Archive for April, 2012

Retailing’s Hourglass Effect to Continue

Sunday, April 29th, 2012
U.S. retailing has experienced a so-called “hourglass effect” over the past three years, with luxury and discount retailers thriving at the highest and lowest price points in the market. Now two new reports say that trend should continue for several years to come.
According to an analysis by RREEF Real Estate, "high street" or luxury retail responds to emerging changes in lifestyle of U.S. professional classes, both young and more mature, who are increasingly favoring urban mixed use environments. It also consistently achieves lower vacancy and turnover and much higher rents than traditional shopping centers. These assets can be expected to outperform in the coming years.
When it comes to neighborhood grocery-anchored centers, the grocery industry has consolidated in recent years, with one to two national or regional chains generally dominating each metro. The remaining traditional grocers are facing new types of competition at both the high and especially low end of the spectrum: gourmet and organic retailers appeal to higher-income consumers, while less affluent households rely upon the discount retailers that increasingly offer groceries (e.g., Wal-Mart, Target).
Consumers driving trends
With consumers now beginning to regain confidence, retail sales are returning to pre-recessionary levels, allowing for vacancies to decline. Nevertheless, absorption has been tepid because retailers have been cautiously focused on raising profit levels. With continuing downward pressure on “bricks and mortar” retail space from online sales, retailers have been decelerating the pace of expansions. With a more positive outlook emerging though, retailers are once again looking at expansion for 2012. With virtually no new supply in the pipeline, the prospects for lower vacancy and renewed rent growth are improving.
According to RREEF, retail vacancy rates are expected to continue to gradually improve over the next few years as the U.S. economic recovery continues to take hold. RREEF is forecasting a continued gradual, moderate market recovery in the near term in line with recent trends, and accelerating gains in the following years.
Vacancies in community and neighborhood shopping centers will decline slowly from about 11% currently to 9% by 2015 – as moderate demand absorbs existing vacancies with little new space added to the market. In general, regional malls have been better performers through the downturn and now are further into recovery, while power center and lifestyle centers have lagged, but there is considerable variation in each category. Rent growth will be generally commensurate with occupancy rates, not reaching the previous peak nationally until 2015, say RREEF.
With increasing market bifurcation, some metros and centers will fare better than others. Already, the best centers and metros are edging into recovery, while their weaker counterparts continue to suffer.
Markets with the best future prospects are the relatively prosperous metros with the greatest constraints to supply. Most of these metros are found on the coasts, including New York, San Francisco, Miami, and Seattle. At the same time, many of the metros with the highest initial vacancy rates and lowest rents at the peak of the cycle – typically located in the nation’s fastest-growing southern metros – experienced the greatest vacancy spikes and rent declines and are the slowest to recover.
A new report from New York-based Fitch Ratings for the fourth quarter of 2011 also highlights a few major trends among publicly traded U.S. retailers, specifically focusing on the widening performance gap between luxury/discount retailers and their mid-market brethren. Here are a few highlights:
  • The U.S. retail sector is benefiting from a gradually improving economic backdrop, though the results of individual retailers are uneven.
  • Contrasting fortunes are coming to the fore. Strong comparable store sales at Costco Wholesale Corp.; Macy’s, Inc.; Nordstrom, Inc.; and other retailers that cater to higher income households contrasted with weaker results at Bon-Ton Stores, Inc.; JC Penney Company, Inc.; Sears Holdings, and several other mid-to-low tier retailers. This confirmed the diverging fortunes of high- and low-income consumers.
  • 2012 Expectations: Lower income households will remain challenged in 2012, suggesting sales of discretionary and/or big-ticket items could come under additional pressure. Moreover, higher cotton costs will continue to affect first-half 2012 results, leading to further gross margin compression for department stores and specialty apparel retailers, before margins begin to recover in the second half.
  • Overall, operating margins for the retail sector are expected to hold steady in 2012 at around 5.6%.
  • Operating and credit trends in the retail sector are generally steady. Free cashflow is healthy across the sector as capital expenditures inch higher but remain below the levels of 2005-2008, even as dividends move gradually higher. However, share repurchases are projected to remain elevated in 2012, around 2011 levels, eating into industry cash balances and potentially leading to additional downgrades. Adjusted debt levels are expected to move gradually higher in 2012, but adjusted debt/EBITDAR is projected to be steady at an industry-weighted average of 2.5x-2.6x. This figure masks operating pressures at certain credits, such as Bon-Ton, Sears Holdings, SUPERVALU, and RadioShack.

In the News (April 23-27)

Saturday, April 28th, 2012
Check out these links to some of the noteworthy stories that are trending in the world of commercial real estate.

SkyDance Bridge Opens to Pedestrians

Sunday, April 22nd, 2012

City leaders celebrated the opening of Oklahoma City SkyDance Bridge with a ribbon cutting ceremony. The 380-foot-long pedestrian bridge and 197- foot-tall landmark sculpture spans Interstate 40 near Robinson Avenue.
The bridge’s soaring architecture was inspired by Oklahoma’s state bird, the scissor-tailed flycatcher.  It is located at the heart of the future MAPS 3 downtown park, which is expected to begin construction next year.
The bridge will be illuminated nightly with LED lights to welcome visitors to downtown. The color of light can be changed remotely, depending on the event or holiday.
“The Oklahoma City SkyDance Bridge adds a striking and iconic element to Oklahoma City’s landscape. Evoking the state bird, it’s a visual reminder that this is a city taking flight. For the millions of Americans who cross our country on I-40 each year, the brightly lit sculpture will be a head-turning reminder that they were in Oklahoma City,” said Mayor Mick Cornett.
Planning for SkyDance Bridge began in 2008 when Mayor Cornett announced a competition to design a pedestrian bridge of  “iconic status that reflect the cosmopolitan and vibrant qualities of Oklahoma City and serve as a symbol for the City.”
“Our design team was excited about helping connecting not only north to south and east to west, but in connecting travelers’ first impressions of our evolving city with this majestic image for Oklahoma City,” Professor Hans Butzer said. 
The bridge design and structural engineering was performed locally by S-X-L.  Civil engineering was performed by MKEC engineering.  SXL and MKEC engineering won a national competition for the project in 2008. SXL is a collaboration of architects, engineers, university professors and designers that include Laurent Massenat, Professor Hans Butzer, Professor Stan Carroll, Ken Fitzsimmons, Professor Chris Ramseyer, David Wanzer, Jeremy Gardner, and Brett Johnson.
Manhattan Road and Bridge was the general contractor.  W&W Steel fabricated the steel and Swanda Brothers fabricated the feathers. "The extreme amount of personal pride demonstrated by everyone who worked on this bridge, from architects, engineers, to the constructors and the City and state administrators, was unprecedented,” said architect Stan Carroll.
Oklahoma City SkyDance Bridge was built prior to development of the MAPS 3 downtown park to avoid disrupting traffic once the new Interstate 40 opens.
Total cost for the pedestrian bridge is $5.8 million; $3.5 million came from ODOT funds and $2.3 million came from the 2000 and 2007 General Obligation Bond Authorizations.

Fitch: Store Closures Pressure Retail CMBS

Sunday, April 22nd, 2012
Recent store closing announcements have made business headlines for several weeks, and now they have also gained the attention of one of the top U.S. rating agencies.
In general, New York-based Fitch Ratings’ outlook on the retail sector is stable, but as large retailers like Best Buy talk about cutting their real estate operations, concern grows over the state of retail loans in commercial mortgage-backed securities (CMBS) transactions.
Certain retailers, such as Sears (rated ‘CCC’), The Gap (‘BBB-‘) and Abercrombie & Fitch, are selectively closing big box, anchor and in-line mall stores. That means landlord borrowers will be faced with seeking alternative uses or breaking up larger stores to accommodate smaller tenants. Single-tenanted locations or second tier malls pose the biggest threat to further decline.
These findings are part of Fitch’s U.S. CMBS Market Trends weekly newsletter, which highlights significant CMBS research including rating actions and events within the CMBS group.
One of the latest retailers to announce store closings was Best Buy (‘BBB-‘), which plans to close 50 stores in 2012. The list of store closings was published on April 14, 2012, and seven of them are in CMBS deals while six are rated by Fitch Ratings. Best Buy announced that most locations will close permanently by the end of May 2012.
Because CMBS conduit transactions are fairly diversified, Fitch Ratings does not expect imminent rating actions on the CMBS bonds based on these store closings, as there is enough diversity and credit enhancement to address any potential performance issues on these loans.
Most of the riskiest loans are seasoned CMBS transactions where there are near-term loan maturities and Best Buy represents a large percentage of the space. There are two transactions with single tenant Best Buys (CSFB 2001-CK3 and MLCFC 2006-3). In many cases, the ratings of the junior CMBS bonds in these seasoned transactions are already ‘CCCsf’ or below, and in CSFB 2001-CK3, the transaction could absorb 100% loss on the loan. All of the most senior classes have a ‘AAAsf’ rating.
Here are the transactions and loans with Best Buy closures, sorted by highest percent of the outstanding deal balance:
 – CSFB 2001-CK3: Best Buy #185; 7.9%; $5.7 million
 – BSCMS 2007-TOP28: The Shops at Biddeford Crossing; 2.7%; $44.8 million
 – BACM 2007-2:   Fayette Pavilion III & IV; 2.1%; $50.7 million
 – JPM 2011-C3: The Shops at Tech Ridge; 1.4%; $20.8 million
 – JPM 2007-CIBC18 (NR): Golden East Crossing; 1.4%; $48.9 million
 – JPM 2011-C5: Bayport Commons; 1.3%; $13.0 million
 – MLCFC 2006-3: Best Buy West Dundee; 0.2%; $4.7 million
According to Fitch, more store closings are expected to put stress on certain CMBS loans going forward, but ratings actions should be limited, again based on the diversity of collateral in the transactions. Tenants at certain locations with co-tenancy clauses may choose to vacate prior to their lease maturities if a more desirable location nearby better suits their needs.

In the News (April 16-20)

Sunday, April 22nd, 2012
Check out these links to some of the noteworthy stories that are trending in the world of commercial real estate.

Retailers Make Major C-Suite Moves

Sunday, April 15th, 2012
It was a huge week that was in terms of retail executive C-suite movement. And it opened with a bang, thanks to the announcement that embattled Best Buy CEO Brian Dunn was resigning after 28 years with the company amid an internal “personal conduct probe.”
Only two weeks ago, Best Buy announced it was closing 50 of its 1,100 stores and would cut 400 jobs. That news had not been entirely unexpected, however, as the electronics retailer had been struggling financially for some time, reporting same-store sales declines in six of the last seven quarters.
As the week progressed, more changes came. J.C. Penney CFO Michael Dastugue is departing. Safeway assigned Laree Renda more real estate duties and moved its CFO, Robert Edwards, to president. And Krispy Kreme’s president and COO resigned after only five months on the job.
What’s happening here? It would seem to be the retailing equivalent of “Spring cleaning.” There is a greater sense that the U.S. economy is continuing to bounce back, and retailers are making the appropriate moves to position themselves for growth. The economic excuses don’t hold much mustard anymore, and we can expect to see more C-suite movements in the months ahead.

In the News (April 9-13)

Saturday, April 14th, 2012
Check out these links to some of the noteworthy stories that are trending in the world of commercial real estate.

Outlet Centers Are New “Crown Prince” of Retail

Sunday, April 8th, 2012
As trending topics heat up in advance of the retail industry’s annual rite of pilgrammage known as RECon in Las Vegas in May, one of the hottest discussion points is the increased attention on outlet centers.
According to Steven B. Greenberg, outlet centers are the “crown prince” of retail in the U.S.
Greenberg, president of consultant The Greenberg Group in Hewlett, N.Y., which provides market research and analysis, sales forecasting, site selection, and deal negotiation for several of the nation’s premier retailers, says outlet centers as clearly the best performing segment of the retail business.
“Fashion shoppers are more discerning than ever before – they demand the value that outlets offer,” says Greenberg. “Everyone wants first quality product at a discount. Outlet centers throughout the U.S. are providing high margins for retail tenants.”
Greenberg also points to a few factoids that all high-end fashion retailers should know the following before signing their next lease:
• Highly accurate sales forecasting (within 4%) is crucial.
• Desirable specialty co-tenants – not anchors – are most critical to consider.
• ROI and four-wall contribution should be top priorities.
• For first time since 2008, pendulum has now swung sharply back toward landlords during negotiations, with malls up to 90% leased.
• Rents have not reached pre-2008 levels, but are now only down 10-12%.
• Make shopping a memorable experience for customers.
One of the most recent success stories is the Outlet Shoppes at Oklahoma City, a 350,000-sq.-ft. center that opened on a tax-free weekend in early August 2011.
When Horizon Group Properties and CBL & Associates announced the deal in summer 2010, 80% of the stores were already leased. At the time the city estimated annaul sales would total $120 million and yield around $4 million a year in city tax benefits.
But sales have outpaced expectations. The city originally projected the mall would generate about $44 million in sales by the end of 2011, but instead it tallied some $66.4 million in sales through the end of December. Now the developers are now planning a second phase. Retailers have taken notice and are snapping up land parcels around the center.

In the News (April 2-6)

Saturday, April 7th, 2012
Check out these links to some of the noteworthy stories that are trending in the world of commercial real estate.