Shopping Center Business is the leading monthly business magazine for the retail real estate industry.
Issue link: http://shoppingcenterbusiness.epubxp.com/i/903727
INSTITUTIONAL INVESTORS 96 • SHOPPING CENTER BUSINESS • December 2017 ing of the middle class. Shopping center GLA is spread equally; it's an egalitarian product type, but discretionary income did not keep pace as we built more and more on the prior upwards trajectory. We also have a void in the age demographics: baby boomers have graduated to consum- ing medical services while the millennials (88 million of them) are only now entering prime household formation and spending years. There are other exacerbating fac- tors such as obsolete supply and heavily leveraged balance sheets among many retailers that prevent their evolutionary response. If the majority of pressures has nothing to do with e-commerce, there are a lot more variables that can change for the positive and more tools available for correction. MUSSELL : I think that a lot of these busi- nesses that are bankrupt or closing stores are not a surprise to anyone in the busi- ness. A lot of these retailers should have closed or gone out of business during the recession, but landlords would give them concessions to stay in and operate even though their sales were down. Now, I think they can no longer justify keeping these stores running. SCB : How has 2017 been for acquisitions and dispositions? Have you seen a lot of assets on the market? And what do you see for 2018? FALATKO : For very high quality assets, the pricing is still premium. The Number 1 grocer in the Number 1 location in the market is going to demand a premium. It's really where you're buying and what you're buying. There are definitely sec- ondary and tertiary markets, but the num- ber of buyers drops off dramatically. Core real estate is still king. CLARK : I would second that — what we are buying and selling is like two different worlds. For the properties we are looking to acquire, the environment remains very competitive. The properties we are selling tend to be lower growth assets in smaller markets and we are seeing a high volume of properties in this space. Those have been a little bit of a challenge, but there are buyers and they are getting done. Hav- ing a value add component to sell helps many of these buyers. VALERO : I find 2017 to be very challeng- ing. You mentioned how several years ago we were sitting here with a different reces- sion, a 'debt recession.' In 2017, it feels like a recession in the retail world even though the economy is not in a recession at all. There's a major disconnect in pric- ing between Wall Street and Main Street. The disconnect between the two usually doesn't hold for long and eventually real- ity sinks in. I believe sooner rather than later the prices on main street will reflect the pain of the REITs on Wall Street. HERRING : On the other end of the spec- trum, from low cap rates on strong retail assets, is the distressed mall world — it is the Wild West. The pricing is highly unpre- dictable and varies wildly. There are very few sophisticated buyers of malls. Last week, there was a decent mall in Califor- nia where the brokers were ultimately saying, 'hey, we're just trying to get a 14 cap on this.' On another mall, the bro- kers wanted a price of $20 million, but the real price was more like $5 million. It is a bizarre time in the mall world and that is not changing anytime soon. Many more of these distressed malls are coming to the market. We now track every mall in America and use numerous factors to pre- dict which ones will face financial distress. We call it the Mall Doom Index. I used to believe that if a mall has good retail fun- damentals that it would survive, but now I think if the mall has too much debt to be refinanced easily, then it will probably will fail. We can determine where the cur- rent value of the mall is less than the debt. If I know the mall cannot be refinanced, then certainly the current owner knows that also. So even if the loan is not due for several years and has positive cash flow, the owner probably is not investing any more money into the mall, because he is planning on just turning over the keys to the lender when the loan matures. Then the value of the mall really plummets. FALATKO : Another interesting trend we've noticed is the presence of undervalued secondary and tertiary assets that have a value-add component. There is a lot of ac- tivity on these properties, which is where I'm seeing multiple buyers that have some value even if there is a high cap rate. COOPER : As a real time example, we closed on an asset on Friday in Missouri that was a power center that had vacant office space. We intentionally kept it va- cant and put it into the market and re- ceived seven offers. If we had leased it, we would've gotten one or two offers. We're selling another asset in North Carolina right now where we had a letter of intent to lease a vacant H.H. Gregg box, and we (left to right) Gar Herring, David Harvey and George Fryer.