The Expert: The Pain Deepens

What a hangover! Almost all the news about the retail industry during the past few months is terrible and focuses on the lack of consumer spending and low retail sales, earnings statements and the number of retail jobs lost. Although some crumbs of good news have fallen here and there, no retail business has been exempt from this deep and profound recession. We have seen the pain spread from luxury goods stores to department stores to electronics and specialty stores and now even to discount stores. And according to most projections, consumer spending is expected to be extremely weak throughout 2009, as U.S. retail sales are projected to fall 0.5 percent below 2008 levels, according to the National Retail Federation.The retail industry’s pain is now showing up in the retail property sector. For investors forced to sell properties in order to pay down debt or help position their firms to meet other obligations, they couldn’t pick a worse time to sell. Buyers don’t want to pay asking prices—and don’t have to, as there are few if any buyers—and the financing, without a debt market behind them, can be wicked or even non-existent. For example, Simon Property Group Inc. recently sold Cincinnati Mills, a 1.4 million-square-foot “challenged” mall, for a reported $20 a square foot, and the transaction required recourse loans and personal guarantees from its buyers.On the other side of the spectrum was a Voice Road Plaza, a 132,000-square-foot, 99-percent leased shopping center on New York’s Long Island, which sold for slightly more than the seller paid for it two years ago (not too shabby, given the environment). But the transaction required an assumption of the existing mortgage and a significant amount of capital to complete, thus significantly reducing the number of potential buyers and increasing the marketing time to 10 months. Sperry Van Ness said in a release that it was the most “difficult” sale their team has ever completed.More so than owners in most other property sectors, the retail owner is basically in business with its tenants. If an anchor or any of the stores go dark, the center and the area around it can implode, which is becoming more common these days. Investment conditions ratings provided by Real Estate Research Corp. in the winter 2009 RERC Real Estate Report reflect this risk and the drop in demand for retail properties. On a scale of 1 to 10, with 10 being the highest, the investment conditions ratings for power centers declined to 2.7 during the fourth quarter of 2008 from the prior quarter’s rating of 3.1, while the rating for regional malls declined to 2.9 in fourth quarter from 3.9 in the previous quarter. Neighborhood/community centers were a little more attractive to investors, with an investment conditions rating of 3.4, although the fourth quarter rating declined from the third quarter’s 4.1. This places retail investments at the bottom of the heap relative to the other core property types.As more and more retail properties, whether regional malls, power centers, or neighborhood/community centers, go on the sale block, buyers and sellers should keep expected returns in mind. Real Estate Research Corp.’s required pre-tax yield weighted averages for the retail sector overall increased 100 basis points to 9.6 percent in the fourth quarter of 2008, and the firm’s required going-in and terminal capitalization weighted averages increased to 7.8 percent and 8.2 percent, respectively.Retail availability and returns vary from location to location, but the pain for retail buyers and sellers is palpable and will continue to resonate throughout 2009.