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TRC Blog

December 10 , 2010

Staying The Course

December 10th, 2010
By David Wilson
President | CDS

At Connected Development Services, challenges are always seen as motivations to improve upon what we already know. Our perspective is always proactive, and we try very hard to stay a few steps ahead of others who are not very good at dealing with downturns. As property owners, we have been pleased with the low interest rates. Rates under 2% go a long way in making cash flow. Even longer term debt at rates near 5% work well for those properties that were penciled at 10.5% to 11% returns. On our best properties, the leasing activity has been strong, and lease rates have changed insignificantly.

Over the last three years, while we lost our share of struggling tenants, we were able to aid a good deal more with repositioning ingenuity, marketing strategies, and even reconstructing floorplans to ensure greater sales in high potential areas of business. During the recession, there were 152,000 store closings across the U.S. With our nation’s joblessness near a 26 - year high and projected to average more than 9% through 2011, it stands to reason. But retail sales were up .6% in September after being up .7% in August, so all of the tenants who made it through this recession are in a much better position for not only survival, but even profitability as the economy gets better. These tenants have found out how to weather a retail storm by getting their inventory under control, finding creative ways to advertise and merchandise, and more importantly, reduce costs. Hopefully, the upcoming holiday sales season will be in line with recent economists’ projections of being the best in the last 4 years.

As an organization initially set up to develop and sell properties, we have had to adjust and become more and more agile. When we realized the properties we developed in 2006 would not be fully leased and ultimately sold, we quickly established a gameplan to create an in-house management group. We buckled down with good asset management and a focused leasing effort to fill the projects with solid tenants. We have labored over these projects to make them premier properties, and the strategy has worked. But even with 90% to 95% lease up, the current market makes it very tough to get projects financed without writing checks.

Learning from the difficulty in securing loans with our well-leased projects, we anticipated challenges with properties with lower occupancies, and it appears that the banks and servicers are offering no options other than taking those projects back. With that in mind, and in order to grow, we have shifted our efforts to the acquisition of retail properties and formed a strong team to do due diligence.

With over $55 billion dollars worth of CMBS retail assets coming due during 2011, 2012, and 2013 and more being dealt with by the banks, there should be plenty of opportunities. While the pricing on many assets is still significantly over what it needs to be for developers to provide the tenant with ample TI, offer a compelling rate, arrange a loan, and bring in equity, we are confident we can respond with a good solution. The bid/ask dilemma is everywhere we turn, but this will be resolved over time.

Tenants will need to expand, which will increase rent. The banks will get healthier and will begin to compete on their leverage. The same goes for the equity. And, if the above three things cannot get a property sold, the seller will drop the pricing. The $24,000 question, of course, is when will these things all come together?

We are making sure that we stay disciplined and focused on what we do best. Our platform at The Retail Connection/Connected Development Services provides a mix of brokers with exceptional tenant relationships and sought after professionals with many years of development and construction experience. Finding properties in need, and matching the needs of the property with our ability to identify tenant or redevelopment solutions, is what we work on every day.

We think that working to fix the problems of those properties held by the servicers and the banks is where the action is going to be for us for another 2 to 4 years. The economy has virtually stopped for three years with housing starts at 550,000 in ’09 and 600,000 in ’10. These statistics are about one third of what is normal, and until these numbers pick up significantly, there is not going to be much demand created in the edge cities for new product. Even though some retailers talk about focusing on the inner cities, we think they’ll find that this approach is no easier now than it has been in the past. Finding acceptable locations at reasonable prices will be frustrating. So the bigger $24,000 question may be….can developers be patient? 


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