Strolling the Agora: Though Many Are Directing Their Expansion Offshore, They And Many Others Are Preparing For Major Growth in the U.S. and Canada

For months now, we and a multitude of very experienced people in the real estate industry have been directing our attentions to high-profile activity offshore – especially those larger landlords and tenants with the financial capabilities to grow and expand their brands. No question, it was a lot sexier to talk of building in China, Brazil, Russia, and the like–when we could all see that no new development or retail expansion of any note was taking place here–and that numerous projects announced just months ago have now been placed on the back burner.

Right now, the opportunities domestically have been limited due to the economic crisis, said these senior sages, consultants, investors and developers.

However, that does not mean that many of them are not now positioning themselves to take advantage of these falling values when “all the ducks line up.”

In fact, one investor, Tom Shapiro of Golden Tree InSite Partners, classifies the US as the new emerging market. Moody's/REAL National All Property Type Aggregate Index states that the value of real estate domestically has dropped to levels not seen since September 2004. And others are predicting that these prices could be 50% off the values established just before the economy tanked.

The latest of the heavy-hitters entering this now crowded field is Vornado Realty, which expects to raise $1 billion to fund distressed real estate acquisitions in New York and Washington, DC.

Based on their record-breaking, positive performance over the second quarter, the larger, established REITS are expected to lead the way in aggressive acquisitions [Simon, Macerich, Developers Diversified, CBL]. Granted these funds with their returns of well over 100% have achieved these levels because they were among the hardest hit when stocks plummeted; but by refinancing and reducing their debt, they are now in a good position to buy for cash and avoid the trap of chasing properties using highly leveraged instruments. 

And numerous others have formed new companies or divisions for this purpose. According to one marker, some $13 billion has already been raised in the stock market since March just for this purpose.

Financing new projects, said Simon Ziff of Ackman-Ziff Real Estate Group, is still a major challenge. Two years ago, he continued, the average loan his company made was $75 million; today it is $15 million, “and you have to go to 100 lenders to get a deal done.”

To this mix, now, add the foreign investors who are beginning to consider shopping centers ripe for investing and acquisitions, with most of their attention being directed at strips, mainly those that are anchored by financially sound, chain supermarkets, and with high occupancy rates.

The biggest obstacle right now, though, is that despite all the talk of substantial vacancies, foreclosures, distressed properties and the like, there really isn't that much in the shopping center/retail industry that is available right now for these buyers-in-waiting. Lenders have been easing payment requirements to numerous strapped landlords, many through short-term extensions; but with increasing vacancies in these properties, and the rent decreases being demanded by retailers, landlords may still not be able to service these loans.

Many anticipate, therefore, that even these loans that have been re-negotiated may be in trouble unless the economy begins to pick up. The more conservative are estimating that it could take three years; most, however, are hopeful that activity will begin to improve later in the year or by early spring.

What most, however, are in agreement on is something we noted earlier (See Agora, May 11, 2009, P. J385): The landscape is changing and as it contracts more shopping centers will be controlled by fewer and larger owner-operators.

So, those with the cash are facing off against those who need it, and the question is who's going to blink first? There's little question that the more financially sound companies can afford to wait and have no reason to open their wallets until they think the price is right. 

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Strolling the Agora was a twice-monthly column discussing trends, issues of importance, and commentary on the leasing/development aspects of the shopping center/retail chain industry in the US and Canada. Called Strolling the Agora, it was a part of Shopping Center Digest, a newsletter founded in 1973 published until September 2010. The column provided expert insight into various retail focused topics. It was primarily authored by Murray Shor, Editor & Publisher as well as industry and veteran retail experts.  A smattering of archived columns are presented here for your reading “pleasure”. It's an interesting “look back” at what were current hot topics at the time with regard to shopping center/retail industry focus, development and leasing expansions and processes, retail mix, opinions and more.