Eight Restaurants Do Well While Market Falters

As reported by MSN Money, eight restaurants have done relatively well compared to their competitors and still have the ability to expand regardless of our current economy climate. Specifically, “all of these companies are financially healthy, with reasonable debt and the wherewithal to keep expanding despite a credit crunch”.

Here is the list:

1. Buffalo Wild Wing Factory
2. BJ’s Restaurants
3. Chipotle Mexican Grill
4. Olive Garden
5. Panera Bread
6. Peet’s Coffee & Tea
7. P.F. Chang’s China Bistrow
8. Texas Roadhouse

Calkain profiled Buffalo Wild Wing Factory (# 1 on the list) in our Net Lease Advisor.

Net Lease Insider Pulse: Richard Ader on Commercial Real Estate

Net Lease Insider interviewed Richard Ader, Chairman and Founder of U.S. Realty Advisors, LLC, one of the largest owners and acquirers of single tenant net lease real estate transactions. We asked him five questions dealing with the present and future of commercial real estate, his answers proved both insightful and thought provoking.

(1) Will the commercial real estate market bottom out in 2010?

I do believe the first six months of 2010 will continue to show a decline in value and rents in most sectors of the real estate market. I believe the commercial real estate market will start to bottom out in late 2010 or possibly into the first quarter 2011. A key determinant will be how the growing shadow of maturing mortgage loans is handled.

(2) Is commercial real estate’s fate tied to unemployment or any other pertinent economic factors?

Commercial real estate is tied to all economic factors due to the fact that real estate iscapital intense, and supply and demand driven. Job creation and unemployment directly impact all aspects of commercial real estate: vacancies impact rents for office buildings, and we assume that retail demand will continue at lower levels which will affect both retail and distribution properties. In addition, until the real estate capital markets are re-started, new real estate development is likely to remain at the current depressed level. In the background is the potential for increased inflation, which would impact the cost of operating properties and financing properties, but may not affect rents which are more demand driven.

(3) When recovery does begin, what areas will grow first and fastest?

I think the first areas to recover in the real estate market will be retail and distribution, with office being last. I believe when the recovery comes, people first will start shopping again. This pent-up retail demand will trigger distribution to meet greater retail demand (and permanent changes in retail patterns). Office space will trail the recovery, as companies will first re-occupy large volumes of currently unused space before starting to lease new space.

(4) Are there segments of commercial real estate that you find appealing even in this economy, including the net lease market?

We find net leases to be appealing. Like most real estate assets, cap rates today have increased substantially compared to the over-heated markets of two years ago, and lease terms are longer. There also are opportunities to buy mortgage debt at good discounts with the objective of owning the real estate or achieving equity-type returns.

(5) Would you prefer to invest: Close to home or in a stronger metro market? If yes, what are your top two choices?

I think the preference today for investments in multi-tenanted office assets should be in the stronger metro markets. Distribution should also be in the stronger distribution areas, and retail should be based on prior performance. Net leases should be driven by corporate credit. How the lessee uses the asset in its business and what alternate demand for the asset would exist if the lessee were to move out.

Sale of Detroit Pontiac Silverdome Sends Shockwaves

The Detroit Pontiac Silverdome, an 80,000 seat stadium sitting on 127 acres, has just sold for the titanic price of $583,000. It was sold to a Toronto based company at an auction held by the city of Pontiac, Michigan.

This is a remarkable statement for a building which once hosted the 1994 world cup and was home to the Detroit Lions (when they had Barry Sanders). It also is a harrowing representation of the current state of commercial real estate, shining light upon on an issue many know about but have yet to seen brought into daylight. Should the fabled "other shoe" finally drop off commercial real estate, could this prove to be the rule rather than the exception?

Commercial Real Estate Crisis Overblown Says One Industry Expert

Sam Zell, a “legendary real estate investor”, recently commented on the dire predictions attached to the coming commercial real estate crisis, stating that they are overly pessimistic. Specifically, he cited the cause for the current commercial real estate ailments as a “demand recession” but one not driven by drastic oversupply. According to Zell, there haven’t been major new supplies of commercial real estate since 2007.

However, he also notes:

“By 2011 and 2012, the lack of supply will fill those buildings. That's the good news. The bad news is that the buildings will be filled at very low rental rates -- so lenders won't get paid back."

CTL Financing and NNN Properties

By: Andrew Fallon

Debt financing, what debt financing? The capital markets remain dysfunctional, forcing borrowers to utilize alternative sources of capital. Fortunately, net lease property developers and investors can, and have been taking advantage of CTL financing.

Credit tenant lease (CTL) financing is a non-traditional type of commercial real estate loan that allows borrowers to “leverage-up” based on the predictable income streams of long-term leases. CTL financing provides substantial debt levels based on the credit-quality of the tenant, and the net lease structure securing the asset. The collateral is the long-term lease, not the physical real estate. Lenders are comfortable providing funds knowing that an investment-grade tenant’s monthly rent check will be paying the mortgage balance. Because CTL financing is based on the creditworthiness of the tenant rather than the creditworthiness of the borrower, developers and investors can access debt to build and purchase net lease properties, which continue to trade competitively in today’s market.

CTL can be a valuable source of capital given its key advantages over traditional financing. These advantages include maximum loan proceeds and lower debt service coverage requirements. CTL loans are characterized by their high LTVs (85% - 100%) and low debt service coverage ratios (1.10 – 1.25 DCS). If you are considering the purchase or development of a net lease property, then you might want to explore the CTL financing opportunities available for your tenant.

CTL recently in the news:

Walgreens Lending: A Victim of Its Own Success

Reinventing the Credit Market for Commercial Real Estate

CTL Financing Helps Large Deal Close

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?