Here at Retail Traffic we're constantly trying to gauge the temperature of the market. That's become increasingly challenging given the schizophrenia that seems to have swept through the retail sector.
Here's what we know right now:
Credit markets are shot: It's more difficult to get a loan now than it was 12 months ago. Lenders have adopted tougher underwriting standards. Further, they are not being as aggressive with their loan-to-value and loan-to-cost ratios. So you absolutely need to have a stack of equity going into a deal (or else you need the number of a good mezzanine lender on your speed dial).
Retailers are struggling: This past holiday shopping season was the worst in years. Most retailers are still wrestling with the aftermath. But it would be shocking if we didn't see an uptick in store closures and a slowdown in new openings. There has not been too much talk of consolidation yet, but that remains a possibility. Further, the wave of private equity buyers that swept through and bought up retailers using gobs of debt in recent years will now be tested. Are the turnaround plans working? The big question for them is will private equity investors be able to sell or take companies public the way they had anticipated?
Cash is king: As our cover story indicates (see p.18), buyers with huge stores of equity rule the market right now. REITs that had slowed down on acquistions have jumped back into the market in recent months. We've seen sizable acquisitions from the likes of Macerich, CBL & Associates Properties, Regency Centers and Ramco-Gershenson. In every case, the REIT supplemented its own cash with funds from a similarly well-endowed pension fund or other institution. This trend will likely continue.
Leasing and occupancies remain stable: The leading researchers have registered rises in vacancies at neighborhood and community centers as well as regional malls. Levels are at their highest points in the recent cycle, but remain historically pretty low. It may be difficult to grow rents this year as much as in years past. But so far, we haven't heard too much talk of concessions or givebacks on new leases and renewals. That indicates for today, fundamentals remain strong and retail properties continue to generate healthy income streams.
CMBS are not subprime: There have been an awful lot of reports of late comparing commercial-mortgage backed securities and commercial real estate collateralized debt obligations to their residential cousins. And while there will likely be a rise in defaults and delinquencies, they are not going to come anywhere close to what we're seeing on the residential side. CMBS lenders have gotten stingy. And investors may see some losses. But a repeat of the subprime meltdown is highly unlikely. For one thing, every loan in a CMBS pool is examined unlike on the residential side. For another, there are no such things as “no-doc” or “lo-doc” loans where borrowers had to furnish very little information about their financial standing.
In short, this is a challenging time for retail real estate. But it's not Armageddon. That's how we see things. Do you agree? Let us know. You can send feedback to me at [email protected]. Or swing by the Traffic Court blog and leave a comment at: blog.retailtrafficmag.com/retail_traffic_court/.