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EXPERTS SHARE INSIGHTS ON EVENTFUL YEAR

The past year has seen record-low interest rates, Kmart Corp.’s bankruptcy and a tapering off of sales, among other retail industry events and trends. SCT asked industry specialists engaged in various aspects of retail real estate finance to give their assessment of the past year and to share a few hunches about what’s to come.

REITs

Craig Schmidt, retail REIT analyst, Merrill Lynch, New York City — “Clearly, we expected consolidation to take place in the industry, and in the long term we still see it continuing, but we did not expect it to be this active. At some point we thought JP Realty would be folded [into another company], but not in the same year as the Rodamco and the Westcor transactions. That was surprising. More of the sellers felt it was time to act, and I think we will see more and more mall properties fall into select groups of larger REITs, because it does not make sense to be outside that group.

“Analysts thought that retail REITs would outpace the other sectors. We did not see diminution in rent spreads in lease rollovers. Retailers were adding stores despite the Kmart closings, and we did not think there would be serious deterioration of occupancy for those REITs without Kmart exposure.”

Private equity

Michael Pollack, president and founder, Pollack Real Estate Investments, Mesa, Ariz. — “The first three-quarters of this year were slower than molasses. There were a lot of sellers with unrealistic [pricing] expectations, and buyers were smart enough not to overpay for some of the things the sellers were trying to do. On Oct. 1, as if by magic, our phones started to ring off the hook, and now we’ve got five deals in escrow.

“We’re going to be very busy [in the fourth quarter and beyond]. Sellers that had been sitting on the fence have decided now that they are going to sell. They realize now that they have to take whatever offers they are going to get, just as long as they are within some form of reason. The REITs are not going to come in and bail everyone out. Back in the 1990s, they were buying up everything, but a lot of REITs have housecleaning they need to do themselves.”

Commercial mortgage origination

Lawrence Brown, president and CEO, Deutsche Banc Mortgage Capital, New York City — “Lenders wanted to rebound from the lull that took place [post-Sept. 11], and it was sort of an anxiety-filled time. The first quarter was very slow, because it did not just bounce back immediately. The lending community … had no choice but to scrutinize data in a different way than it had in the past. We had aberrational things happening in retail — traffic was down and the economy was down.

“I divide business into three silos: acquisition financing, balloon maturity financing and refinancing for rates’ sake. Of those three, the acquisition silo was very dormant this year. We had buyers and sellers who could not agree on cap rates, and very few properties were trading hands. It’s picked up in the last couple of months. People woke up and said, ‘It’s about to be the fourth quarter, and we have to get deals done!’ Relatively speaking, it will be a very good year for originations, which should reach around $60 billion [of which 30 percent would be retail]. That is about 15 percent lower than what was expected at the beginning of the year.”

CMBS

Darrell Wheeler, director of CMBS research, Salomon Smith Barney, New York City — “We’ve seen an increase in the amount of retail property loans that have been going into [commercial-mortgage-backed securities] pools. The 2001 retail average for a CMBS deal would have been 24 percent. In 2002 the average retail portion in a CMBS deal was 32 percent, mainly because hotel loans have been a smaller component, and there has been less demand for office loans. Overall, we’ve definitely securitized a lot more retail this year than last year.

“We thought we would have about $70 billion to $80 billion in issuance. Already, we’ve had about $50 billion in issuance domestically. That was as of Oct. 18. The year has been faster-paced than we expected, and if this were to continue through year-end, it probably would bring total CMBS issuance to more than $60 billion domestically.”

 

MARKET SCANNER

Goldman Sachs has cut its rating on Wal-Mart Stores, saying that the stock could hardly get much higher. The investment bank lowered Wal-Mart to “market performer,” down from “recommended list.” The stock has outperformed the Standard & Poor’s 500 index by 27 percent over the past year, and at press time its price-to-earnings ratio was at a nine-year high. Further, Goldman noted, though the stock would outperform the broader market in an economic slump, it would lose some of its leverage in an economic recovery. • Consumer spending has helped prop up the U.S. economy, but economists wonder how long that can go on. The third quarter saw an increase as a result of robust sales of new cars. Overall consumer spending was up 4.2 percent, versus the second quarter’s 1.8 percent, thanks to zero-percent financing on new car purchases. The Commerce Department reported in late October that third-quarter GDP grew at an annualized 3.1 percent, up from the second quarter’s meager 1.3 percent. Economists suspect, however, that Americans will not keep up that pace of shopping. The Conference Board underscored this fear in late October, reporting that consumer confidence had plunged to a nine-year low for the month. The board’s index fell to 79.4 from 93.7 in September, an indication of lowered expectations for six months out.

 

U.S. NEIGHBORHOOD AND COMMUNITY CENTER RETAIL SPACE Source: Reis Between 2002 and 2006, average rents among neighborhood and community center properties are expected to increase only 2 percent to 3 percent annually.

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