The mood at ICSC's New York National Conference and Dealmaking is markedly better than it was this time last year, but most feel that the retail real estate sector is far from out of the woods.
A year ago, attendees still seemed dazed by the events that crippled Wall Street and were unsure of what was to come. Since then, the sector has experienced a major reshuffling. Among retailers there have been huge drops in retail sales, store closures, bankruptcies and liquidations. There were financial woes at industry giants Centro Properties Group and General Growth Properties. Investment sales activity all but dried up. The credit crunch and a collapse in the CMBS market made financing scarce. And property fundamentals, including rents and vacancies have deteriorated. Having gone through that, there is a hope within the industry that the worst is now behind us. No one expects a robust recovery is the cards. But there is hope that 2010 will not be as bad as 2009.
An opening general session featuring Gregory Melich, a managing director and retail analyst with Morgan Stanley, Simon Ziff, president of Ackman-Ziff Real Estate Group LLC and Glenn Rufrano, CEO of Centro Properties Group, set the tone for the event. Rufrano, who has helped steer Centro onto firmer footing in the past 12 months and was recently appointed to General Growth Properties' board of directors, talked about what it takes to navigate the process of restructuring debt--a challenge that may lay before many in the industry given that there is about $320 billion in commercial real estate debt coming due in 2010, according to ING Clarion.
"The restructuring process in one word: Time," Rufrano said. It is about working with lenders and creating the time necessary in order to get a property performing again or get to a point where prices have recovered enough to make a sale possible. But it's also about convincing a lender that you remain commited to the asset. Rufrano talked of three critical points that need to be won early--establishing trust and credibility with the lender, proving to them that you are in the best position to run the asset and proposing to them a fair. Without doing those three things lenders may decide to cut their losses and bring in another manager or sell the debt at deep discounts to someone else. The challenge for distressed owners will be to prove to lenders that they can get a higher return by staying the deal and working through the problems than by selling.
However, there's a sense that there remains a bit of a waiting game in the distressed process. Distress has started to spread, encompassing commercial real estate assets worth $132 billion—a 122 percent increase in distressed situations from the beginning of 2009, according to ING Clarion. That includes 1,486 properties, valued at $32 billion, in the retail sector. But in many cases banks are not working through the bad loans. They are extending and pretending. In additon, bank regulators have not pushed banks to recognize the losses that exist on balance sheets. The relaxation of accounting and tax rules has created a climate where banks are kicking the can down the road rather than addressing problems. "We're all waiting for bank regulators to tell banks they need to clean up their balance sheets," Ziff said.
The other big challenge for the industry will be the continued evolution of e-commerce. It is no longer about consumers sitting in front of their computers and browsing sites. Increasingly, people are making purchases via cell phones and other mobile devices. That is opening the doors to new ways of comparison shopping. For example, there is an application for I-phones that allows people to scan bar codes when looking at an item in a store and then being presented with a list of online purchasing options where the item may be less expensive.
As an early indicator of the changes occuring, online sales accounted for up to 15 percent of Black Friday sales this year. Traditionally, online sales account for about 4 percent of retail sales, but Melich sees the Internet's share climbing to 6 percent in the next few years. The implication to that is that when retail sales do rebound, the recovery will be less robust at brick-and-mortar locations than in the last cycle. In the post 2001-recession, year-over-year same-store sales gains averaged about 5 percent during the strongest periods of growth. But the increased share of Internet sales could shave a percentage point off that growth this time around. Furthermore, a rise in the savings rate coupled with high unemployment and reduced availability of consumer credit will make any retail sales recovery weaker than in the last cycle, according to Melich. As a result, Melich concludes that between 200 million square feet and 300 million square feet of existing retail real estate estate may need to be shuttered or repurposed.
Beyond the reduced sales, the evolution of shopping patterns presents a challenge to owners and managers in how they will work with retailers going forward to meet consumers where they are at. How will they be a part of the equation in which people walk through malls and shop online simultaneously? This is something owners and managers are only beginning to try to figure out if conversations on the show floor are any indication.
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