The Lost Year
Dec 1, 2008 12:00 PM, By Elaine Misonzhnik
Meanwhile, the lingering disconnect between buyer and seller expectations continued to prevent new deals from occurring throughout the third quarter, when only one out of every three offerings resulted in a closed transaction, according to Real Capital Analytics. Cap rates averaged 6.8 percent, up only 35 basis points compared to the third quarter of 2007, but the figure is misleading, Fasulo cautions. Cap rates remain low because only top-quality assets are trading hands. One telling sign of where the market is headed is that cap rates for anchored strip centers have risen faster than those for unanchored properties, reflecting buyers' concern that an anchor could go bankrupt and leave them with a huge rent shortfall, according to Lynn.
Fariba Kavian, senior vice president with Sperry Van Ness, an Irvine, Calif.-based real estate investment brokerage firm, listed one single-tenant restaurant property in a suburb of Chicago at a 9.0 percent cap last month, but says the offers have still been sporadic.
“I am starting to see sellers capitulate to the buyers' market, but the gap hasn't closed fully,” says Suchman. “Even buyers are looking out there and saying ‘I don't know what a good deal is.’ People are being much more cautious in terms of the type of real estate [they are getting] and the percentage of occupancies by credit tenants versus non-credit tenants.”
At the same time, institutional buyers and vulture funds have largely stayed away from the acquisition market because they perceive cap rates have room to go up, says Gill Warner, senior director with Stan Johnson Company, a Tulsa, Okla.-based commercial real estate investment firm.
SHARE OF THE PIE: CMBS origination volume was down massively in 2008, but the share of loans covering retail properties was in line with historical norms.
Brokers expect the gap to start closing sometime around the middle of 2009, when inability to pay down debt and dissolving partnerships will force owners to accept lower prices. Warner closed several net-lease deals in September, involving Walgreens-anchored properties in the Midwest, but they were sold to a high-net- worth private buyer who did not need to secure financing. Furthermore, the seller, in the market for close to a year, had to accept a cap rate increase of approximately 50 basis points, to 7.6 percent.
Aware that retail values have room to fall further, opportunistic investors with cash at their disposal don't feel pressure to buy right now, says Gorczycki. They know the real estate sector's recovery will take a long time and are patiently waiting for ever steeper discounts. “If you are flush with cash, you wait for an opportunity that's so ridiculous, it's beyond ridiculous,” Gorczycki adds.
Those investors may see more opportunity outside direct investment in property, according to Fasulo, who notes there may be fewer cash-heavy prospective buyers in the market than people realize (the estimated amount for equity allocated to commercial real estate is $300 billion, according to brokerage firm CB Richard Ellis).
At the moment, investments in distressed debt, CMBS notes sold through the secondary market and REIT stocks appear to offer better value. For the next two years, that's where most of the equity is likely to go, says Haddigan. And that's to say nothing of investments outside the retail real estate arena entirely.
The unfavorable outlook on retail properties will likely get worse in early 2009, when the dismal holiday sales season is expected to bring about a dramatic number of new bankruptcies and store closings. The first half of 2009 will likely see more than 3,100 store closing announcements, according to the most recent forecast from ICSC. On Nov. 10, for example, electronics retailer Circuit City filed for Chapter 11 bankruptcy protection, after announcing it would close 155 of its 721 stores and attempt to renegotiate leases for the remaining locations. Department store chain Bon-Ton Stores might be another candidate for a bankruptcy filing, as is furniture seller Pier I Imports, according to Howard Davidowitz, chairman of Davidowitz & Associates, Inc., a New York City-based retail consulting and investment banking firm. Davidowitz estimates the total number of store closings next year will fall in the range between 10,000 and 12,000.
Excess Space Retail Services, Inc., a Huntington Beach, Calif.-based real estate disposition and restructuring firm, puts the number even higher — at up to 14,000 store closings. In October, same-store sales for U.S. chain stores declined 0.9 percent, according to the ICSC.
Luxury stores showed the steepest decrease, at 19.2 percent, followed by specialty apparel sellers, at 11.0 percent, and department stores, at 10.9 percent. ICSC projects that during the November/December 2008 holiday sales period, same-store sales in the U.S. will show only a 1.0 percent gain.
