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Five Takeaways from RECon 2016, Day Two

Five Takeaways from RECon 2016, Day Two

  1. Don’t expect new retail center development to ramp up any time soon. While many of the attendees insist retailers are eager to sign new leases, that demand has not yet reached a level worth justifyingground-up projects on a significant scale, according to Tom McGuinness, CEO of InvenTrust Properties Corp. The other reason is that rent increases have to get to a point where it makes sense to build. "Construction costs are relatively high, so it’s not at that point yet,” he notes. Instead, retail property owners will likely continue to focus on redevelopment and additions to existing centers.
  2. At the same time, when it comes to acquisitions of existing properties, pricing may have reached its peak and should either remain stable or begin a gradual decline. “Right now, there are not a lot of bargains out there. The properties are fully priced,” notes Jeffrey S. Edison, principal and CEO of Phillips Edison & Co., which bought approximately $1 billion in grocery-anchored centers last year and is targeting $750 million to $1 billion in acquisitions in 2016. But Edison adds that his firm’s executives continue to see the same pool of buyers competing for assets, which leads him to believe there hasn’t been enough of an increase in available capital to justify any further price increases. “The top 15 markets will continue to see a lot of competition,” he says. “I think there will be a gradual softening in demand in secondary markets, but it will take time to see it happen.”
  3. Borrowers are also starting to feel the impact of the new government regulations affecting the lending industry, including the Dodd-Frank Act and Basel III requirements. Kenneth S. Katz, of real estate agency Baker Katz, says his firm has been receiving term sheets from lenders that reflect the new rules for construction and short-term loans. “I don’t know that this means the deals won’t get done, but it may result in requirements for more equity and may mean the borrowers may not be able to pay as much because the deals are not as favorable," he adds.
  4. If you are a mall owner that needs to refinance this year and your center is bringing in less than $300 to $300 per sq. ft., you may find yourself in strained circumstances when facing lenders. “If you own lower quality assets, I think it’s going to be a struggle,” says Joseph F. Coradino CEO of PREIT. PREIT spent the past few years disposing of its non-core assets in order to bring up its average sales per sq. ft.—the REIT’s portfolio is now at $460 per sq. ft., while the ultimate goal is $500 per sq. ft. Part of the reason, according to Coradino, was the desire to make refinancing easier. But while Coradino believes the retail real estate market is strong and there’s healthy leasing activity, he notes that buyer appetite for lower grade malls has been “very, very thin, and it’s gotten worse, not better. Every time there’s an announcement about a retailer underperforming, the buyer pool gets thinner and thinner.”
  5. Part of the reason for buyer skittishness has to do with a tightening in capital markets. While it hasn’t adversely affected assets in primary and secondary markets, in tertiary markets lenders are requesting that investors put in equity covering as much as 30 to 40 percent of the asset’s value, according to Mark F. Hunter, managing director of asset services, retail, with CBRE. They are also much more likely to insist on recourse. “That narrows the buyer pool,” Hunter notes. In addition, the difference in cap rate between a like-kind asset in a tertiary market and one in a suburb of a major city can be between 100 and 125 basis points, sometimes reaching as much as 200 basis points, says Todd Caruso, senior managing director in the retail agency services group of CBRE. These market dynamics are also leading to a bid/ask gap, with the sellers unwilling to accept the prices the buyers are willing or able to pay for lesser quality centers.
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