Archive for the ‘Research’ Category

September Sales Come in Soft

by David Bodamer October 11th, 2007

Lingering summer weather and an uncertain economy kept consumers out of malls and stores in September, leaving many of the nation’s big retailers with disappointing sales for the month.

As the merchants reported their sales figures Thursday morning, the biggest losers were apparel sellers including Limited Brands Inc. and Mothers Work Inc. Wal-Mart Stores Inc. posted a modest sales gain that was slightly below analysts’ expectations, but raised its third-quarter profit outlook because of cost-cutting measures.

‘Sales are coming in soft, as expected,’ said Ken Perkins, president of RetailMetrics LLC, a research company in Swampscott, Mass. ‘It was a perfect storm, a combination of abnormally warm weather, high food and energy prices, a continued sluggish housing marketing and tight credit.’

The news wasn’t encouraging as the holiday season fast approaches. Retailers have been struggling with a sales slowdown for most of the year as shoppers face higher food and gasoline prices as well as a weakening housing market. But last month, stores also had to deal with warm, muggy weather that wilted consumer demand for fall clothing.

Wal-Mart reported a 1.5 percent increase in sales at stores open at least a year, known as same-store sales. Same-store sales are considered a key barometer of a retailer’s health. That was slightly below the 1.8 percent estimate from analysts surveyed by Thomson Financial.

More here.

10/11 Update 1: After reporting September sales figures, many retailers have now lowered their forecasts.

10/12 Update 2: Deloitte sees increasing volatility and potential spending slowdown.

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Are REIT Returns Correlated With Tenant Performance?

by David Bodamer October 9th, 2007

Here’s a question that I’ve always wondered about: how closely is a REIT’s performance tied to the performance of its tenants’ sector? For example, if the retail industry goes south, how badly will that hurt retail REITs? I’ve always assumed that because retail REITs rely so little on percentage rent that if retail sales dipped, they wouldn’t get hurt badly unless it caused retailers to actually close stores. But what about when you get to stock prices? Do retail real estate stocks move up and down in lockstep with retailer stocks?

It turns out the answer to that question is yes.

This premise–the correlation between tenant stocks and REIT stocks–is the subject of new Bank of America research. Nicholas Yulico at TheStreet runs down the results.

New research from Bank of America shows that the stocks of office real estate investment trusts are generally correlated to the stocks of financial-related companies, which tend to make up a good portion of their tenant bases.

In addition, retail REITs, which own malls and shopping centers, are well correlated to retailer stocks, according to the report from analyst Christy McElroy.

Over a three-year and five-year period, the correlation between office REITs and the S&P IBK/Brokerage and Financial indices is around 0.95.

In measuring correlation, a reading of 1.0 suggests the two sectors’ stock prices move in the same direction at all times. Thus, the 0.95 reading means that office REITs and financial stocks are nearly always moving in lockstep fashion.

No Comments Related Topics: Commentary, News, REITs, Research, Retail Real Estate |

NetGain Recommends 7% Cap Rates

by David Bodamer September 14th, 2007

That is why we have emphasized the capitalization rate, and continued to raise our recommendation (NIPI™) to the current 7%. NetGain’s essays have advised against negative spread, negative cash flow, artificial mortgage rates, and artificial yields. NetGain has strongly emphasized the importance of good due diligence and has developed the most comprehensive proactive due diligence program (EVS) available on the Internet. Successful income property investing is a serious business, and those who treat it as any less than that are the ones whose sad stories you have read in the newspaper.

The National Income Property Index™ (NIPI™) is the preeminent income property guide for increasing ROI and minimizing investment risk. NIPI™ provides investors with time-proven recommendations based on the two most crucial influences affecting the value of income property: jobs and the cost of debt service. Based on monthly National Employment figures, NIPI™ provides recommendations on the most advantageous positive spread to negotiate when purchasing income property. It also calculates the current cost of debt service and recommends the best capitalization rate range that responds to the recommended positive spread based on up-to-date nationwide data.

More here, including charts.

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Is Retail Inextricably Tied to Housing?

by David Bodamer September 14th, 2007

Our sister publication NREI asks, “Is Retail Inextricably Tied to Housing?”

It’s true that for many, many months pundits have continued to predict that retail sales would fall as a direct result of the slowdown in housing. Certainly, sales growth has slowed this year. Same-store sales growth has averaged about 2.4 percent per month in 2007. That’s below each of the past three years when the figures for 2006, 2005 and 2004 were 3.6 percent, 3.9 percent and 3.8 percent, respectively.

But it hasn’t been Armageddon. Only April–when same store sales fell 1.9 percent–sticks out as a truly disastrous month in the past year.

Still, that sinking feeling persists because of problems in the credit markets, slow wage growth, inflating gas and food prices and the continued shakeout of the housing bubble. As always, we’ll just have to continue to wait and see how this plays out.

Meanwhile, the Commerce Department today reported preliminary August and revised July sales figures. The news was mixed. Overall, retail sales were up 0.3 percent. But that was below a forecast of a 0.5 percent gain. Also, when auto sales are stripped out, retail sales actually fell 0.4 percent. (The figure for July, meanwhile, was revised to up 0.7 percent.)

Meanwhile, here’s an excerpt from the NREI piece.

“As it stands today, retail sales growth has held up better than the falling housing market would otherwise indicate,” says Suzanne Mulvee, senior real estate economist at Property & Portfolio Research. “For some reason retail sales haven’t reacted to falling home prices yet. That’s probably because we have very low unemployment today, so people aren’t worried about losing their jobs.”

In previous economic cycles, retail sales have followed the ups and downs of the housing market with a lag time of about six months, according to Property & Portfolio Research. In the 1990s, for example, home sales plummeted from year-over-year growth of 20.2% in October 1994 to a year-over-year contraction of 16.5% in October 1995. The three-month moving average of retail sales reacted with a drop from a 7.3% growth in January 1995 to 3.7% growth in January 1996. Those retail sales numbers exclude fuel and automobile sales.

In the current market cycle, however, home and retail sales began to diverge in 2005, when home sales began to slow from a high point of 16.2% in December 2004. Retail sales took off about that time, climbing from 5.8% growth in December 2004 to peak at 8.6% growth in March 2006. Retail has slowed steadily since then but has remained in positive territory, and even rallied from a low of 4.1% in April this year to 4.4% in July.

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Construction Spending Drops, But Not on Commercial

by David Bodamer September 6th, 2007

On Tuesday, the Commerce Department reported July construction stats, which showed the biggest drop in six months.

However, that drop was on the residential side. On the non-residential side, construction actually increased.

In other economic news Tuesday, the Institute for Supply Management said that its closely followed gauge of manufacturing activity rose at a slower pace in August compared to July. The index was up 52.9 in August compared to a reading of 53.8 in July.

The construction report showed that the weakness in housing was offset somewhat by strength in nonresidential building which rose by 0.4 percent in July to an all-time high of $346 billion at an annual rate. Construction of shopping centers, office buildings and hotels all showed increases.

No Comments Related Topics: Development, News, Research, Retail Real Estate |

July Sales Disappoint

by David Bodamer August 9th, 2007

The back-to-school shopping season had a disappointing start in July as consumers rattled by a weakening housing market and other financial pressures stayed away from stores and malls.

As merchants reported sluggish monthly sales results Thursday, the weakest performers were mall-based apparel chains, particularly teen merchants like Pacific Sunwear of California Inc. and Wet Seal Inc. Wal-Mart Stores Inc. posted a slim gain but warned that its increased discounting are hurting profit margins.

Among the few standouts were J.C. Penney Co. and Costco Wholesale Corp., both of which beat expectations.

“Overall, July sales were negatively impacted by soft mall traffic,” said Ken Perkins, president of RetailMetrics LLC, a research company in Swampscott, Mass. “The consumer is holding up, but certainly feeling the pinch of the housing market and higher gasoline price.”

According to Thomas Financial, 15 retailers beat expectations, while 29 missed estimates.

More here.

ICSC, meanwhile, reported (pdf., membership req.) July same-store sales grew by 2.6 percent over last year, based on a tally of 48 chains. The performance was consistent with the February through July period’s average growth of 2.3 percent.

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Taking Stock of Hot Markets

by David Bodamer August 9th, 2007

CoStar has released its 2007 Mid Year 2007 National Retail Report. A feature on its site runs down some of the hottest markets with commentary from top brokers.

According to the report, the hottest markets are Phoenix, South Bay/San Jose, Calif., New York City and Chicago.

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Report on Fundamentals

by David Bodamer August 9th, 2007

Our sister publication NREI has a report discussing fundamentals among all commercial real estate sectors.

While the overall trend lines were all weak, differences were apparent between property classes. In the second quarter, for example, apartment and warehouse vacancy rates were flat at 5.8% and 8.6% respectively. Retail vacancies jumped from 10% at the end of March to 10.2% at midyear. And while office vacancy continued to decline, it did so at just half the rate of the previous two quarters (falling 10 basis points to 14.8% during the second quarter).

So are market fundamentals really unwinding? Or is this simply a quarterly lull? The answer won’t be clear until at least early 2008. But one troubling sign was tepid economic growth in July. Last week, the Labor Department reported that non-farm payrolls increased by just 92,000 in July, down from 126,000 in June (and 188,000 in May). Monthly job growth through July this year has averaged 136,000, which registered well below the monthly average for that period.

Of course, this suggests that third quarter economic growth may be muted. The timing isn’t great, either: As vacancy declines begin to plateau or reverse course, many commercial landlords are finding it tougher to raise rents. In the office market, for example, quarterly rent growth of 2.1% in the second quarter will top out the cycle, reports PPR. Office rent growth is expected to drop off to 1.7% in the third quarter, too. Retail rent growth already peaked during the last quarter of 2006. And quarterly rent growth in the warehouse and apartment markets both peaked during the second quarter at 1.3%.

“As with vacancies, there will be differences among markets,” notes the PPR report, which pegs the following markets and asset classes as faring best over the next few months: Denver and San Francisco apartment, Nashville and Denver office, Kansas City and Minneapolis retail and San Antonio and Memphis warehouse.

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RREEF Sees Global Real Estate Growing 40%

by David Bodamer August 9th, 2007

According to a story from Private Equity Real Estate (reg. req.), RREEF has issued a report projecting the global real estate market to grow by 40 percent over the next five years, from $9.8 trillion in 2006 to an estimated $13.7 trillion in 2011.

According to the report, the US market is expected to grow by $1.5 trillion over the next five years, the European market by $1.1 trillion, and the Asia-Pacific market by $1.3 trillion.

Emerging markets will experience strong growth of more than 100 percent, but their scale will remain relatively small. By 2011, emerging markets are likely to have grown by $1.7 billion but will still only represent 13 percent of the global total. North America and Western Europe could represent as much as 70 percent.

According to RREEF’s findings, the value of the total invested commercial market—the space owned by professional real estate investors—was estimated to be close to $10 trillion at the end of 2006. The investible market, which also includes space that is currently owner-occupied but may in time become institutional, totals $16 trillion.

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Torto Wheaton on the Debt Crisis

by David Bodamer August 6th, 2007

Torto Wheaton has a new essay summing up its reaction to flutters in the debt market entitled Will I Be Paid Back? (reg. req.)

In short, the firm doesn’t expect contagion in the commercial real estate arena to be that widespread.

We are strong believers that “fundamentals matter most” and we do not see a contagion into the commercial real estate market. We do see a slowdown in commercial space demand and are expecting to see higher vacancy rates in some property types at year end compared to today. But to us this is not a contagion from the capital market, but rather a response to a slowing economy – largely from the effects of overbuilding and subprime credit in the residential market.

Of all areas, it says that retail is seeing the great effects thus far.

Retail space is showing the effects of the downturn in the single family market. Vacancy levels are up with the current rate being 80 basis points above a year ago. Net absorption for the year is positive, but the second quarter was a negative 500,000. We expect vacancy to be higher by year end and we do expect this property type to be the most affected by the economy at this time.

Lastly, the essay concludes that there is less interest in Class B and C properties, but the market is showing “favor for the selection of the low leverage buyer over the highly leveraged structured player.”

That conclusion is similar to what we found in our July cover story titled Quality Counts.

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