Steven Roth's Message to Investors

In his Chairman's Letter as part of Vornado Realty Trust's April 3rd 8-K filing, Chairman and CEO Steven Roth in a letter to investors provides some interesting thoughts about the retail sector and about commercial real estate in general and how things will change because of the current "Great Recession."

On retail:

Remember the 90's with see-through office buildings in every major city in the country. That market in that time suffered the double whammy of enormous overbuilding (mainly of spec buildings) followed by a recession-induced drop in office demand; retail of all size and type escaped. Well, in this cycle I predict that weak, marginal, poorly tenanted, commodity retail (and there is a lot of that stuff around) has a target on its back.

After 15 years of predicting, the country is finally over-stored with 22 square feet of retail per capita. Most retailers themselves are on shaky financial footing and even worse they suffer from a sameness of product offering, a boredom, if you will. The ever-expanding mass market discounters are dominating conventional retailers, both large and small. Internet shopping is for real and is starting to take real share. And, finally the consumer, having lost enormous wealth in housing and savings, is retrenching. Whoever heard of holiday sales at a great retailer like Neiman Marcus declining 28%?

Really scary is the consolidation of mall anchors. In many malls, in many markets, the loss of an anchor now spells a very long-term empty and a dead mall wing. Who will replace Mervyn's, etc.? B Malls and C Malls will suffer declining sales, and difficulty replacing failed tenants and refinancing their loans. Ditto for marginal strip shopping centers. Every commercial highway in the country is lined on both sides end to end with too many stores. And, today struggling retailers don't reorganize- they liquidate, a la Linens ‘n Things, Steve and Barry's, Circuit City.

And on "What Will Be Different When This Is Over":

What Will Be Different When This Is Over

* The severity of this economic crisis will affect behavior for a very long time.

* Government regulation and the rule of markets will force a lower leverage, lower risk business model. Real estate businesses such as ours will require a larger equity base. The corollary of this is that capital “haves” will be advantaged.

* Rebuilding balance sheets by both consumers and businesses is the order of the day. The savings rate will go from minus 2% to perhaps as high as 5-7-10%. This may reduce consumption somewhat, but will generate, say, a trillion dollars per year of incremental capital into the system,(8) a very good thing.

* No new supply of any form of real estate can or will be built for the forseeable future. This will inevitably produce, after the recession's end, equilibrium in occupancies to be followed by increases in rents. The business cycle lives.

* When the big banks and the big brokerages suffer, so does New York. But the nation needs the capital markets and the business leadership that are New York's stock and trade, now more than ever. If the nation is to grow and flourish, New York must be the engine of capital formation and ideas. We believe in New York; it is the financial capital of the world.

* Doesn't a slow growth, low risk environment spell low interest rates? Don't trillion dollar government expenditures spell inflation? Either will benefit Vornado.

(Spotted at Deal Junkie)

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