RITTER: When we have a chain like Circuit City or
Linens ’n Things completely shut down, does that mean
HENRY: What you certainly have is a situation where fewer tenants are willing to go into that vacancy, so by definition you are
oversupplied—or you’re beginning to be—as these stores hit
the market and stay vacant for a sustained period of time.
SCHECHNER: But we are seeing situations where the vacant
Mervyn’s and Circuit City stores are being backfilled by other
tenants. So while we might think we are over-stored and that all
the space isn’t being absorbed, a surprisingly large amount of
single-tenant boxes are being retenanted.
RITTER: By whom?
HENRY: We’ve signed leases with HHGREG, Nordstrom Rack
and Ross Stores for vacant Linens ’n Things in the US. In Canada, Bed Bath & Beyond took four of the six vacant Linens ’n
Things we were left with.
GRAISER: We’re involved with the disposition of the Linens ’n
Things and Circuit City leases, and retailers are absorbing those.
The more challenging issue is with the vacant Circuit City properties; there were leases done with Best Buy and PC Richard and
others, but this round of vacancies is going to take longer to
absorb than the Linens ’n Things.
RITTER: Will the Treasury’s actions make any difference
in the retail sector?
SCHECHNER: You’d think that having more capital come into
commercial real estate would help relieve some of the pressure.
Whether it’s the Term Asset-Backed Securities Loan Facility,
which is the program for new loan origination, or the Public-Private Investment Program, which is for legacy loans and securities—if they are successful and add more capital to the system,
it should also put a floor on valuation. If an owner can borrow
40% with partial support from the government, that 40% loan
and the resultant 60% equity means you have a floor for the
capital structure of the asset. That should help with a lot of the
valuations going forward—no more assumptions that there is
no available debt. While not perfect, it is a start. Now, while the
government programs create a baseline capital structure—40%
LTV loans—the other large issue is whether you can come up
with an NOI for underwriting purposes. It’s one thing to have a
lot of capital, but the question is, what are you underwriting to?
HENRY: Anything the government can do to stimulate lending
and capital into the sector is going to be good. I agree that the
real question for investors is, how low is this going to go? You
don’t want to use that oft-repeated expression, “Catch a falling
knife,” and jump in too early. Most investors would rather wait
to see definitive signs that things are improving, and if they miss
the bottom by a little bit, that’s okay. You’ve still got a market
filled with fear rather than greed, and greed works a lot better
in the real estate market.
HADDIGAN: History has shown we run in cycles. The question
is how long and how deep this one is going to be. There’s just so
much uncertainty and investor activity remains virtually frozen.
Let’s assume consumer spending started accelerating today.
From the transaction side, things aren’t going to start trading
until people can more accurately assess risk and feel comfortable with what they’re doing. That goes to the heart of all this.
When underwriting a deal today, how do you assess risk? In
general, rents are certainly not moving up. There’s pressure on
the expense side across the entire US. Whether the expenses
are encumbered by the tenant or the landlord, it doesn’t seem
like we’ve got an environment in which you’re going to see any
significant NOI growth. There will certainly be exceptions, but
as a general statement, there’s pressure on NOIs and lenders
are very reluctant to take any aggressive positions. Deals that
are getting financed in today’s market are situations where the
lenders are underwriting the borrower as much as they are underwriting the real estate.
Treasury Secretary Timothy Geithner’s actions are certainly
positive, but anything we do to try to create some relief and
start some activity and movement with distress is going to be a
RITTER: Is this tied in any way to consumer confidence?
Do you think the Treasury’s actions will impact consumer
SCHECHNER: Consumer confidence is a very big part of it.
Right now, people are watching family, friends and neighbors
losing their jobs. There’s a lot of anxiety. Until that turns around,
whether through a stimulus package or restoring stability to the
banking system, a return of consumer confidence and spending—at rational, long-term patterns, not even aggressively—
would give a sense to all retailers that they should put a lot of inventory in the stores. That will probably signal to landlords that
there will be more activity in the centers, which would certainly
give more confidence and stability to the operating incomes and
cash flows of the underlying assets.
Otherwise, you wonder how far NOIs will fall. Different public
companies are expecting incomes to be down 3.5% or 5%, but
no one really knows. The visibility is extremely low.
RITTER: Speaking of spending, there aren’t many trans-
actions taking place, and those that do occur are very
small deals. Have you seen this shift?
HADDIGAN: The investment sales market has been a developing story over the past 24 months. With the capital markets seizing in the summer of ’07, we saw a bit of a lag time in terms of
the transactions that were being done. But when all was said
and done, in calendar year 2008 versus 2007, the $20-million
plus market was probably off by 95%.
Approximately 97% of the retail market has historically consisted of deals under $15 million. As 2009 progresses, transaction velocity will continue to decelerate. However, properties
priced under $10 million are still trading. If the institutional
side of the market was off 95% or more in 2008 compared to
2007, the market in general was probably off by well over 50%.
The bright spot in the retail sector is the net lease business,
which is off by 35% to 45%. But the market is much more careful in how it’s assessing transactions.
HENRY: There’s a huge disparity between the bid and ask today. If you assume for the moment that we’re following the residential market, it took a while to see severe decreases in home
prices. It’s like when you put your house up for sale in a soft
market, you don’t reduce your price right away. It isn’t until the
traffic slows down and your broker moans and groans for three