After a rough few months that saw the credit markets seize, a slowdown in investment sales volume and what's expected to be a lackluster holiday shopping season, the buzzword at ICSC's New York National Conference and Dealmaking was "uncertainty."
Although the three-day conference boasted a record attendance of 8,500 registrants, there was a palpable feeling of caution in the air and a notable lack of consensus on the industry's outlook. The most pessimistic observers used the dreaded "r" word--recession. A few said the industry would rebound quickly and things would return to full speed by the summer. However, most retailers, investors, brokers and developers speculated it would fall somewhere between the two extremes.
Investors said the changes in the debt market have altered the playing field. There are fewer bidders for projects. Pricing spreads based on asset quality and location are getting worked back into the market as highly leveraged buyers who had been driving the market have disappeared. But not everyone is pulling back.
Coyote Management L.P., which currently owns two regional malls, expects to close on another deal any day now and has two more acquisitions close to fruition. By mid-2008, the Addison, Texas-based mall owner and operator could have as many as seven properties, says its president Robert D. Lee. "The challenge is not finding the money, but not overpaying for the product."
However, an expected source of investment--overseas investors with increased buying power caused by the weak dollar--may not materialize as some have predicted. "Real estate investors are not currency speculators," says Richard W. Bloxam, international director with the European retail capital markets group of Jones Lang LaSalle. "They're buying diversified risk. If they benefit from the weakened dollar it's a bonus, not the reason they'd buy more property." Instead of investing in the United States, Bloxam expects European investors to pursue opportunities in growth markets within emerging Eastern Europe, China and India.
On the construction front, lenders are presenting developers with tougher underwriting standards, making it difficult to secure financing for speculative projects. To get funding, developers say they need higher pre-leasing levels. Further, developers pursuing mixed-use projects with residential components are finding they need to switch from building condos to rental units. However, firms flush with cash or with stable financing sources will continue with committed development plans--albeit at a slightly slower pace.
Then, there is an expectation that a slow holiday season could be the death knell for more retailers. The past few years have been marked by low numbers of bankruptcies and store closings. But that could soon change. Pier 1 Imports, which has increased the number of announced store closings, job cuts and shed some of its businesses, continues hemorrhaging cash. And the plight of Bombay Co. illustrates how quickly retailers' fortunes can change. The firm was still opening new stores as recently as this fall (in spite of flagging sales). But it went from Chapter 11 bankruptcy protection to liquidation in a matter of months.
"We are expecting more store closures," says Andy Graiser, co-president of DJM Realty, a Melville, N.Y.-based real estate consulting and advisory firm that specializes in disposition and restructuring of troubled retailers. DJM was shopping Bombay's 333 locations at the Deal Making conference. "There's a lot less deal making being done at this conference. . . we're hearing that from landlords and from tenants. Although, Graiser says, "I'm not sure we'll see many more bankruptcies--just healthy retailers doing housecleaning and being proactive about their space."
The biggest factor looming over the industry is the housing market. Most don't expect it to get better in 2008, although some markets will fare better than others. Regardless, the effect will be nationwide and could prove damaging for retailers, according to Philip D. Voorhees, senior vice president with Los Angeles-based CB Richard Ellis Group Inc. The problems may have started in the Midwest (where the rate of foreclosures is the highest), but he expects them to spill over into even the strongest markets meaning the housing crisis will not bottom out until sometime in 2008; and then won't begin its turn around for at least two years.
For retailers, the housing market will slow expansion plans. "Right now, particularly, the home furnishings and home improvement retailers are struggling and the difficulties in the housing market will continue putting more pressure on them," says Michael S. Wiener, president and CEO of Excess Space Retail Services, Inc., a Huntington, Calif.-based disposition and lease restructuring firm. "If the economy continues to worsen, most retailers will hopefully be prudent about their portfolios, cutting back on expansions. I think it's going to reverberate throughout the retail sector. … Even if we pull off a decent Christmas, things seem to be heading in not a good direction."
The challenges in the retail sector will also lead more retailers to closely monitor and quickly adjust their portfolios and real estate strategies. That will create more business for Excess Space and DJM, as well as RCS Real Estate Advisors, a New York-based full-service real estate advisory firm that specializes in retail. The firm helps retailers renegotiate leases, downsize and unlock value by optimizing real estate plans. Mitchel Friedman, senior vice president of the firm, anticipates that a lot of retailers will go that route in the coming months.
-- Staff Reports