Retail Real Estate Investors Remain Parked on the Sidelines (5/27)
May 27, 2009 1:49 PM, By Beth Mattson-Teig
Buyers are sitting on vast mountains of cash, but are content to wait for bargains to emerge.
Distressed sales ahead?
Many buyers are biding their time, hoping to pounce on real estate bargains. Distressed retail properties have already started to hit the market, and many anticipate that a surge of distressed retail properties will emerge later this year. "So no one wants to pay retail price for a property when they can buy in a couple of months at the wholesale price," Fasulo says.
In fact, some industry observers believe that distressed property sales will serve as a much-needed catalyst to revive the floundering commercial real estate investment market. "What will emerge in leading us out into more sales activity will be private equity. They will see distress as an opportunity, and they will be the first movers to take risk," Buono says.
The volume of distressed retail properties is on the rise. Since September, about 3 percent of all retail sales have been associated with a distressed situation, largely sales from former lenders that have foreclosed on assets. The current volume of distressed retail assets on the market at the end of April reached 1,276 properties valued at $30.6 billion, according to Real Capital Analytics. That makes it the property type with the greatest volume of distress. Overall, Real Capital estimates the value of distressed properties across all commercial real estate property types to be $81.6 billion.
There has been a trickle of distressed properties that have hit the market over the past 60 days with attractive prices that are below replacement cost. "That being said, there are still a number of sellers, including banks, that are doing their best to hold onto assets and not put them on the market at a big discount," Fasulo says.
The volume of distressed retail assets that may eventually land on the for-sale market is uncertain. Some industry observers believe there will be a "flood" of distressed properties for sale in late 2009 and into 2010 as the shake-out among retailers continues, and owners battle against falling cash-flows and refinancing challenges.
Others believe that the supply of discounted properties will be more modest. Owners may find more success hanging onto their properties, and some distressed properties that hit the market may not be desirable at any price. Many lenders, for example, have shown a willingness to grant forbearance to put off foreclosures, taking an "extend and pretend" mentality. Banks, dealing with mountains of other sorts of bad debt, are loath to take on ownership of commercial real estate in the current climate.
"We have definitely been out looking for deals for the last four to five months in the mid-south, and those deals are proving to be scarce," says Allen McDonald, a principal at Baker Storey McDonald Properties, a Nashville-based real estate investment firm with a 650,000-square-foot portfolio of retail properties. BSM's goal is to acquire $100 million in assets over the next 12 to 18 months. Whether or not the firm will be able to find enough properties that match its investment criteria remains to be seen.
BSM is currently negotiating for the purchase of a $10 million community retail center in the southern U.S. "What is motivating us to move on this particular asset is that we feel like we are getting it at a good discount to replacement cost," McDonald says. Because the property has a motivated seller, BSM is negotiating a price that is 40 percent to 45 percent of replacement cost. The property also has good tenancy and a good infill location, he adds. Finding – and closing – on such deals is not easy. Firms have to be nimble and adept at underwriting, because the market remains very competitive, he adds.
Timing the market
The big question for many is when the stand-off between buyers and sellers will end, and investors will start moving capital back into retail real estate acquisitions. "I wouldn't be optimistic that there will be a flurry of transaction activity this year," Buono says. Although there are sellers today that are getting closer to that price gap, Buono anticipates that it will likely be 2010 before sales activity picks up.
Because lenders are working hard to avoid loan foreclosures, by extending terms and offering flexibility on payments, it may be late summer or fall before the dam breaks on troubled retail properties, Haddigan says. However, lenders are going to be forced at a certain point, because of the amount of distress, to start filing notices of defaults and mark-to-market their assets to be taken over by the FDIC.
"Eventually, we are going to see an acceleration of distressed properties on the market, and the three worst segments are going to be retail, hospitality and office," Haddigan says. However, Haddigan admits that it could be mid to late 2010 before the real estate investment market is in the "eye of the storm" for distressed sales. "People don't want to catch a falling knife," he adds. "People don't want to buy now when prices are likely to continue to fall."
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