lems is that the cost side hasn’t gone down. There has been a lot
of talk about changes in material and labor costs, and yes, you
can go back to the well and attempt to get better pricing for your
construction. It is not as though there are many of these kinds of
situations where the project is still viable and the math works.
FIALA: There is a lot out there that isn’t viable. One of the challenges right now is to sort through what’s real and what’s not
and whether to even spend any time on it. Most of those opportunities are coming to us through the retailers, a major anchor
that we have done a lot of projects with in the past that’s now
working with a local developer. They are coming to us saying,
“Can you step in?” And in those cases, the anchor deal is signed
up and it does make financial sense. Over time, I do think there
are going to be portfolios and assets in high-income areas that
we will be able to redevelop. But it’s still early; everybody is sitting on the sidelines, waiting to see it happen.
Other than JVs, is there capital available for retail today?
MOZER: It is available, it’s just more conservative. It is also a
bit more expensive, but as the indexes—Libor and Treasuries—
come down, spreads will come up. If you have a preleased grocery-anchored or a power center, you can still get financing.
The problem is that people are being very conservative on
their leasing assumptions because tenants are taking a lot more
time to sign the deal. If a shopping center is 50% leased or a
pad site deal has been done, lenders will give you a phased
loan, but you have to build the property as you lease it. They’re
not going to let you get too far ahead with a lot of spec space.
Overall, you can still get transactions funded. I’m not saying
it’s easy, but there is capital out there. Is it as aggressive as it
used to be? No. You can’t get a 95% non-recourse construction
loan, but you can still get some recourse. And they’re underwriting the takeout, which is more of a 70% or 75% loan-to-value instead of 80% to 90%.
STOLPESTAD: There are a lot of private equity funds that have
raised capital and have not fully committed it. And funds that
are in the opportunistic and distressed return spectrum, sort of
the 18% to 20% IRRs, still have capital available, as do a fair
number of the value-add-type funds. I think at the moment
these capital providers are more interested in other property
types because they don’t see as much headline risk and there is
not as much near-term risk. And again, it is all a matter of compelling returns. They don’t see that we have quite hit bottom or
they don’t have the ability to soundly underwrite attractive,
compelling opportunities at this time. On the international
side, there are still some investment markets around the world
that look a little bit better than many of the US markets. On a
relative basis, investors that can consider worldwide markets
are very intrigued by the US because of correcting prices and
the depressed dollar, but I don’t think they view this as being
quite the right time to invest.
What does the overall investment climate look like?
HADDIGAN: On the single-tenant side, drugstores are very
popular. Pricing has softened slightly, but these properties are
pushing the upper limits of value. Buyers are willing to take
lower yields. On the multi-tenant side, quality infill product
with strong demographics will see tremendous demand. It is
really the weaker credit, secondary location, less-trafficked
properties that buyers aren’t touching right now. We are not
doing the fortress malls, but I don’t think that anyone is. There
is very little velocity on that side of the business. We are
engaged in many more conversations involving power or
lifestyle centers that owners are trying to get priced, and it is a
tough product to move right now. Food and drug are really
very much coveted. You bring a Publix-anchored center to
market and it is going to get a lot of attention.
With rising land prices and construction costs, the rents that
have to be achieved to make the numbers work have jumped
quite a bit. If you have a net rent of $15 to $30 and put a 6% or
a 6.5% cap rate on it, your price per foot starts to increase considerably above what many intrinsic value buyers find acceptable. It is not unusual to be shopping properties priced
between $300 and $500 per sf—and we are not talking
Manhattan but decent suburban developments across the US.
Buyers are much more careful today when that price per foot
goes over a certain level.
“People are being very
conservative on their
because tenants are
taking a lot more time
to sign the deal.”
GARY E. MOZER
GEORGE SMITH PARTNERS
How are rents and other property fundamentals trending
FIALA: You are definitely going to see softening in terms of
rent growth and a slight decline in overall occupancies especially in B- and C-quality portfolios. In those properties, the
mom-and-pop retailers are having a more difficult time, so
there will be a higher rate of move-outs and there aren’t retailers to replace them. Again, if you have good demographics and
strong anchors, you will fare much better than most. But I do
think in the aggregate, we are going to definitely see changes in
some of the fundamentals.
HADDIGAN: Both anecdotal and formal research point to
increased vacancies and a slowdown in development.
Vacancies are up slightly, rents are pretty much leveling off,
but again, there is a divide between the haves and the have-nots. The better locations, the quality deals, the highly trafficked centers with affluent consumers, those property owners
are still in the driver’s seat. But anything less, there is a lot
more negotiating that’s flipping to the tenant’s advantage. In
general, construction in the pipeline is substantially preleased,
so I think you are going to see continued delivery of new product, but the pace will decelerate quickly.
STOLPESTAD: Reduced construction volumes over the
medium term will be good for the market. The other thing we
haven’t touched on is the risk of inflation. One can paint the
picture of a situation a few years from now where owning retail
real estate with exposure to percentage rents and other infla-tion-mitigating structures will be a very good thing. If we can
get through this period, owners of good-quality existing real