Not surprising to well-informed Commercial Real Estate Brokers, the CMBS market has weakened over the course of 2008. The popular CMBS market helped finance many commercial transactions for hotels, office buildings, and shopping centers. Now there is speculation that this market will collapse on the premise of the default of only two big commercial mortgages. Well, it will take more than two failed loans to bring down financing for commercial real estate.
As we all know, any commercial real estate investment is scrutinized by the brightest businessmen and the most intelligent investors. The fancy speadsheets, complex algorithms, and intricate projections all help mitigate the risk involved in multi-million dollar projects. If investors continue a disciplined and analytical approach to their acquisitions and dispositions of assets, the market shall weather this storm just fine.
Now, lets look at the delinquency rate, which is truly a bellweather for the industry. Delinquencies on commercial real estate debt rose to 0.78 percent in October, from 0.66 percent in September according to RBS Greenwich Capital data.
According to Mary MacNeill, managing director at Fitch "they’re still much lower than they were a few years ago.They would still be in line with the historical average, which is 0.78% to 0.79%.”
Now, even with a delinquency rate at 0.78 percent, we're still in line with the historical average; and average is far from a crisis. (Bear in mind that delinquencies are not defaults!) Those who are afraid can take the news and burn it to fuel their fears and make irrational decisions. Those of us that know the historical data, understand the real estate cycle can make informed investment decisions and still profit in this down-market.
Wednesday, November 19, 2008
Retailers to Close Stores
Although We're optimists at heart, we can't deny the reality of the retail landscape changing in front of our eyes. Everyone is aware that Retail has been the most underperforming sector of Commercial Real Estate. This unofficial list of retailers (shown below) shuttering their stores was a shocking splash of cold water in the face.
Now, before people start yelling that the sky is falling, remember that Real Estate works in cycles. This is going to be a tough down cycle for the retail sector as consumers cut back on spending, slashing retailer revenues and impacting. Shopping Center Owners (as we saw in the previos blog posting) , and strip all owners will be taking serious hits and filing for bankruptcy. This contraction in the market will open up opportunities for innovative investors and enlightened entrepreneurs to make their move and acquire distressed properties.
In the meantime, cash in your gift cards and look for bargains at the following stores:
Retailers to Close Stores
- Circuit City - Filed for bankruptcy, unsure as to how many stores will close
- Ann Taylor- 117 stores nationwide
- Lane Bryant, Fashion Bug ,and Catherine’s 150 stores nationwide
- Eddie Bauer to close stores 27 stores and more after January
- Cache will close all stores
- Talbots closing down all stores
- J. Jill closing all stores
- GAP closing 85 stores
- Footlocker closing 140 stores more to close after January
- Wickes Furniture closing down
- Levitz closing down remaining stores
- Bombay closing remaining stores
- Zales closing down 82 stores and 105 after January.
- Whitehall closing all stores
- Piercing Pagoda closing all stores
- Disney closing 98 stores and will close more after January.
- Home Depot closing 15 stores
- Macys to close 9 stores after January
- Linens and Things closing all stores
- Movie Galley Closing all stores
- Pacific Sunware closing stores
- Pep Boys Closing 33 stores
- Sprint/ Nextel closing 133 stores
- JC Penney closing a number of stores after January
- Ethan Allen closing down 12 stores.
- Wilson Leather closing down all stores
- Sharper Image closing down all stores
- K B Toys closing 356 stores
- Lowes to close down some stores
- Dillard’s to close some stores
Tuesday, November 11, 2008
Local Shopping Centers for Sale?
The Gargantuan REIT, General Growth Properties (GGP), one of the largest shopping mall owners (and owner of several large shopping centers in the Washington DC Metropolitan Area), is facing bankruptcy straight in its eyeballs. Will it blink?
GGP has failed to refinance or extend $1 billion in debt due this month, which could trigger default. Already, GGP warned of its precarious position in its quarterly filing to the SEC. Furthermore, GGP is facing an additional $3.07 billion in debt coming due in 2009.
GGP has failed to refinance or extend $1 billion in debt due this month, which could trigger default. Already, GGP warned of its precarious position in its quarterly filing to the SEC. Furthermore, GGP is facing an additional $3.07 billion in debt coming due in 2009.
GGP Says: “Our potential inability to address our 2008 and 2009 debt maturities in a satisfactory fashion raises substantial doubts as to our ability to continue as an ongoing concern,” General Growth Properties said in a Securities and Exchange Commission filing. “We may be required to take further steps to acquire the funds necessary to satisfy our short term cash needs, including seeking legal protection from our creditors.”
This current financial situation will be placing the future of its assets in jeopardy. GGP will be under extreme pressure to raise additional capital to pay off these imminent obligations.
What Will GGP Do? or WWGD?
1) Issue Stock or Bonds: Now, GGP can issue stock or bonds to raise money, but who would want to buy stock/bonds in a company thats in this dire position? The company has lost 99 percent of its market value this year; its stock was trading at 48 cents per share at the close of the market on Tuesday. Skittish investors will most definitely steer clear. And the liquidity crisis means most institutional investors and banks will continue to hoard money rather than take this investment risk.
2) Ask Uncle Sam: Bailouts abound these days, perhaps a Government bailout can be GGP's white knight. Solid support for their presidential neighbor may very well pay off.
3) Cut Corners & Costs: GGP is a major employer of 4,200 professionals nationwide, will it lay people off and start buying the single-ply toilet paper for its facilities? This option may generate savings and reduce overhead, but won't generate any revenue.
4) Raise Rents: Raising tenant's rents is out of the question as it would only drive out tenants and have the opposite effect. Moreover, the weak retail segment won't bear this increase in rent.
5) Divest its Assets: Taking the Good 'ol Fashioned approach to raising capital by selling off its assets may very well be the most sensible option in this economic environment. However, this won't be a walk in the park. Challenges in the retail sector will make this a complex and lengthy proposition. GGP should be willing to take reasonable offers on its properties, since this will allow them to pay off lenders and keep afloat. Trimming down its property portfolio and getting rid of the "dogs" may improve its overall long-term position. Sometimes one has to take one step back to take two steps forward.
This current financial situation will be placing the future of its assets in jeopardy. GGP will be under extreme pressure to raise additional capital to pay off these imminent obligations.
What Will GGP Do? or WWGD?
1) Issue Stock or Bonds: Now, GGP can issue stock or bonds to raise money, but who would want to buy stock/bonds in a company thats in this dire position? The company has lost 99 percent of its market value this year; its stock was trading at 48 cents per share at the close of the market on Tuesday. Skittish investors will most definitely steer clear. And the liquidity crisis means most institutional investors and banks will continue to hoard money rather than take this investment risk.
2) Ask Uncle Sam: Bailouts abound these days, perhaps a Government bailout can be GGP's white knight. Solid support for their presidential neighbor may very well pay off.
3) Cut Corners & Costs: GGP is a major employer of 4,200 professionals nationwide, will it lay people off and start buying the single-ply toilet paper for its facilities? This option may generate savings and reduce overhead, but won't generate any revenue.
4) Raise Rents: Raising tenant's rents is out of the question as it would only drive out tenants and have the opposite effect. Moreover, the weak retail segment won't bear this increase in rent.
5) Divest its Assets: Taking the Good 'ol Fashioned approach to raising capital by selling off its assets may very well be the most sensible option in this economic environment. However, this won't be a walk in the park. Challenges in the retail sector will make this a complex and lengthy proposition. GGP should be willing to take reasonable offers on its properties, since this will allow them to pay off lenders and keep afloat. Trimming down its property portfolio and getting rid of the "dogs" may improve its overall long-term position. Sometimes one has to take one step back to take two steps forward.
6) Chapter 11: Bankruptcy.Game Over. Lenders Call the Shots. Shareholders Lose Big Time.
Monday, November 10, 2008
Surviving the Storm: A Recipe for Success
Weathering the Storm: As the financial storm makes its way through the Washington DC region, we can expect our fair share of changes that can present perfect opportunities for savvy commercial real estate investors, particularly those with available liquidity. In recent years, the commercial real estate market was a seller's market, with institutional investors and gargantuan private equity firms gobbling up as many properties as possible. The previous conditions spurred this type of irrational exuberance (yes, this term also applies to larger commercial real estate investors) as the carrying costs were low, bank lending terms were lenient, non-recourse loans were plentiful, and CMBSs were the hot-topic. Now, in the middle of the storm, learn how to stay dry and not lose your shirt.
Investment firms like Merril Lynch and Lehman Brothers played this game and funded many commercial real estate operations across the region. Now, as the financial crisis has claimed its victims, commercial real estate funding has become quite scarce as banks hoard cash and build up their reserves to cover all the bad loans they made. Now, don't get me wrong, there is still money out there, it's just that the bar has been raised and the rules of the game have changed.
The Queen of Hearts Dilemma: Bank behavior these days remind me of the Queen of Hearts in Lewis Carroll's epic Alice in Wonderland. Alice described the queen as a "fat, pompous, bad tempered old tyrant," now I don't believe banks deserve this description, although many investors, developers and small businesses may disagree. The Queen of Hearts, when she challenged Alice to a game of croquet, would continuously change the rules of the game to ensure she was always winning despite Alice's noble efforts to play the game.
Changing the Game: Well, banks are changing the rules much in the same way the queen did for Alice. Banks have always done so to gain an edge over the competition. They changed the rules and lowered the lending standards... and got burned with defaulting loans and bad paper. Somewhere along the way banks forgot that their only competitive advantage in the industry is disciplined lending. Nothing more, nothing less. Al the Marketing in the world couldn't save IndyMac or Wachovia from their demise (the same applies to Merril Lynch and Lehman Brothers). Except now, banks have changed their internal rules and made it increasingly difficult for many investors to finance a particular project or acquisition, They've even been so bold as to pull the funding out of previously approved projects! All in all, over $1.3 Billion in commercial real estate projects has been cancelled this year.
Work with the experts! Banks are scrutinizing loans more carefully; investors would be very well advised to work with a reputable Commercial Broker and Title Company, since these professionals can best help formulate the transaction and anticipate any problems that may scare off a lender. The do-it-yourself-deals won't have the momentum or appeal to make it past the tougher lending standards.
Cash is King! Having available liquidity prior to any commercial acquisition is important these days as most lenders are requesting 20-30% down. Furthermore, banks want to see income sources other than real estate that can guarantee the loan.
Opportunities Abound! As the financing pool has dried up, those liquid investors will be able to jump on the deals others couldn't afford due to bank lending requirements. Also, as banks have pulled the credit lines or significantly reduced credit lines to businesses and investors, many properties are for sale. Some aren't formally on the market, but the parent company is strapped for cash and the only way to raise funds is to do it the old-fashioned-way: liquidating assets!
Gain a Competitive Edge! Working with a commercial real estate broker, whether you are purchasing, selling, or investing, will help you obtain an edge in this difficult market.
Search for properties! Learn how the TG Commercial Property Group can help you succeed: http://www.tgcommercialproperty.com/
Investment firms like Merril Lynch and Lehman Brothers played this game and funded many commercial real estate operations across the region. Now, as the financial crisis has claimed its victims, commercial real estate funding has become quite scarce as banks hoard cash and build up their reserves to cover all the bad loans they made. Now, don't get me wrong, there is still money out there, it's just that the bar has been raised and the rules of the game have changed.
The Queen of Hearts Dilemma: Bank behavior these days remind me of the Queen of Hearts in Lewis Carroll's epic Alice in Wonderland. Alice described the queen as a "fat, pompous, bad tempered old tyrant," now I don't believe banks deserve this description, although many investors, developers and small businesses may disagree. The Queen of Hearts, when she challenged Alice to a game of croquet, would continuously change the rules of the game to ensure she was always winning despite Alice's noble efforts to play the game.
Changing the Game: Well, banks are changing the rules much in the same way the queen did for Alice. Banks have always done so to gain an edge over the competition. They changed the rules and lowered the lending standards... and got burned with defaulting loans and bad paper. Somewhere along the way banks forgot that their only competitive advantage in the industry is disciplined lending. Nothing more, nothing less. Al the Marketing in the world couldn't save IndyMac or Wachovia from their demise (the same applies to Merril Lynch and Lehman Brothers). Except now, banks have changed their internal rules and made it increasingly difficult for many investors to finance a particular project or acquisition, They've even been so bold as to pull the funding out of previously approved projects! All in all, over $1.3 Billion in commercial real estate projects has been cancelled this year.
What does this mean?
Work with the experts! Banks are scrutinizing loans more carefully; investors would be very well advised to work with a reputable Commercial Broker and Title Company, since these professionals can best help formulate the transaction and anticipate any problems that may scare off a lender. The do-it-yourself-deals won't have the momentum or appeal to make it past the tougher lending standards.
Cash is King! Having available liquidity prior to any commercial acquisition is important these days as most lenders are requesting 20-30% down. Furthermore, banks want to see income sources other than real estate that can guarantee the loan.
Opportunities Abound! As the financing pool has dried up, those liquid investors will be able to jump on the deals others couldn't afford due to bank lending requirements. Also, as banks have pulled the credit lines or significantly reduced credit lines to businesses and investors, many properties are for sale. Some aren't formally on the market, but the parent company is strapped for cash and the only way to raise funds is to do it the old-fashioned-way: liquidating assets!
Gain a Competitive Edge! Working with a commercial real estate broker, whether you are purchasing, selling, or investing, will help you obtain an edge in this difficult market.
Search for properties! Learn how the TG Commercial Property Group can help you succeed: http://www.tgcommercialproperty.com/
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