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When JPMorgan Chase released its fourth quarter earnings for 2013, it announced that it had provided $19 billion of credit to U.S. small businesses. The figure sounds impressive, but it pales in comparison with the $589 billion of credit that it provided to big corporations.
This should not surprise anyone. The country’s biggest banks ($10 billion+ in assets) actually prefer to provide capital to “small businesses” that average $10 million in revenue or more. While, it is encouraging that the spigot has opened and big bank loan approval rates for small businesses reached 17.6 percent, according to the December 2013 Biz2Credit Small Business Lending Index, many of them are primarily interested in lending to large “small businesses.” (Yes, that is an oxymoron.)
For many of the big banks, small loans are paper intensive and thus cost more to process. This is a reason why they prefer to offer non-SBA loans, which typically require more forms and documentation and, as a result, take longer to process.
Small banks, which typically do not have the same type of brand recognition, cannot afford to be as choosy. Often, they are a secondary choice as consumers tend to go to the names they know first. Further, because of the amount of advertising that big banks have invested in advertising to promote their small business loan-making, entrepreneurs are going to the bigger players.
Unfortunately, although big bank lending approval rates are currently at post-recession highs, they do not approach the percentage of loan applications granted by small banks (almost 50 percent). Alternative lenders, comprised of microlenders, cash advance companies, are approving more than two-thirds of their requests.
Here Is How Things Can Change:
1) As they continue to be thwarted by big banks, borrowers will continue to comparison shop and seek alternatives to the big banks. Many will use the Internet to find the best deals. Small business owners will secure capital from community banks, alternative lenders, and increasingly, institutional investors that are hungry to make deals.
2) Big banks can improve and upgrade technology. It is still astounding that many of the biggest financial institutions in the country do not allow for online loan applications or eSignatures. What makes this so perplexing is the fact that the large, name brand banks have more vast resources to invest in upgrades.
One can look at the mercurial rise of alternative lenders as proof that when there is a void in the marketplace, the hole is quickly filled. Accounts receivable and cash advance lenders used their technological advantage and made capital more readily accessible. In many cases, speed is often more important to borrowers than low interest rates.
For instance, if you need working capital to make payroll, you cannot wait three months for an SBA loan. Employees want to be paid in a timely fashion and likely won’t wait around for a long period of time without payment.
A number of the large banks, such as TD Bank, Union Bank and others, are investing in upgrades and becoming more active in small business lending. Look for others to follow suit in 2014.
Source: Smallbiztrends Jan 26, 2014 by Rohit Arora
A 114,016-square-foot office building in Naperville owner Omaha, Neb.-based Quarter Circle Capital LLC sold for more than $5.7 million. DuPage County records show the buyer of the property at 1717 Park St. was a venture of a Farida Tazudeen, a local real estate investor who could not be reached. The venture financed the Jan. 15 purchase with a $4 million loan from New York-based Garrison Realty Finance LLC, according to county records. It was the last remaining building owned by an approximately eight-year-old fund that also had included 1755 Park, which previously sold for $2.5 million to Riverwoods-based Podolsky Circle CORFAC International, Quarter Circle Principal John Martin said. A Podolsky venture also agreed to buy 1717 Park, but Quarter Circle sued the venture in December, saying it failed to close on the deal. The lawsuit is still pending, Mr. Martin said.
Source: Chicago Real Estate Daily January 28th, 2014
Real Estate Forecasts See CRE Recovery to Accelerate in 2014
Commercial real estate firms are moving into the New Year with a renewed sense of optimism – a positive outlook not seen for the past seven or eight years.
While many in the industry predicted a recovery in 2013, they did so with a sense of nagging worry over slower than expected job growth and concerns that the political brinkmanship in Washington could threaten the nation’s credit rating and pitch the economy into stagnation or, even worse, recession.
Much of those concerns have ebbed as the two parties came to terms in December over next year’s budget. In addition, the Federal Reserve has established a clear path for rolling back the so-called quantitative easing steps taken in years past to bolster the economy. By spelling out its path for reducing debt purchases, the Fed has taken out much of the guesswork for when those financial supports will end.
Given the overhanging sense of dread seems to have disappeared from most forecasts, experts are predicting a better year in 2014.
CoStar News has encapsulated Following 14 outlooks for 2014 from forecasts offered by respected industry participants and observers. We’ve sorted them alphabetically by the firm making the forecast.
Cassidy Turley: Impact from Rising Rates
If the big economic story of 2013 was policy vs. housing, this year doesn’t promise much in the way of variety. Policy vs. Housing, Part II will see the same threats to economic growth as we continue to struggle with dysfunction in Washington and, most likely, more political brinksmanship that may undermine confidence in the economy. But, while the challenges will be the same, the underlying fundamentals will be slightly stronger. Perhaps the biggest difference is that by the middle of 2014, economic growth should be strong enough for inflation to start to be a possibility once again. This is actually a good thing. The timetable could vary, but we anticipate the Fed raising interest rates by the end of the second quarter-likely in May or June. So long as interest rates don’t move too far too fast, the impact on the overall economy will be minimal. But there will be one. This could slow the housing recovery and it will certainly have an impact on commercial real estate pricing as the price of borrowing becomes more expensive. But that is assuming the underlying economic fundamentals have heated up to the point of warranting such a move-which is ultimately a good thing. A stronger economy may bring higher interest rates, but it will also bring higher earnings, lower unemployment, greater consumer spending and-for landlords-better rental rate growth and NOI. In the meantime, look for the first big political squabble (over the debt ceiling once again) to start up again in late January.
CBRE: Office Market Recovery Poised To Accelerate
The office market recovery is poised to accelerate in 2014, as an improving economy should result in increased office-using employment according to CBRE, the world’s largest commercial real estate services and investment firm. The growth in office-using occupations, particularly in high-tech industries, is expected to increase demand for office space. The U.S. office market vacancy rate will continue to decline next year, falling by 80 basis points (bps) to 14.3% by the end of 2014, Steady improvement in the office market is expected to continue in 2015, with the vacancy rate forecasted to dip another 80 bps to 13.5%. CBRE forecasts that office rents will increase by 3%, on average, in 2014, and rise another 4.4% in 2015, as vacancy levels fall steadily toward the “equilibrium” level over the next two years.
Cornell Univ. and Hodes Weill: Big Money Will Continue To Rule
Institutions are significantly under-invested in real estate and are poised to allocate significant capital to new real estate investments. The weight of this capital can be expected to have broad implications for the industry, including transaction volumes, fund raising, lending activity and property valuations. The supply of capital may sustain current valuation and financing metrics (including capitalization rates and the cost of debt capital), according to Cornell University’s Baker Program in Real Estate and Hodes Weill & Associates, which co-sponsor the Institutional Real Estate Capital Allocations Monitor.
Deloitte: Steady Growth but Not Enough To Spur Much New Development
CRE fundamentals continue to improve across all property types, including vacancy, rent, and absorption levels, according to Deloitte’s real estate forecast. However, demand is yet to increase enough to drive development activity, except for multifamily and hotel construction, which continues to be robust. These same sectors, which were the first to grow and recover after the recession, may see some tapering off in fundamentals as new supply comes to the market. Overall, it appears that fundamentals will continue to improve at a moderate pace, in line with the macroeconomic situation.
DTZ: Business Tenants Keep Bargaining Clout
The U.S. economy will continue to expand at a moderate rate, which will lead to more job growth and a related increase in demand for occupational space, reports global property services firm DTZ. However, with the expected moderate job growth, vacancy will only trend down slowly. Occupiers will remain in good bargaining positions over the next two years and occupancy costs will increase in line with inflation. They will continue to receive concessions as landlords compete to increase their properties’ net operating income. Occupiers will gravitate to the most affordable markets and continue to reduce their costs through more efficient internal space build-outs.
EY: Private Equity Funds Getting Hands Dirty
Having emerged from the global recession and its aftermath, the real estate private equity sector is finally positioned for growth in 2014, according to a global market trends outlook in real estate private equity published by EY (Ernst & Young). Strategies being deployed by different PE firms and even funds to take advantage of this growth opportunity differ, as fund managers seek to differentiate themselves in a hotly competitive fundraising environment. But EY sees fewer opportunities in the future for fund managers to capitalize purely from the financial structuring side of their investments. The funds that come out ahead of the competition in this next phase of growth will have one thing in common: an ‘old school’ asset management approach that realizes maximum investment value by working closely with service providers to fill buildings and manage real estate.
Freddie Mac: The Emerging Purchase Market
Led by a resurgent housing sector, 2014 should shape up to be better than 2013 with a quickening recovery pace leading to more job creation. Freddie Mac expects single-family home sales and housing starts to be at their highest levels since 2007, and expect multifamily transactions and construction to post gains as well. The big shift ahead will occur as the single-family mortgage market begins transitioning from a rate-and-term refinance-dominated market, to a first purchase-dominated market. The emerging home-buyer purchase market should gather momentum in the coming year.
Grant Thornton: Huge Boost Ahead for Industrial Markets
U.S. companies will bring production, customer service and IT infrastructure back home, reports tax-advisory firm Grant Thornton. The reshoring trend is real and about to dramatically reshape the U.S. economy. More than one-third of U.S. businesses will move goods and services work back to the U.S in the next 12 months, which means that as much as 5% overall U.S. procurement may return home. The Grant Thornton LLP “Realities of Reshoring” survey found that even IT services, one of the first business functions to move offshore, are likely to return within a year. The trend could provide an enormous boost to domestic manufacturers, retailers, wholesalers/distributors and service providers.
Jones Lang LaSalle: Pent Up Retail Demand Will Drive Investment
Total retail investment is expected to increase upwards of 20% in 2014, according to Jones Lang LaSalle, as pent up demand that was not satisfied in 2013 fuels investments and investors look to balance their portfolios. The retail market will continue to turn around despite store closings and consolidation. Vacancy rates are projected to inch downward driven by power center popularity, while rents are expected to increase albeit slightly for the fourth consecutive quarter. JLL also expects the number of retail property portfolios coming to market, which combine a broad spectrum of B and C retail assets, will increase as REITs look to sell assets and recycle capital in the year ahead.
Kroll Bond Ratings: Multifamily Resurgence in Conduit CMBS
The Federal Housing Finance Agency (FHFA) has begun to implement strategies to reduce the multifamily footprints of the two GSEs it oversees. As a result, Kroll Bond Rating Agency expects we will see a gradual decline in Fannie and Freddie’s securitized market share, which could revert to levels not seen since before the run-up to the CMBS market peak. At the peak of market in 2007, the conduit market’s share of the $36 billion securitized multifamily loan market was just over 78%. As the financial markets spiraled, that trend reversed and the GSEs became the primary source of loan production, dominating securitized new issues with more than a 95% market share.
Nomura: Muted CMBS Loan Maturity Risk
Based on the performance of loans maturing in 2012 and 2013, the investment bank Nomura estimates that 84% of loans maturing in 2014 will pay in full, a decline of just 3% from 2013 levels. Similar to 2013, Nomura expects the balance of loans rolling to delinquency to decline over the coming year, influenced by muted maturity risk and fewer term defaults resulting from improving CRE fundamentals. Most of the loans maturing in 2014 have 10-year terms and were underwritten prior to the sharp rise in property values that began in 2005. However, 15% of maturing loans have 7-year terms and were underwritten at the market peak. This set of loans has an increased risk of default at maturity.
PKF: U.S. Hotel Investors Poised To Do Well in 2014/2015
After a slight deceleration in growth during the last half of 2013, PKF Hospitality Research, LLC (PKF-HR) is forecasting very strong gains in revenues and profits for the U.S. lodging industry in 2014 and 2015. PKF projects national revenue per available room (RevPAR) to increase 6.6% in 2014, followed by another 7.5% boost in 2015. Concurrently, hotel profits should enjoy growth of 12.8% and 14.5% respectively over the next two years.
PwC US and ULI: Investor Activity Continues To Expand Beyond Core Markets
The U.S. real estate recovery is set to continue into 2014, with investors increasingly looking beyond some of the traditionally popular markets to secondary markets in search of higher yields, according to the latest Emerging Trends in Real Estate 2014, co-published by PwC US and the Urban Land Institute (ULI). The predicted growth in secondary markets will be driven by investors searching for returns as opportunities in core markets become harder to find and the most sought-after properties become more expensive. The move into secondary markets is underpinned by the anticipated increase in both debt and equity capital during 2014.
Transwestern: More Opportunities in Sale-Leasebacks and Net Lease
The cost of capital for owner occupants is on the rise, thanks to increasing interest rates. To cope with higher costs, owner-occupants are increasingly looking at selling their owned real estate as one strategy to generate funds for operating expenses, company expansion or retiring debt. This scenario presents an excellent sale-leaseback opportunity for investors looking to acquire real estate that comes with a long-term tenant in place. The lending environment is expected to bring more net-lease properties to market, as well. As interest rates increase, a larger number of office, industrial and retail buildings are projected to be marketed for sale.
That’s 14 predictions for 2014. We look forward to covering these and many other major trends in commercial real estate in the year ahead. Here is a bonus prediction from CoStar’s Property and Portfolio Research group:
CoStar: 2014 Best Year of Office Occupancy Gains in Recovery Cycle
Heading into New Year, office employment has been growing at the fastest rate since the start of the recovery, with the sole exception of early 2012. But there are two key differences between today’s market and that of the past few years. First, the office market now has far less under-utilized “shadow” supply space, which will drive a higher level of net absorption as more office-using tenants expand. Second, with the demand outlook improving and new construction still at bay in most markets, the 2014 occupancy gains in US office markets should be the best of the entire recovery and should tip the scales toward greater rent growth during 2014 than in the past few years. However, developers have already shown their willingness to break ground at the first sign of improvement. This has already happened in Boston, Houston, Silicon Valley and most recently, San Francisco. As developers ramp up new supply, the office occupancy gains are likely to slow in 2015 and certainly by 2016. Investors should enjoy the benefits of occupancy gains in 2014, which are expected to be the best in the current recovery cycle.
The average vacancy rate for a U.S. strip mall improved slightly in the fourth quarter from the third quarter, as consumer sentiment and retail sales ticked up, according to a preliminary report released on Tuesday from real estate research firm Reis Inc.
“Consumers appear to be acting more aggressively in response to improvements in the labor markets,” the report said.
The national vacancy rate for strip malls was 10.4 percent in the fourth quarter of 2013, down from 10.5 percent in the second and third quarters.
The report noted a growing rift between “have” and “have-not” markets as income inequality worsened. “In these ‘have-not’ areas,” the report said, “demand remains enervated, rents continue to fall even as the macroeconomy and labor market improve, and new development activity is virtually if not completely nonexistent.”
Reis said it expects this “two speed” recovery to continue in 2014.
Investors Flirt with Riskier Real Estate Strategies in 2014
Other trends predicted for the new year include that multifamily properties might fall off of investors’ must-have lists, construction investment could pick up and foreign investors are expected to continue to scoop up trophy properties in the U.S.
“Looking ahead, I would fully believe investors would take advantage on value added and opportunistic strategies instead of focusing on core,” said Brad Morrow, senior private markets consultant in the New York office of Towers Watson & Co. The riskier strategies appear to be a better opportunity because of the risk-return spread between them and core.
Mr. Morrow does not expect a wholesale switch of capital out of core for value added and opportunistic real estate. Instead, he expects investors to begin using riskier strategies with a little more return potential “at the margins.”
As for the real estate markets, Jim Sullivan, managing director, REIT research, of Green Street Advisors Inc., a Newport Beach, Calif.-based research firm, said real estate market projects are “tied at the hip with any investor’s view of interest rates.”
One camp’s view is that interest rates might go up because the economy will be recovering at a robust pace, Mr. Sullivan explained.
“A higher cost of capital is bad for real estate investing but a robust economy is great for real estate,” he said. Another view is that if interest rates go up unaccompanied by strong economic growth, it will be bad for real estate because it is an industry that is capital intensive, Mr. Sullivan said.
Multifamily is out, malls are in
Meanwhile, multifamily real estate investments may no longer be the darling of real estate investment community in the coming year.
Apartments — and the multifamily sector as a whole — have been extremely strong for several years, but it won’t be as hot going forward, Mr. Morrow said.
The net operating income might start to come down as new multifamily development projects that are in the pipeline are completed, he said. Indeed, there might be oversupply of multifamily properties in certain markets.
“I don’t see the growth opportunity we’ve seen in the past,” Mr. Morrow said. “Apartments might become less desirable.”
It could be a completely different story in the apartment real estate investment trust sector, Mr. Sullivan said.
Apartment REITs were red hot in 2011 and 2012, but underperformed the rest of the public markets in 2013, he said.
“Our view is the market overreacted to the decelerating growth,” Mr. Sullivan said. “Apartment REITs look cheap going into 2014.”
There will be a similar story with mall REITs, he added. In 2013, the mall sector significantly underperformed as investors anticipated a decline in consumer spending and a tax increase.
As a consequence, high-quality malls look cheap in the public real estate market, Mr. Sullivan said.
“Investor angst in relation to investor spending is legitimate but the mall sector was overly discounted,” he said.
One really big-picture item in 2014 is that the pace of new construction is starting to pick up.
“The commercial real estate party … usually ends not because of the lack of demand but because of excess new supply,” Mr. Sullivan said.
New construction, which had been at generational lows, is starting to change “in a pretty meaningful way,” he said.
The pace is picking up the quickest in multifamily, industrial and niche strategies such as student housing and data centers.
“The good news is that there is demand to meet the new supply,” he said.
The increasing supply is not enough to ring any alarm bells, but it is the first time in two or three years that observers will be watching out for oversupply.
One trend that sprouted in 2013 and might take firm root in 2014 is an increase in co-investments in real estate. While co-investments are fairly common in private equity, real estate deals have not been large enough for co-investments.
Real estate managers that can’t raise a large blind pool closed-end fund are looking to new ways to raise capital including seeking co-investments.
Managers may be more open to it in 2014 as fundraising continues to be a challenge, said David M. Sherman, president and co-chief investment officer of Metropolitan Real Estate Equity Management, Carlyle’s newly acquired real estate fund-of-funds business, and head of the real estate fund of funds group in Carlyle Group’s solutions subsidiary.
“Managers that need to stretch the remaining equity in a fund may co-invest, even if their deal sizes are manageable, during the latter half of a fund’s lifecycle,” Mr. Sherman said. “A manager of a new fund may seek co-investment because fundraising is going slowly. Some managers utilize co-invest in between fund raises.”
A big theme in 2014 is expected to be continued investment by foreign investors in U.S. real estate, said P.J. Yeatman, head of private real estate for CenterSquare Investment Management, a Plymouth Meeting, Pa., real estate manager. In a flight to quality, foreign investors have been buying up trophy assets in the U.S., leading to the overpricing for these properties, Mr. Yeatman said.
“We (the U.S.) became the flight-to-quality market,” he said.
These investors consider U.S. core real estate to be akin to fixed income, Mr. Yeatman said. What’s more, many of these buyers purchase properties on the basis of “perception,” he added. “The perception is that New York is a fortress and it is worth paying anything for New York real estate,” Mr. Yeatman said.
He added: “I don’t expect (foreign purchases of U.S. property) to stop” in 2014.
Astute investors will begin investing in value added and opportunistic real estate in order to sell into the overheated core market.
“The smart money will recognize the arbitrage opportunity between creating income streams to sell into the overheated market vs. buying income streams,” Mr. Yeatman said.
Another huge investment opportunity will be European real estate debt, said Joe Valente, managing director and head of real estate research and strategy in the London office of J.P. Morgan Asset Management (JPM).
Some €400 billion ($546.7 billion) of distressed European assets will be coming to the market, Mr. Valente estimated. “Half will be in core European markets where investors don’t have to take macro risk,” he said.
As for the year just ended, one of the big surprises was that the capital markets rebounded stronger than many real estate investors expected.
“I expected it to be strong, but it was stronger than I had expected,” said Gary M. Tenzer, Los Angeles-based principal at real estate investment banking firm George Smith Partners Inc.
Even though prices were at very high levels, in many cases around the pre-financial crisis levels, cap rates were very low, he said, noting that investors were chasing yield.
Source: PIOnline Arleen Jacobius, January 2nd 2014
Stiff Competition for Shopping Center Acquisitions
Dennis Gershenson, president and CEO of Ramco- Gershenson Properties Trust (NYSE: RPT), joined REIT.com for a CEO Spotlight video interview at REITWorld 2013: NAREIT’s Annual Convention for All Things REIT at the San Francisco Marriott Marquis.
Gershenson provided an overview of the acquisition market in the shopping center industry.
“It’s very interesting, because we were in a very frothy market in the first five months of 2013,” he said. “When Mr. Bernanke came out with his prognostication that things might change, the market just crushed. It took most of the summer for both the buyers and sellers to feel that there was some normalcy coming back into the marketplace. Now, here we are in the fall (Editor’s Note: video was recorded in November 2013), and we’re seeing the high quality shopping centers, as well as the B shopping centers, back on the market. What we find is, that as far as the highest quality assets are concerned, the institutional buyers are still paying approximately the same cap rates that they were paying before, and there is a tremendous amount of competition for those.”
Gershenson described his company’s involvement in in development and redevelopment activities.
“Development takes one of two forms,” he said.” Either it’s legacy property that we purchased in the go-go days of 2004 to 2007, and we’re now redeveloping those properties. We will not be greenfield developers going forward, but what we have been doing is acquiring land adjacent to our most recent acquisitions – that gives us the opportunity to expand on a very successful asset.”
Gershenson also talked about his anchor tenants, and what changes he is seeing in terms of occupancy.
“We’re very focused on improving the quality of our anchor tenants, as well as the whole spectrum of retailers in our shopping centers,” he said. “We have filed our shopping centers where we had vacancies, either that existed before the debacle of the recession, or as a result hereof, with high-quality, national retailers. One of the exciting things about bricks and mortar retailing, is it’s always refreshing itself. So, with the problems that Circuit City and Linen’s had, along comes retailers like BuyBuy Baby.”
Distressed Property Prices Approach Market Values Banks Clear Out Inventories
It’s a sellers’ market for distressed commercial real estate and Taylor Burke, senior executive vice president and chief lending officer for the $2.62 billion Burke & Herbert Bank in Alexandria, VA, wants to move his inventory.
“I think this is a great time to buy distressed property, especially that which we are selling,” joked the Alexandria-based banker.
More seriously, though he says, the market is good for bad property right now.
“Banks should be cleaning out their inventory this spring,” said Burke. “I want to sell all my stuff now and I suspect that my conferees are ready to unload their REO now, too. There is finally some demand in outlying areas where most of our problems are located. Not just income-producing any more – even lots are selling at last. Builders need inventory. There are a lot of troubled suburban strip centers and offices everywhere. There has been a sea change in demand.”
But, therein also lies the weakness to the distressed investment market.
“I don’t see enough of a price spread to justify the risk of buying an empty or troubled building,” Burke said.
Luke Wood, partner in Haverwood Management, an opportunistic investment and management firm in Austin, TX, concurs.
“If you can find a good distressed deal at a ‘distressed’ price, buy it,” Wood said. “Good distressed assets are selling at market value (or above market value, depending on your opinion) at this point in the market recovery. Equity is looking for limited parking spots and we are seeing many distressed assets sell at non-distressed prices to optimistic buyers, eliminating the high returns sought after for distressed deals.”
Distress Sales By the Numbers
Distressed sales as a percentage of total commercial real estate property transactions have been on a declining trend since the start of 2011, according to CoStar Group data. Distressed property sales made up 20% of the dollar volume of deals in 2011 but just 11% of total property sales volume in 2012 as the number of nondistressed sales soared and the volume of distressed sales fell. There was $16 billion fewer distressed sales last year compared with 2011. At the same time total sales increased 26% from $255 billion to $322 billion.
The number of distressed sales decreased significantly in many core markets. Distressed sales in New York state were down $7.6 billion; down $3.1 billion in California and down $1.2 billion in Texas. Notable also was that distressed sales in Nevada were down $1.3 billion; where distressed sales made up almost entire volume of sales in 2011, they represented less than 30% last year.
However, different markets appear to be in different stages of the recovery cycle. For example, while total distressed property sales volume dropped year-to-year in Michigan, Nevada and Georgia, they still accounted for nearly 30% or more of all commercial property sales. But as distressed property sales plummeted in some states, they were increasing in other. Distressed sales were up more than $100 million in 2012 vs. 2011 in Maryland, South Carolina, Illinois, Colorado, Pennsylvania, New Jersey and Missouri.
Lots of Buyers, But Numbers Don’t Always Pencil Out
Ember Grummons, a commercial sales and leasing representative for Investors Realty in Omaha, says there are a lot of buyers looking for distressed product in his markets.
“But the numbers need to make sense,” Grummons added. “Most of my clients require a 20% or greater internal rate of return on a distressed asset, using realistic lease-up assumptions.”
“There is a tremendous opportunity in tertiary markets in the Midwest right now, both for distressed as well as core and core+ opportunities. Markets such as Omaha, Tulsa and Des Moines have strong economies and fundamentals, but are overlooked by most buyers due to the size of the market, Grummons added. “There simply are not a lot of bidders for these properties, and it is possible to purchase them at very attractive pricing.”
Kevin Markwordt, managing director of Transwestern in Atlanta, said, “The likelihood of an investor or owner/user over-paying is unlikely (given rising property values). There are lots of buyers in the Atlanta market and competition is driving up prices.”
But there is a downside too, Markwordt said. “The negatives can be carrying costs and a slow turnaround time. Vacancy rates and rental concessions remain high, which are affecting projected cash flows downward, and ultimately providing a ceiling on the price per square foot (for purchases).”
“The market is appreciating at rapid rate and the longer you hold assets off the market the more value sellers will extract, as long as the carry (expense) does not cause hold costs to outweigh the opportunity an investor will associate with the acquisition,” said Paul Choukourian, managing director of Colliers International in Detroit.
In many markets, brokers say investors have cherry-picked the ‘best’ of the distressed inventory. “The remainder that will come to market has some inherent challenges,” Choukorian added. “The lenders are of aware of the demand and their focus seems to be maximizing the amount they extract. The majority of distressed assets that have the most significant value-add potential do not come to market due to the CRE market turn around.”
Multifamily and retail continue to attract the most interest from buyers. “They have decreased risk and a larger audience that can afford their purchase,” Choukorian said. “These assets are available because they are still seeing mature defaults that will not allow the current owners to procure take-out financing due to changes in lending practices.”
Retail Distress Still a Hot Commodity
Among all property types, only retail property saw an increase in distressed sales volume last year, up 4% in 2012 over 2011, CoStar data shows. Sales of distressed property for all other types declined. Distressed hospitality sales were down 52% year-to-year; office, down 45%; multifamily, down 26%; and industrial, down 22%.
“Retail seems to be a strong interest for distressed investors at present and there seems to be an ample supply of attractive, newer yet distressed retail properties,” said Ryan Phillips, president of Signature Asset Management in Dallas. “Moderately leased suburban office may be an opportunity in distressed real estate. I would stay away from very low occupancy buildings unless they are small and could be filled with a few leases. Any Class “A” product that is moderately leased could be viable — as long as it is priced as distressed and not at very low cap rates.”
Cheryl Pestor, senior vice president of NAI Capital, Pasadena, CA, also noted the strong interest in retail among investors targeting distressed real estate assets.
“I specialize in retail or service-oriented retail investments with about 20% of my sales working with banks on their REOs, and there is continued interest for retail properties if they are well located corner locations with good visibility,” Pestor said.
While there are always value investors in the market, no matter where the market is in a recovery, Pestor faults seller for not pricing distressed property correctly to incentivize an investor for the risk in buying a property “as is, where is, with all faults.”
Capital and Deal Structure Will Define Distress in 2013
“We’re at an interesting point in the cycle of distressed investing with many funds reconsidering the nature of the value investment thesis from a fundamental standpoint,” said Sean Banerjee, managing director of RedBrook Capital, a distressed investment firm in Seattle.
Banerjee sees synthetic credit markets re-emerging after largely being absent throughout the last cycle. He believes funds will be able to leverage newly available credit to acquire higher quality assets, which have been priced out of the range of distressed buyers in this cycle.
“Funds are starting to realize that when you are stepping into great product in great locations and taking advantage of circumstantial distress that isn’t always related to the real estate (such as entity-level or lender-level distress, then you’ve got a better overall picture to sell to investors when attempting to fundraise,” Banerjee said. “Ultimately you’ve got to successfully execute for current investors, but to attract new interest from sellers of distressed assets and investors alike, funds must also be innovative and ahead of the market. Investors don’t want to hear about funds returning capital. They’d rather hear about great deal junkies who have found creative ways to get deals done.”
Market timing is everything, but Banerjee and others understand while current conditions offer a great time for sellers to sell-off distressed assets, changes could be in store for the market down the road.
“Ultimately in the next three to five years, many local and regional banks will have the expiration of FDIC loss-share agreements, which will unlock their ability to sell assets at their sole discretion,” points out Banerjee. “This has the potential to cause flooding in the marketplace, which would saturate a market which has really been driven by competition over assets.”
The Triumph of “Extend and Pretend?”
Up until now, many banks have been reluctant to put to their distressed assets on the market, says Michael J. Tharp, an associate vice president for NAI Norris, Beggs & Simpson in Portland, OR.
Tharp, who works with a special asset team set up to work with REO subdivision, apartment land and raw land for residential, said the strategy pursued by many banks to work with borrowers on troubled loans rather than foreclose and take the loss is paying big dividends as prices recover in many areas.
“It’s become less risky the further we get into the recovery, so the length of time you might get stuck holding an asset with no market lift whatsoever is shorter,” agreed Joshua Anderson, COO of The Roseview Group in Seattle, who invests with and advises institutional clients across the nation.
“In terms of supply and demand of product, it’s more of a seller’s market for bank holders of distress than it is a buyer’s market, especially for notes,” Anderson said. “Geographically the best opportunities are in markets that are showing some initial signs of recovery but that are not as far along the curve as others yet. That applies to most of the Southeast and Midwest. “In terms of strategies, I think many of the best opportunities remain to be had by working through borrowers to approach lenders with white knight restructuring capital; that is generally the best path to getting off-market deals.”
Michael Lapointe, executive managing director and who runs the Capital Market’s in Florida for Newmark Grubb Knight Frank in Miami, said, “Banks, servicers and other asset managers have gotten incredibly savvy in the past few years in marketing assets for sale using a combination of off market, auction and other techniques.”
“Regardless of the medium, the groups that are successful are ones with a clear strategy that is often consistent amongst their dispositions,” Lapointe said. “Lenders that pick off single assets early to close relationships and then mass market remaining notes or poor assets often yield a lower total value then if a more thought out strategy was applied.”
Independent Grocers Negotiating to Buy 10 Dominick’s
Independent grocery chains affiliated with the Centrella cooperative are in negotiations to buy as many as 10 Dominick’s stores, sources familiar with the talks said.
Grocers affiliated with Centrella, the brand name used by Joliet-based Central Grocers Inc., are looking to purchase stores as a group in both the city and suburbs, sources said. It’s unclear which Dominick’s locations Centrella would buy on behalf of its member firms.
The group has hired food industry investment banker David Schoeder to negotiate the package deal with Dominick’s parent, Pleasanton, Calif.-based Safeway Inc., which announced it would leave the Chicago market.
Mr. Schoeder, a principal with Food Partners LLC in Washington, declined to comment. A Centrella executive could not immediately be reached this evening.
Centrella grocers looking to open stores in soon-to-close Dominick’s around the region include Tony’s Finer Foods, Treasure Island and Strack & Van Til, among others, according to the sources. The co-op has more than 150 members.
Tony Ingraffia, president of South Barrington-based Tony’s Finer Foods Inc., did not return calls. Christ Kamberos, vice president of development at Treasure Island Foods Inc., declined to comment. An executive with Highland, Ind.-based Strack & Van Til did not return a call.
Jewel-Osco, meanwhile, is suspending plans to snap up additional Dominick’s on the market here. The firm, owned by private-equity firm Cerberus Capital Management LP, is no longer looking to buy additional Dominick’s stores that are currently open, said an Itasca-based spokeswoman for Jewel.
When Safeway announced in October that it would leave the Chicago market, the firm operated 72 stores across the region. No more than 55 remain.
Earlier this month, Milwaukee-based Roundy’s Inc. announced a $36 million deal for 11 Dominick’s. Jewel-Osco has purchased four. And Dominick’s leases are expiring at properties in Matteson and Morton Grove and the landlords there are pursuing other options.
A Safeway spokeswoman did not return a call.
Jewel announced its Dominick’s acquisitions in October, stores at 1340 S. Canal St. and 2550 N. Clybourn Ave. in Chicago, and in Homer Glen and Glenview. It’s currently operating those outlets as Dominick’s, with plans to convert them into Jewel stores by mid-January, according to Jewel spokeswoman Allison Sperling.
The grocer won’t buy any more operating Dominick’s stores, Ms. Sperling said. Instead, Jewel will wait to see what’s left after Safeway shutters its chain Dec. 28th.
“In the near future, we will consider any opportunities that arise” to take over closed Dominick’s, said Ms. Sperling, who declined to elaborate further.
Chicago Tribune first reported on Jewel-Osco’s decision not to pursue Dominick’s that are currently open.
In other Dominick’s developments, Safeway did not renew its lease for its store at 4233 W. Lincoln Hwy. in south suburban Matteson. A spokesman for Indianapolis-based Simon Property Group, which owns the retail property that Dominick’s is leaving, said in a recent email that Simon is trying to find a new tenant for the space.
In Morton Grove, Dominick’s lease is expiring in April, a source said, and the landlord plans to pursue a retail-focused redevelopment project there.
Source: Crains Chicago Business Micah Maidenberg December 18, 2013
Shopping Centers Seeing Healthy Demand from Retail Tenants
Continued healthy demand for retail space is driving strong occupancy increases for many of the nation’s shopping center landlords and is even beginning to show up in rent increases.
“We’ve seen occupancy increase for a couple of years now and landlords are showing increasing net operating incomes and some are starting to see rents pop,” said Ryan McCullough, senior real estate economist CoStar Group (PPR division), speaking at CoStar’s 2013 Q3 Retail Review & Outlook webinar last week. “However, rents for most retail space are still low to the point that they are not an undue burden on the tenant,” a positive for both sides, said McCullough.
In fact, he added, the decline in vacancy appears to be accelerating. Net absorption of retail space reached its highest point since the start of the recovery with 19 million to 20 million square feet of net absorption per quarter, the best results in years.
McCullough said there is still plenty of upside for quarterly net absorption, which remains well below the height of the market in 2007 when national net absorption per quarter was approximately 50 million square feet.
With the increasing net absorption, retail rents are even starting to tick up.
“We’re just talking about a 0.8% gain over the year, not a huge number,” McCullough said, but also noting that some of the stronger U.S. markets are seeing retail rent gains of from 4% to 5% and even higher.
McCullough’s comments on the CoStar webinar are backed up by other comments made by senior executives for some of the largest publicly held retail REITs in their third quarter earnings conference calls.
Demand Coming from National, Regional Tenants
“We’re still not seeing the formation of new mom-and-pop businesses; and most of our new leases are coming from national, regional or franchise operators. These tenants want to be in Weingarten properties because our top tenants, supermarkets and discount closing retailers, continue to drive sales and traffic to our centers.
Rent growth for new leases continues to accelerate. We produced an increase of 9.4% in the third quarter and 12.6% year-to-date. We do see leverage slowly shifting to the landowner, particularly in urban markets that have more depth of retailer demand.
Johnny L. Hendrix, Chief Operating Officer and Executive Vice President of Weingarten Realty Investors
New Retail Outlet Concepts Spur Growth
We love all the new outlet concepts that are coming. There are several that have announced plans to expand, such as Francesca’s, Asics, Talbots, Vince Camuto, Cache. We’re also working with folks like Helzberg Diamonds, Joe’s Jeans, MaxStudio, Theory, Andrew Marc. There seems to be an ever-increasing list of high-quality designer and brand names that want to enter or expand in the outlet space.
Steven B. Tanger, President and CEO of Tanger Factory Outlet Centers
Demand Driving Tenant Turnover
The demand we’re seeing is from domestic retailers looking to expand the existing footprints to scale up new concepts, international retailers seeking to enter or expand within the U.S. market and the traditional destination retailers that are coming into the mall.
It is also an opportunity for us to replace lower productivity tenants with a higher productivity tenant, thereby supporting a continued growth in sales at the malls.
Sandeep Lakhmi Mathrani, CEO of General Growth Properties
Occupancy Increases Up for both Anchors and Small Shops
Quarter over last quarter, overall occupancy was up 30 basis points pro rata and 20 basis points gross. Anchor occupancy increased 40 basis points to 97.4%; small shop occupancy was up 40 basis points to 84.7%, an 80 basis points increase from third quarter of 2012. The increase in small shop occupancy continues to be driven by positive net absorption from the disposition of riskier assets.
Given that demand for large boxes is very strong, and occupancies are high for this space across our sector, Kimco is benefiting from this trend through higher rents for a larger portion of our portfolio. Additionally, we continue to see the advantage of old leases in our portfolio coming to the end of their term.
Conor C. Flynn, Chief Operating Officer and Executive Vice President of Kimco Realty
Retailers Making Up for Over-Reacting Three Years Ago
You know everybody probably overreacted in terms of closures in 2010. And so a lot of [what] you see is a lot of these national guys who are really scrambling to find space.
There has been a real strong increase really across the board and demand from national tenants. A good example is Starbucks as an example. Eighteen months ago people would say ‘they’re done, they’re closing stores, they’ve got too many stores.’ Now Starbucks is opening lots of stores or re-opening stores that they [had previously] closed.
John Kite, CEO of Kite Realty Group Trust
Lease Terms Also Becoming More Landlord Favorable
On a same-property basis, the operating portfolio is nearly 95% leased at the close of the quarter, and shop space occupancy stands at roughly 89%, the highest it’s been since 2008 and a 130-basis-point improvement over 2012. With this increase in occupancy, aided by strong tenant demand and limited new supply, we continue to gain pricing power. Rent growth returned to double digits this quarter. Average rents for side-shop tenants continue to trend upward and are now 34% above the trough.
And not only are starting rents improving, but we’re also seeing more favorable lease terms as a whole, including better rent steps and more aggressive commencement dates.
Retailers are acting on this positive sentiment. Many are making significant investments in their current spaces, as well as in new ones. Given the underlying strength of tenant demand, we see no slowdown in the positive momentum in all of the key operating metrics.
Brian M. Smith, President, Chief Operating Officer of Regency Centers
8% Rent Increases in Core West Coast Markets
We have seen a considerable increase in retailer demand across each of our core markets this year, coming from a broad range of large national retailers, as well as regional and local tenants. Needless to say, we have been working very hard to capitalize on the increased demand and as a result, our overall portfolio occupancy has risen to 95.3% as of September 30.
In terms of same-space comparative numbers, cash rents increased by approximately 8% on average for the third quarter.