CMBS Pros Bearish on Retail

When covering retail real estate and largely talking to professionals that specialize in this sector, it's easy to get caught up in the view that retail will continue to roll along. Sure, there will be some blips and most investors and developers think that retail is not going to see the same kind of growth in 2007 that it has in previous years. It's no longer the leading light in commercial property circles either. But for the most part the mood is optimistic.

But stepping into a different circle and hearing what a different group of investors and financiers have to say provides a stark contrast. At the Commercial Mortgage Security Association's CMBS Investors Conference in Miami, a gathering of investors, servicers, sponsors and other professionals involved in securitizing real estate debt, a morning panel discussed the prospects for commercial real estate in 2007. Retail didn't fare well.

All four panelists pointed to the office sector as the best bet for 2007 with multi-family and industrial also garnering a few nods. Randy Mundt, president & chief investment officer for Principal Real Estate Investors, then noted the lack of optimism for the retail sector, which spurred a brief back-and-forth on the topic.

“We're most cautious on retail today,” Mundt said. “We're concerned by consumer-related issues and worried about retailer credit. It's never been a strong credit industry any way. And now there's a lot of LBO activity, which is worrisome.”

Steve Coyle, managing director and chief investment strategist for Citigroup Property Investors, was even more bearish.

“There will be fallback—in 6 months to a year—from consumers pinched by falling home prices,” Coyle said. “We worry about malls even more than shopping centers because of this, but we're worried about both.”

Michael Gilberto, managing director for JP Morgan Asset Management added that he wasn't too optimistic about shopping centers either because of the amount of construction in that sector. “Those centers have built more space than any time than 1990,” he said.

(For more on the retail development pipeline, check the results of a joint survey conducted by Retail Traffic and NREI than ran in both magazines' December issues.)

And it's hard to dismiss these opinions. In 2006, sponsors issued $299.2 billion in new CMBS issuances and $34.4 billion in new CRE CDOs. All told, CMBS represents about 25 percent of current outstanding real estate debt and the share of originations is even higher—over 30 percent. In other words, they know what they're talking about.

Food for thought.

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