June 27, 2012

The Wednesday Wrap: June 27, 2012

Each Wednesday, The Wrap presents a compilation of recent noteworthy commercial real estate stories from a variety of publications. Below are five stories that caught our eyes in recent days.

“Malls Compete Harder as Economy Recovers, Says Moody’s” by Bendix Anderson for National Real Estate Investor.

Dominant malls continue to draw retailers away from their weaker counterparts, according to a report entitled “US CMBS: Growing Gap between Strong and Weak Malls” from Moody’s Investor Services.

In a mall market challenged by online merchants and other retail formats including outlets, power centers and lifestyle centers, retailers are increasingly attracted to malls that are the dominant or only mall within a trade area, have four or more anchor department stores, and have high occupancy and tenant sales rates, Anderson writes.

The report also notes that the national retail vacancy fell to 10.9 percent in the first quarter, the first decline since 2005.

“Bank Downgrades Won’t Impact CRE Lending—Yet” by Jacqueline Hlavenka, Natalie Dolce and Robert Carr of Globe St.

Moody’s downgrades of 15 major banks last week are not a concern to many of those in the commercial real estate industry, according to this GlobeSt.com report.

Industry leaders say they expect little impact from the downgrades, as they were expected for some time and that they take little stock in the rating agencies anyway. “They’ve lost a lot of credibility, especially after they missed the collapse,” said Joel Ross, principal with Citadel Realty Advisors. “Major investors today are smart enough to do their own analysis. The rating is just one minor part of it.”

“Commercial Real Estate Recovery Far From Complete, Says NAREE Panel” by Matt Valley of REBusinessonline.com.

The commercial real estate market is not out of the water yet. That was the general consensus of a panel discussion at the National Association of Real Estate Editors Conference in Denver last week.

Although the panel was titled, “Commercial Real Estate: The Crash That Never Happened?” most of the panel members agreed that the market did indeed crash.  Furthermore, Bill Hoffman, CEO of Trigild, said the potential for a relapse is there because $1.4 trillion in commercial real estate loans will come due over the next three years, and the resulting sales of troubled assets could lower prices again.

Panel members also showed concern over rising multifamily valuations.  Bob Jacobs, chief investment officer for The Broe Group, said developers are willing to assume high risks for new construction but most sites will likely have only a “very modest return scenario.”

“Investors Plow Equity Into Projects” by Eliot Brown and Craig Karmin of The Wall Street Journal.

Developers increasingly are looking past the debt markets and turning instead to equity to finance high-risk projects in major U.S. cities, according to Brown and Karmin. Most developers pursuing such projects – such as speculative office towers in Chicago and San Francisco – are relying on outside equity but some are using their own capital.  

Increased reliance on equity reduces potential gains but “the returns still look good to investors in an environment of low interest rates and turbulent stock markets,” Brown and Karmin write.

“Macro Concerns Weighing on Commercial Real Estate” by Carisa Chappell of REIT.com.

The country’s REITs have been able to improve their balance sheets in recent months, but the looming crises in Asia and Europe are casting shadows over their future, Tony Kenkel, portfolio manager with Principal Global Investors, told Chappell.

“I think the unfortunate thing is we continue to be in a very macroeconomic-driven world,” Kenkel said. 

Kenkel said the multifamily market has strong operating fundamentals, but he expects demand will drop when the emerging new supply hits primary markets.  He also said hotels are typically sensitive to a slowing GDP, but that the sector is currently “defying gravity,” which will soon change if unemployment rates don’t improve, he added.

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