Situs Newswatch 6/16/2017

Is Retail Development Outpacing Growth in Demand?

Credit Suisse has this stunning prediction: As many as 275 malls — a quarter of the U.S. total — will close in the next five years.

So as Bloomberg asks: What were they thinking in Cleveland?

Real estate developers built more than 21 million square feet of new store space in the Northeast Ohio metropolitan area from 2000 through the first three months of this year, increasing its retail footprint by 21 percent.

But while the new stores were moving in, shoppers were moving out. The metro area’s population declined by more than 90,000 — more than 19 percent — and it became a stomping ground for students of the dying American mall.

As Situs RERC President Ken Riggs points out, retail is always changing, “In the 1990s when big-box stores such as Walmart and Target were thriving in the retail market, 15 percent of the nation’s retail assets were classified as obsolete. Today, this rate of obsolescence is being accelerated with the deployment of technology and the ability to create programs that anticipate human buying behavior.

“It’s deja vu all over again, but happening in real time,” quips Riggs.

Across the U.S., retail real estate development outpaced demand in the early years of the new millennium. Now retailers are going bankrupt at a record rate, and hedge funds are betting against the commercial mortgages used to finance mall properties. The woes of brick-and-mortar retail come partly from the rise of e-commerce, which has grown to about 8 percent of retail sales, from less than 1 percent in 2000.

But some of retail’s woes are self-inflicted, according to Suzanne Mulvee, director of research at CoStar Group Inc. The industry built new stores faster than the consumer could spend at them.

“Retail is not dead, but it is changing fast, says Situs’ Riggs. “Stores today need to provide an experience. If retailers aren’t quick enough, willing or able to adapt their business models to a consumer-driven world that is changing every minute, they are bound to fail.”

In Cleveland and Chicago, developers chased growth that was being undercut by shrinking or static populations, according to Bloomberg. In Phoenix and Atlanta, the builders erected new retail space in anticipation of consistent population growth and household formation that was delayed when the housing bubble burst. Even in Houston and Dallas, where the local economies fared relatively well through the Great Recession, developers outbuilt the growth in buying power.

Situs RERC also finds that vacancy loss — the percentage of total revenue uncollected due to space that remains vacant over a typical holding period — is in the mid-range for the regional mall compared to other property types (see below), likely reflecting the wave of store closures. However, the renewal probability for the regional mall is relatively high compared to the renewal probability for other property types. The stores that are besting the competition are not merely getting by, but are thriving and will continue to need spaces in which to sell their wares.

Clearly in these difficult times you need a trusted advisor, and Situs can help. Please contact us if you need help with retail real estate investments.

No Shock: Fed Raises Rates by Quarter of a Percentage Point

The Federal Reserve said it would raise short-term interest rates and spelled out in greater detail its plans to start slowly shrinking its $4.5 trillion portfolio of bonds and other assets this year.

The moves on Wednesday mark the latest test of the economy’s ability to stand on its own as the central bank dials back the extraordinary stimulus measures it unleashed through successive bursts of bond purchases to boost household and business spending after the 2008 financial crisis.

Fed officials increased their benchmark federal-funds rate on Thursday by a quarter percentage point to a range between 1% and 1.25% and penciled in one more increase later this year if the economy performs in line with their forecast.

Officials also revealed plans for winding down their holdings of Treasury and mortgage securities. Fed Chairwoman Janet Yellen said if the economy performed in line with the central bank’s forecasts, it could set those plans into motion “relatively soon.”

read more: Wall St Journal

Get This: Mall of the Future May Have No Stores
When Starwood Capital Group LLC bought Fairlane Town Center in 2014, the investment firm had a lot of work to do.

The Dearborn, Mich., mall was only 72% leased, and among the vacant space was a sprawling former anchor store.

A chance call to Ford Motor Co. to sell some mall advertising turned out to be a game changer. In April, Ford moved its entire engineering and purchasing staff into space once inhabited by department-store chain Lord & Taylor. Ford is now the mall’s largest tenant, with 240,000 square feet of space.

“Our relationship began as good neighbors,” said Michael Powers, senior vice president of leasing at Starwood. “Then we found out they were in the market for office space. It was somewhat serendipitous.”

As retailers close bricks-and-mortar stores at an accelerating pace, shopping-center landlords like Starwood Capital are facing a vexing question: What to do with all this empty space?

Their solutions are varied but all have a common element: reducing, or even eliminating, retail from the equation.

Some landlords plug empty spaces with churches, for-profit schools and random enterprises while they figure out a long-term plan. Others see a future in mixed-use real estate, converting malls into streetscapes with restaurants, offices and housing. And some are razing properties altogether and turning them into entertainment or industrial parks.

Ford’s 10-year lease at Fairlane Town Center “brought 1,800 to 2,000 employed people to our property, people with a paycheck,” said Mr. Powers. The mall, which is still anchored by Macy’s, J.C. Penney and Sears, is currently 91% leased, he said, and its food operators are doing better in the daytime than they did before, as Ford workers pile in for lunch.

Ford liked the mall’s proximity to its main facility in Dearborn, which is being rebuilt over the next 10 years, and its wide open spaces.

“We didn’t move walls, didn’t change anything in a significant way,” said Dave Dubensky, chairman and chief executive of Ford Land, the company’s real estate arm.

A construction binge in the 1980s and ’90s left the U.S. oversaturated with malls. Growth in online sales and declining demand for full-priced goods are causing retailers to shrink their store fleets and divert resources to e-commerce platforms.

In all, retailers have announced 2,880 store closings from January to April 6 of this year, more than twice as many as in the same period a year earlier, according to Credit Suisse. For the full year, the investment bank anticipates more than 8,600 stores to close. Analysts predict that 400 or so of the roughly 1,100 malls in the U.S. will close in the coming years.

Many mall owners are trying to liven up the experience, bringing more dining and entertainment tenants and eschewing the traditional mix of middling food courts, fashion retailers and department stores.

“The appetite for experimentation is there,” said Matthew Billerbeck, a Seattle-based senior vice president of design and architecture firm CallisonRTKL. “The industry had gotten complacent and formulaic.”

One strategy is to convert enclosed malls into open-air properties that landlords call “lifestyle centers,” with apartments, theaters, grocery stores, medical offices and other conveniences — and much less retail.

read more: Wall St Journal

It’s Bad Out There
Just this week children’s clothes retailer Gymboree has filed for Chapter 11 bankruptcy protection. With the record pace of bankruptcies in the industry this year, bankruptcy, for some, is becoming an issue of when the company will file, not if they will.

So far this year, specialty retailers Rue21 and Payless Shoesource are among those contributing to the rising default rate in the sector.

In a research note Monday, Fitch Ratings highlighted its so-called loans of concern list, which includes: Sears Holdings, Claire’s Stores, Nine West Holdings, 99 Cent Stores, J. Crew, True Religion Apparel, Charlotte Russe, Charming Charlie, NYDJ Apparels and Vince.

Retailers on the list are considered to have a significant risk of default within the next 12 months.

Taking a look at Fitch’s latest list, “a number of these names have been at the forefront of past restructurings,” Joshua Friedman, a legal analyst for Debtwire, told CNBC in an interview.

“Struggling retailers need to look at near-term triggers, such as debt that’s maturing, interest expense and interest payments coming due,” he went on.

High debt leverage and weak operating trends are what drove Gymboree’s filing specifically, Fitch said in a statement Monday.

In conjunction with its latest filing with the Securities and Exchange Commission, Gymboree said it has secured commitments for up to $308.5 million in additional financing. The Chapter 11 filing should reduce Gymboree’s debts by more than $900 million, the company added.

Gymboree now has plans to shutter some 375 stores, according to court filings. The company currently operates 1,300 stores.

“Fitch’s expectation of increasing retail defaults stems from increased discounter (including off-price and fast-fashion apparel) and online penetration, along with shifts in consumer spending toward services and experiences,” the credit rating agency said. “These factors have created a highly competitive retail environment and accelerated adverse trends in mall-based shopping.”

Just last week, Moody’s also issued an updated report saying the ranks of distressed apparel and specialty retailers are growing.

In February, among Moody’s rated retail and apparel issuers, 19 retailers had ratings of ‘Caa’ or lower. That number has now grown to 22 companies, or about 15 percent of the firm’s retail and apparel category, Moody’s reported.

Among those 22 distressed names — Sears, Nine West, Claire’s Store, David’s Bridal and Charming Charlie. In other words, many of the same retail players on Fitch’s watch list.

Moody’s lead retail analyst, Charlie O’Shea, has suggested keeping an eye on those 22 names to track which company might file for bankruptcy sooner rather than later. And there’s a load of retail debt coming due in 2018, too, he added.

read more: CNBC

Are Auto Dealers Next?: Amazon May Sell Cars Online 
You don’t need a brain like Jeff Bezos to figure out why he began selling books online and not cars.

Books are a cheap and easily-shipped commodity product. By contrast, people rarely buy a car without driving it first, while vehicles are bulky and customization options abound. There’s more: new cars are typically bought on credit. Manufacturers and dealers tend to have tight-knit relationships, and in the U.S. there are pesky laws protecting dealers (as Tesla has discovered).

Still, besides a few exceptions — bullets and cigarettes — Inc is getting closer to the Bezos dream of being an “everything store.” So after reports that Amazon is considering a move into prescription drugs, we shouldn’t be surprised that it’s started recruiting auto experts to help it sell cars in the U.K., according to trade magazine Automobilwoche. Details are sketchy, but the article was enough to sink the shares of Auto Trader Group Plc, a British digital automotive marketplace, by about 4 percent.

read more: Bloomberg

As U.S. Big-City Rents Head Lower, Worries Continue for Real Estate, Mortgage Industries
It’s a renters’ market!

In New York City, apartment-seekers who jumped in last month got themselves a deal.

For Manhattan alone, the number of newly signed leases climbed 17 percent
in May from a year earlier to 5,969, the biggest total for the month in nine years
of record keeping, according to a report by appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate. In Brooklyn, new apartment contracts surged 23 percent to 1,460, also the biggest total for the month in data going back to 2008.

Renters are taking advantage of a market that’s crowded with listings, weighing offers of free rent and other perks from landlords who are working to keep their units filled.

In San Francisco, Zumper reports rents down 7.5 percent for one bedrooms and 8.7 percent for two bedrooms.

Meantime, headlines come each day with the bad news for homebuyers of still higher prices. The latest Case-Shiller report shows values reaching a 33-month high, climbing at their strongest rate in nearly three years.

“No question this is a tough market to buy into, especially for first-timer buyers and millennials,” says the Collingwood Group Managing Director Tom Booker.  “Clearly, the industry needs to sit up and take notice and work with government to make the American Dream of homeownership more affordable.”

Booker continues, “Clearly the desire to buy is still strong. The rental market is active but appears to be repricing in some markets to some degree. Homeownership is the best hedge against rising housing costs over time. Even with prices rising, homeownership is attractive if you can get a loan. Credit availability is the current challenge.”

Another real estate site, Trulia, tracks rents comparing them to mortgages. It recently reported that it is actually cheaper to buy than rent in San Francisco (once that pesky down payment is out of the way).

“What goes up eventually has to come down,” says Collingwood’s Booker.

Medical Office Timeshares
Arizona entrepreneur John Groberg is putting a new twist on the relatively old concept of timeshare space for medical tenants, and one medical office broker in Arizona says Groberg’s idea may have momentum.

Groberg is setting up a medical office space called Viva MedSuites in Scottsdale, a Phoenix suburb. He describes it as part medical timeshare/part medical co-working space (similar to Regus in the office sector).

The 3,000-square-foot Viva MedSuites facility, set to open June 15, is aimed at medical professionals such as internal medicine specialists, dermatologists, nurse practitioners and psychiatrists who are seeking flexible space without being shackled by a long-term agreement.

Viva MedSuites will feature 10 exam rooms, a patient waiting room, bathrooms, a tenant break room and an assistant’s room. Tenants will pay $85 a day or $50 a half-day per exam room. This set-up will allow a medical practitioner to add a satellite location, for instance, or test a new market area, according to Groberg.

Under Viva MedSuites’ timeshare-co-working hybrid, “I don’t have just ‘pay a monthly fee and show up whenever you want’ type access, like some more modern executive suite operators have,” he says.

Here’s how the Viva MedSuites model works:
When a tenant signs up, he or she picks a day or days of the week to occupy the space, and then has access to designated rooms only during that period. For example, a doctor might sign up for a full day on Mondays and Wednesdays and a half-day on Fridays. The doctor then would be charged weekly rent based on two full days and one-half day.

read more: NREI

Betting Big on the Co-Working Space
There are more than 160 players in the co-working space. The better-known names among these are WeWork, CoWrks: InstaOffice, Awfis, BHive, Regus, Spaces, 91springboard, and Investopad.

Co-working spaces have become a viable option for startup companies and professionals who cannot afford to maintain an office because of high rentals and deposits as well as maintenance hassles.

The co-working space business offers an Ebitda of 40 percent and it works if the user stays for the long term. Think of it like a star hotel which comes with swanky meeting rooms, fancy restaurants, a gym, and a pool. But, unlike a hotel, a co-work space is collaborative in nature. It works if people keep signing up for the space.

read more: YourStory

Guess Who’s The World’s Highest-Paid Celebrity?
Rapper, fashion designer and producer Sean “Diddy” Combs tops the 2017 Forbes World’s Highest-Paid Celebrities list after banking $130 million pre-tax over the last 12 months, edging out Beyonce and J.K. Rowling.

“I ain’t foolin’ around. … I’m building assets,” Combs told Forbes in 1999, the last time he topped the list. And the majority of the media mogul’s assets came from real estate, selling one-third of his Sean John clothing line for an estimated $70 million, as well as a Diageo Ciroc vodka partnership and his Bad Boy Family Reunion Tour.

The world’s 100 highest-paid celebrities made $5.16 billion pretax during the June 2016 and June 2017 scoring period, which Forbes tallied up using figures from Nielsen, NPD Bookscan, Pollstar, Box Office Mojo, IMDB and more.

While Beyonce is now taking a showbiz break to welcome her twins sometime this year, her “Formation World Tour” and “Lemonade” release over the past year gave her a $105 million haul. Rounding out the top five are “Harry Potter” author J.K. Rowling in third with $95 million, followed by rapper Drake at $94 million – more than double his 2016 earnings thanks to his tours – and with Real Madrid soccer star Cristiano Ronaldo rounding out the top five with $93 million.

Beyonce also praised Combs’ business savvy in the Forbes’ inaugural highest-paid celebrities list 20 years ago, saying, “I’ve never met anyone that works harder than me in my industry.”  Bow down.

The ritzy A-list index is mostly made up of American talent, with just over one-third of the Celebrity 100 coming from outside the U.S. The international icons include Chinese comedian and martial arts master Jackie Chan (No. 39 with $49 million) and Bollywood actor Shah Rukh Khan (No. 65, $38 million.)

TGIF!  Have a prosperous day and a great weekend.

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