Retail Real Estate Should Begin Its Healing Process in 2010
Dec 4, 2009 1:05 PM, By Elaine Misonzhnik
The situation will likely create a substantial amount of pain for both real estate owners and lenders, but might also bring an end to the stalemate in the investment sales market. For most of this year, cash-rich buyers have stayed on the sidelines for fear of making acquisitions before prices bottom out. Once sales transactions start happening in any meaningful fashion, it ought to be easier for sellers and buyers to agree on what fair prices are. Year-to-date, investment sales in the retail sector have totaled $7.7 billion, down 66 percent compared to the same period in 2008 and down 91 percent compared to the same period in 2007, according to Real Capital Analytics. In 2008, investment in retail properties totaled $19.8 billion. By contrast, at the peak of the market in 2007, the retail sector saw $60 billion in sales.
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Sales transactions will likely accelerate starting in the third quarter of next year. Recovery, however, won’t come all at once and it’s not likely that in 2010 the avalanche of sales activity brokers had been hoping for will materialize, in Bach’s view. At best, investment sales in the retail sector might increase by 20 percent compared to the abysmally low levels of 2009. The recovery process likely will stretch through 2011 and 2012.
Opportunity ahead
By the time the third quarter of 2010 comes around, the sheer volume of distress in the commercial real estate sector might force lenders to start dealing with the bad loans. So far, many banks have taken the “pretend and extend” approach to defaulting mortgages, which has helped keep the market in a state of suspended animation. In September, for example, sales of retail properties in distressed situations accounted for only 15 percent of the overall sales transaction volume, according to Real Capital. Because banks refuse to put distressed assets up for sale in the fear of incurring unmanageable losses, investors interested in purchasing real estate properties on the cheap can’t start making acquisitions—they are afraid to over-value the properties.
“We are in the initial rebound phase right now and the workout phase will be in the middle part of 2010,” says Lynn. “That’s when you will have sellers that will finally have to sell because there is distress at the property level and they are under water, and the banks have to realize that loss and sell the property.” ING Clarion estimates that in 2010, retail properties will offer total returns of approximately 3.3 percent. In 2009, total returns on retail properties declined by 11.9 percent.
Most of the prospective buyers for commercial real estate properties (and real estate debt) will likely come in the form of publicly-traded REITs, private opportunity funds and foreign investors. In the absence of readily available debt capital, whoever has cash will benefit during this market cycle.
“Values have adjusted back to [historical levels] and interest rates are still very attractive,” says Anthony M. Villasenor, senior vice president of the retail division with Voit Real Estate Services, a San Diego, Calif.-based real estate services firm. “So there’s never been a better time, in our opinion, to buy commercial real estate.”
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In many markets, cap rates on retail properties have already moved by 200 basis points to 300 basis points from the levels seen in 2007. They should continue to rise through 2010.
But while 2010 might mark a turning point in the investment sales market, industry insiders predict the increase in activity will be moderate, ranging anywhere from 25 percent to 40 percent compared to what we have seen so far this year. It might take up to three years for the industry to clean up the aftermath of this down cycle. As Bach puts it, “Commercial real estate will have to take its lumps.”
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