It has been renamed the REBOR Index.
Moody’s now works with MIT and Real Capital and that index has become a popular reference point. In addition, Green Street Advisors and CoStar have entered the fray and begun producing their own indexes.
The question: Which one of these is the best? Moody’s, as the most established, continues to get the most exposure. But the other indexes are getting mentioned more often and both CoStar and Green Street claim there are key differences in how they’re measuring prices compared with the Moody’s/RCA index. Bloomberg’s monthly report on prices now often cites all three.
What’s often lacking, however, is a look at how the three compare.
According to Green Street, “Green Street Advisors’ Commercial Property Price Index (GSA CPPI) is a real-time series of unleveraged U.S. commercial property values. The key feature differentiating this index from others is its timeliness. The GSA CPPI captures the prices at which commercial real estate transactions are currently being negotiated and put under contract.” Meanwhile, CoStar says its numbers are different from Moody’s because “Moody’s pricing index uses the data that DOES NOT include sales under $2.5M. CoStar Group’s monthly index is the only repeat sales index that covers sales transactions from $100,000 and above. And Moody’s chooses deals by a sale price while CoStar uses property class, size etc. so the two indexes won’t have the exact same deals in the datasets.”
Update 1: Chris Macke, senior real estate strategist for CoStar got in contact with us and provided some more information on what distinguishes the indexes.
He wrote:
The primary difference between our index and Moody’s index is the source of data. We use our own sales transaction data while Moody’s uses sales data from a third party. This not only means our underlying sales database is different but because we use our own data we report monthly results on average 2-3 weeks before Moody’s. Moody’s just reported their results for October transactions while we reported October commercial real estate pricing activity about two weeks ago on CNBC.
Regarding the Green Street index, it is not a pricing index. It does not measure prices of commercial real estate. It is Green Street’s estimate of value.
…
All three indices have their place and value. What is critical is that the market understands the material differences between them.
Update 2: David Geltner, professor of real estate fnance at the MIT Department of Urban Studies & Planning and author of the Professor’s Corner commentaries on the Moody’s/REAL index, also contacted me with some further comments.
Here is what he wrote:
The commercial real estate market in the U.S. these days is a rather complicated animal, or rather, animals (plural). We have been using the RCA repeat-sales database that underlies the Moody’s/REAL CPPI to track pricing in three separate market segments that have opened up and grown apart during 2010: “Trophy” properties, “Distressed” properties, and, well, everything else (”Other”). Trophies are up big-time, Distressed has been very volatile but has recently also turned up although from a much lower price point, and the broad “Other” segment (everything neither Trophy nor Distressed) has been languishing. And these three segments are just within the “institutional” market (the properties valued $2.5M+ that RCA tracks), not even including the smaller “mom & pop” properties that CoStar tracks.
I would also add (which you can see graphically in the commentary) that the main reason why the two price indices (Moody’s/REAL & CoStar) have not bounced up further this year is the role of distressed property sales in the overall market as tracked by those indices. Both Moody’s/REAL and CoStar are equal-weighted indices tracking broad markets. Trophy properties, while large on average, represent a small share of the number of transactions. On the other hand as far as I understand the Green Street index is not exactly a price index, and it is aimed at just REIT-held properties, and I believe it is value-weighted rather than equal-weighted, all of which would explain why/how it presents the larger apparent bounce (as well as the leading nature that Green Street is trying to reflect by focusing on deals in negotiation).
(Editor’s note: Thanks to both Chris and David for writing in with those clarifications.)
I’ve gone ahead and attempted to chart the three indexes against each other. CoStar and Moody’s both use December 2000 as the baseline for their indexes. (For CoStar, the data is its investment grade index.) Green Street Advisors, however, uses August 2007 as its base. I attempted to reindex it by creating a new index where December 2000 = 100 and then had it match the month-by-month percentage changes of the original index. The result is the chart above.
What does it tell us?
Most broadly, the indexes appear pretty similar on the way up and the way down, but have begun to show some more interesting divergences of late. In general, Moody’s and CoStar’s indexes show similar magnitudes of price appreciation during the industry’s good years. Green Street’s peak is a tad lower. The peaks on all three indexes come in 2007, but Green Street and CoStar measure the peak several months earlier than Moody’s does.
In the decline phase, Green Street’s index fell earlier and bottomed earlier. Its bottom is also not as for the CoStar or Moody’s indexes. Green Street’s index hit bottom all the way back in May 2009. In contrast, CoStar’s bottomed in February 2010 and Moody’s in August 2010. The difference stems from Green Street’s attempt to capture the prices at which commercial real estate transactions are currently being negotiated and put under contract rather than closed.
More remarkably, Green Street’s index shows commercial real estate prices rebounding much more dramatically than the other two indexes. According to Green Street, commercial real estate values have gained a lot of ground. CoStar and Moody’s indexes are off their bottoms, but seem to be bouncing along a trough.
So which index do you think is right?
Highlights:
The Moody’s index peaked at 1.919 in October 2007; CoStar’s peaked at 1.879 in August 2007; and Green Street’s peaked at 1.831 also in August 2007.
The low point in the Moody’s index came in August 2010 with a reading of 1.054. Peak-to-trough, Moody’s index fell 45.1 percent. The low point in the CoStar index came in February 2010 with a reading of 1.121 Peak-to-trough, CoStar’s index fell 40.3 percent. The low point in the Green Street index, in contrast, came much earlier with a reading of 1.129 in May 2009. Peak-to-trough, Green Street’s index fell 38.3 percent.
Currently, Moody’s index is still 41.9 percent below its peak. CoStar is 34.5 percent below its peak and Green Street’s is 20.5 percent below its peak.
Moody’s index is 5.7 percent above its low point. CoStar’s index is 9.7 percent above its low point. Green Street’s, meanwhile, is 28.8 percent above its low point.
It seems some of the biggest retail real estate stories these days are coming from overseas. In the latest development in Simon Property Group’s courtship of Capital Shopping Centres, U.K. regulators have given Simon a deadline of January 12 to come up with a “firm offer” for the British mall owners. So much for a restful holiday break for the execs at the nation’s largest mall REIT.
Meanwhile, things are also getting interesting again in the Centro saga. Centro is fielding bids for more than $13 billion worth of assets. According to the Sydney Morning Herald, interested buyers included Westfield, Lend Lease’s Australian Prime Property Fund, CFS Retail Trust, Queensland Investment Corp and the Singapore Government Investment Corp.
As many people had expected, the commercial real estate industry is showing increasing signs of health in the wake of GGP’s successful reorganization. The CoStar Group reports that in November, investors raised $13.2 billion in funds for commercial real estate, up from approximately $8 billion raised in October.
Meanwhile, industry stalwart Sam Zell predicts that as property fundamentals improve, real estate values will bounce back. For more on these and other stories about retail and retail real estate, follow the links below:
Simon Property Group has taken its pursuit of British mall owner Capital Shopping Centres up a notch with a new offer to buy the company for $4.8 billion. Simon had sent another letter over the weekend reiterating its opposition to Capital Shopping Centres’ acquisition offer for Trafford Centre and offered an alternate method for financing that deal. Capital Shopping Centres rejected that proposition.
The $4.8 billion offer is 26 percent above Capital Shopping’s share price immediately prior to the offer period and 21 percent above the average price for the six preceding months. In the latest letter, Simon CEO David Simon wrote, “Our interest in making an offer for CSC is, of course, not new. By making this offer on the terms outlined in this letter, we are confident that we have now answered any objections you have previously expressed. We believe that we should work together to announce a recommended offer, and would urge you to listen to calls from your shareholders – many of whom we have spoken to – opposing the Trafford Centre transaction or asking you to adjourn your forthcoming EGM.”
More details on the offer can be found at the New York Times‘ Deal Book blog and at Property Week.
For previous blog posts on this saga, go here and here.
Update:Property Week is reporting that CSC has rejected Simon’s offer. However, CSC has also decided to postpone the shareholder vote on its proposed Trafford Centre purchase, meaning that there will very likely be more back and forth between the firms before this is all said and done.
We seem to be finally getting to a point where store opening announcements outnumber announcements of closings and liquidations. Family Dollar has revealed it plans to double its annual store growth to 300 locations. Japanese apparel retailer Uniqlo reportedly wants to open 200 U.S. locations. For more on this and other stories about retail and retail real estate, follow the links below:
Now here’s an interesting approach to the problems battering traditional booksellers–a merger of the sector’s two behemoths, Borders and Barnes & Noble. Reports emerged yesterday that Bill Ackman, one of Borders’ largest shareholders (he has also made a name for his investments in GGP, Target and J.C. Penney), has offered to finance a $960 million takeover of Barnes & Noble.
The thinking seems to be that a merger would allow the booksellers to benefit from economies of scale. Barnes & Noble’s shares surged 29 percent when news of the potential acquisition reached the markets.
But some analysts question whether a merger would offer any permanent solutions to the booksellers’ woes. The biggest threat facing bricks-and-mortar book chains today are e-readers and it’s not yet clear how combining forces would help fight competition from Amazon.com, Google and Apple.
In any case, if Borders and Barnes & Noble do end up merging, there will likely be a major portfolio overhaul. We’d love to hear from all of you what you think of this proposal. Does a merger make sense? Will it help save Borders? What will be Bill Ackman’s game plan if he ends up with the largest bookstore chain in the U.S?
Simon sent a letter to Capital this morning and made the text public. This is reminiscent of when it courted General Growth and also shared the text of those letters. Simon reiterates its opposition to Capital’s proposed acquisition of the Trafford Centre Group and says it is “disappointed by the profound value destruction.” In addition, Simon again requests “specific due diligence information with respect to CSC, which would assist us to formulate an acquisition proposal.”
Property Week is reporting that Capital has already rebuffed Simon’s latest overture. Capital refutes some of Simon’s analysis of the deal and concludes that it believes “the deal was in the best interests of shareholders, and that it reiterates its recommendation to vote in favor of the acquisition.”
As I wrote here and here, spirits were exceedingly high at the ICSC New York National Conference and Dealmaking. It feels like a cloud has lifted and that brighter days are ahead. And companies are adjusting their business plans accordingly.
The fact that the holiday shopping season is looking so robust is helping a lot.
There’s just one nagging question. What about jobs? Friday’s report was a disaster. We’ve experienced two jobless recoveries already. And now this is looking like a job-loss recovery. With millions of people out of work and the pace of job growth so low, can we really sustain a retail recovery? To get back to an unemployment rate of below 5 percent (and to keep pace with population growth), the U.S. economy needs to be creating something like 250,000 to 300,000 jobs per month. We’ve seen nothing close to that in this recovery and there’s no obvious industry to drive that kind of growth going forward. We’re looking at a long slog of high unemployment.
Yet, one of the interesting data points that Dana Telsey, CEO and chief research officer with New York-based Tesley Advisory Group, mentioned in her presentation during Monday’s general session was that part of the explanation for having rising sales along with high unemployment comes when you look more deeply into the numbers. The unemployment rate for Americans with a college degree is much lower than for those without. Americans with less than a high school diploma have an unemployment rate of 15.7 percent. The rate for high school graduates is 10.0 percent. For Americans with some college or an associate degree it’s 8.7 percent and for those with a bachelor’s degree or higher it is just 5.1 percent. The conclusion you can draw from that is people that the people most affected by the crisis were not major consumers.
Still, on balance it means that unemployment is highest among people that had little discretionary income to begin with. At the same time, a stabilizing economy is encouraging middle class shoppers to spend more. (There’s also the fact that some people have opted to stop paying mortgages and increased spending in other areas instead.) And don’t forget the rich, who seem to have bounced back more quickly than anybody else. So the retail recovery is being driven by the more well-off, which helps explain in part why the luxury sector has bounced back as strongly as it has. On the flip side, discount and value retailers also continue to do well. It’s the retailers in the middle that face the greatest challenges.
The question then becomes, can the retail sector thrive in an environment where it’s largely relying on consumption by the wealthiest Americans? Will they continue to spend at this clip? Or will we need to see more job growth and improvement in the living situations for people at the bottom for retail to truly recover?
Where Are CRE Values?
by David Bodamer December 21st, 2010
Corrected at 6:46 PM
Update 1 on Dec. 22, 9:18 AM
Update 2 on Dec. 22, 2:43 PM
Click for full-size image.
Indexes designed to gauge commercial real estate values have been around for a few years now. The original intention was that creators of various indexes were competing to create the benchmarks around which commercial real estate derivatives could be created. Pros had a vision that it would give investors an alternative to buying and selling actual real estate and REIT stocks in playing in the commercial real estate space.
The 2008 financial collapse and the subsequent leeriness about derivatives pretty much killed that idea (at least for now), but the desire to design the best commercial real estate index remained. The original players in the market were Standard & Poors, the Chicago Mercantile Exchange and Global Real Analytics; Real Capital Analytics and the Massachusetts Institute of Technology Center for Real Estate; and the Rexx Real Estate Property Index, which includes backing from Cushman & Wakefield and Newmark Knight Frank.
But the landscape has changed. Today, the first
and thirdventures areis now defunct. Correction: The Rexx index still exists. It has been renamed the REBOR Index.Moody’s now works with MIT and Real Capital and that index has become a popular reference point. In addition, Green Street Advisors and CoStar have entered the fray and begun producing their own indexes.
The question: Which one of these is the best? Moody’s, as the most established, continues to get the most exposure. But the other indexes are getting mentioned more often and both CoStar and Green Street claim there are key differences in how they’re measuring prices compared with the Moody’s/RCA index. Bloomberg’s monthly report on prices now often cites all three.
What’s often lacking, however, is a look at how the three compare.
According to Green Street, “Green Street Advisors’ Commercial Property Price Index (GSA CPPI) is a real-time series of unleveraged U.S. commercial property values. The key feature differentiating this index from others is its timeliness. The GSA CPPI captures the prices at which commercial real estate transactions are currently being negotiated and put under contract.” Meanwhile, CoStar says its numbers are different from Moody’s because “Moody’s pricing index uses the data that DOES NOT include sales under $2.5M. CoStar Group’s monthly index is the only repeat sales index that covers sales transactions from $100,000 and above. And Moody’s chooses deals by a sale price while CoStar uses property class, size etc. so the two indexes won’t have the exact same deals in the datasets.”
Update 1: Chris Macke, senior real estate strategist for CoStar got in contact with us and provided some more information on what distinguishes the indexes.
He wrote:
Update 2: David Geltner, professor of real estate fnance at the MIT Department of Urban Studies & Planning and author of the Professor’s Corner commentaries on the Moody’s/REAL index, also contacted me with some further comments.
Here is what he wrote:
(Editor’s note: Thanks to both Chris and David for writing in with those clarifications.)
If you want to pore more deeply into the differences you can download the methodologies for CoStar, Moody’s/RCA and Green Street Advisors.
I’ve gone ahead and attempted to chart the three indexes against each other. CoStar and Moody’s both use December 2000 as the baseline for their indexes. (For CoStar, the data is its investment grade index.) Green Street Advisors, however, uses August 2007 as its base. I attempted to reindex it by creating a new index where December 2000 = 100 and then had it match the month-by-month percentage changes of the original index. The result is the chart above.
What does it tell us?
Most broadly, the indexes appear pretty similar on the way up and the way down, but have begun to show some more interesting divergences of late. In general, Moody’s and CoStar’s indexes show similar magnitudes of price appreciation during the industry’s good years. Green Street’s peak is a tad lower. The peaks on all three indexes come in 2007, but Green Street and CoStar measure the peak several months earlier than Moody’s does.
In the decline phase, Green Street’s index fell earlier and bottomed earlier. Its bottom is also not as for the CoStar or Moody’s indexes. Green Street’s index hit bottom all the way back in May 2009. In contrast, CoStar’s bottomed in February 2010 and Moody’s in August 2010. The difference stems from Green Street’s attempt to capture the prices at which commercial real estate transactions are currently being negotiated and put under contract rather than closed.
More remarkably, Green Street’s index shows commercial real estate prices rebounding much more dramatically than the other two indexes. According to Green Street, commercial real estate values have gained a lot of ground. CoStar and Moody’s indexes are off their bottoms, but seem to be bouncing along a trough.
So which index do you think is right?
Highlights:
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