Retail Cap Rates Surge in the Third Quarter

Retail Traffic reports that retail cap rates surged during the third quarter:

“Average retail cap rates increased 59 basis points in the third quarter of 2009 to 8.71 percent, based on CBRE’s Valuation & Advisory Services (VAS) database. The 59 basis point gain is the largest quarterly increase the company has ever measured, edging out the 55 basis point jump recorded between the first and second quarters. Retail cap rates are now up more than 150 basis points from where they were in the second half of 2007.”

This information has some interesting implications. Cap rates have an inverse relation with prices, so we can alternatively read this article as saying that prices have dropped in the third quarter.

Lower prices could indicate that commercial real estate, retail in particular, could now be about to experience that long awaited and much dreaded crash it was predicted to have. If the trend continues at this pace, the retail sector could be in a lot of trouble very quickly. Alternatively, this could signal the opportunity many investors have been waiting for. Numbers such as these could, ironically, spur investment in certain locations as the perception spreads that the bottom is being hit. How this trend is affected by the coming holidays is going to be an interesting thing to watch.

Is the CRE Shoe Dropping?

By: Andrew Fallon

Recent CRE Headlines – Which Ones Should We Believe?
FDIC Frets Over CRE Loan Losses
3 Signs of the Next Real Estate Collapse
Is a Market Bottom Imminent?
Plan Coming on Commercial Loans
Commercial Real Estate Debt Won’t be the Next Shoe to Drop

So the commercial real estate market will be the next economic catastrophe but the market bottom is near, investors have amassed substantial acquisition capital, and the FDIC is getting ready with a plan. Will CRE be the next shoe to drop? No one is certain how this will play out and varying sources have varying opinions, but something must budge when $1.4 trillion of commercial real estate debt matures over the next three years.

As reported, those likely to budge will be community banks, many of which hold portfolios containing a large percentage of commercial real estate and construction loans. NREI reports that nation-wide, community banks hold roughly 11% of total CRE industry assets. To this point, FDIC Chairman Shelia Bair is encouraging these banks to restructure existing and maturing loans in hopes of avoiding or minimizing larger losses. Unless value returns quickly, community banks might be the next shoe to drop. That will sting, but does it mean that the commercial real estate market is collapsing, and what will the overall impact be on Main Street and the financial system.

Fear and history has everyone thinking about the residential mortgage meltdown and the widespread financial impact, but commercial real estate is a different beast. First, the majority of loans causing concern are construction and development loans, not existing buildings. Secondly, even though CRE property values are down, the underlying assets are/or have potential to be income producing properties, which can be value-add opportunities to capable investors. Lastly, there is a market for distressed commercial real estate (as opposed to second homes). Investors have been amassing cash and REITs have been raising capital to acquire many of these troubled CRE assets. According to a NREI survey, 70% of investors are preparing capital to acquire real estate assets indicating that some investors see great opportunity in commercial real estate despite the doom and gloom reports. Who are you going to believe and what’s your appetite for risk?

McDonalds Earnings Go Up

McDonald's earnings rose 6% in the third quarter, posting earnings of $1.26 billion. Last year, same quarter sales were recorded at $1.19 billion and McDonalds expects this positive trend to continue.

Earnings per share also saw an increase, growing 10% to $1.15 from $1.05 a year earlier.

McDonald's success is a good sign for the net lease industry, as many McDonalds are structured as such.

Calkain Highlighted by Business Journal in Pitango Gelato Sale

Washington Business Journal's Tierney Plumb recently reported on the sale of the Pitango Gelato, located in Logan Circle's Metropole, for $618,000 ($1,123 per square ft.). The sale was brokered by Calkain Companies and represented "the highest square foot price that was attained to date". Assistant Vice President Rick Fernandez represented the seller.

Read the full article here.

Is There Such Thing as a “Recover-less” Recovery?

This is certainly an interesting time for the economy and the world in general. After being rocked by one of the worst financial blows recorded we are seeing a mixed bag of results:

The Stock Market?

Up. Now hovering around 10,000.

Unemployment?

Up. Now at 9.8% but as many analysts point out the real number is closer to 17%. It’s predicted to reach 10.5%.

CMBS Delinquency Rate?

Up. September posted a rate of 3.64% as opposed to .54% a year ago.

Home Foreclosure Rates?

Up. “As of last month, 7.58 percent of U.S. homeowners were at least 30 days late on their mortgages, up from 7.32 percent in July”.

U.S. Debt?

Up. It’s currently over $11 trillion.

There are no doubt numerous other indicators which should be thrown into the tea leaves but aside from the stock market it seems like we are in for a somewhat downtrodden recovery. The recession may be characterized as “over” but do most people really feel that way?

The term “jobless recovery” is thrown around a lot but looking at all these numbers, one wonders if there is also such thing as a “recover-less recovery”. If unemployment continues to rise, people will naturally spend less and more defaults will be observed. Furthermore, due to the large amount of debt accrued over the past few years, one would expect a lot of earnings to be dedicated to debt obligations, not current spending.

When giving out coupons for products businesses are often faced with the prospect of “borrowing from future sales”. They may increase sales numbers this month but next month they will go down. Collectively we did just that over the past decade, borrowing from future prosperity to have it “right now”. Naturally we are now experiencing the subsequent drought. There is nothing to really do; giving out more coupons (stimulus) only puts off the problem till later. That is why the recovery does not really feel like one. The economic growth that was supposed to sustain us today was spent yesterday.

Vacant Commercial Real Estate Reuse

There is an interesting article from Business Week detailing many creative reuses for our vacant commercial real estate. Some of ideas seem more probable than others (some seem crazy). Here is an outline of some of the highlights, organized from least crazy to most.

1. In the Realm of Possibility

Hydroponics in Auto Plants:

Many auto factories have been left vacant from the recession but may serve more agrarian uses. As Business week observes, “The open bay nature of auto plants and showrooms can provide the space for hydroponic and aquaponic greenhouse operations”.

Community (Kitchen) Gardens:

Turn that unsightly vacant lot into a veritable country landscape! Many old properties were demolished to make room for new properties, only to have the recession hit, forcing the projects to be abandoned. Residents are using the land the way our forefathers did, “Philadelphia has already implemented an urban kitchen garden policy and many other U.S. cities could benefit from one.”

2. Getting Out There

Farms In-Between Freeways:

You know those grass, sometimes tree covered medians? Well instead of dreaming about plowing your 4x4 over them when traffic hits, turn your thoughts to farming! “Freeway interchanges can be transformed into self-sufficient, positive contributors to cities…Converting the un-usable green gaps of the interchange to usable farm land is a win-win for everyone.”

Affordable Housing and Malls:

This one is sort of odd because we really don’t get the rationale behind the proposal. Here is the quote in full:

“Public housing has been decimated by the altruistic construction of mixed-income, mixed-use affordable housing projects throughout the country. Unfortunately these projects have, statistically, merely relocated the poor and working poor to inner ring, dying suburbs, with dying retail and little access to the necessary basic services that were centrally located in the original housing ‘projects’. Might it be possible to use dead malls for the basic services needed by these displaced citizens, and program the proximate houses, many in foreclosure, for true affordable housing, providing both access to basic needs as well as the seeds of a sense of belonging and ownership.

Instead of being placed by “dying suburbs and retail”, affordable housing should be placed in neighborhoods populated with foreclosed houses and near abandoned malls?

3. Crazy

Wind Harvesting Super Tower:

How would you feel about your house or apartment located right next to a wind harvesting super tower? “Erect large urban/suburban wind harvesting super tower units that occupy minimal floor space but can cleanly alleviate a percentage of community energy consumption.” At least there won’t be a bird problem, right?

4. Jack Nicholson Crazy

Airships:

This is completely serious, someone did suggest the option you are about to hear. “Repurpose empty lots and/or structures to be used as landing stations for a system of small urban commuter airships. Clean transportation and a notable city feature.” Yes airships. Did you know they make a notable city feature? While we wouldn’t be opposed to having them, it seems like this idea belongs in an alternate reality universe. One without the Hindenburg.

In all seriousness, it is quite an interesting article and worth checking out.

Retail Sales Exceed Expectations for September

Many retailers are quietly having a much better than expected month of September. Stores such as Kohl’s, Target, J.C. Penny, Walgreens, Family Dollar and Limited inc. (the parent company of Victoria’s Secret) all posted sales figures that met or exceeded expectations.

This is great news for the retail sector, which has been hit especially hard by the recession. If all goes well, September could actually post positive same stores sales, rather than ending in the red. If September same stores sales should drop, it will mark the first time this decade that the same month posted declines in consecutive years.