Thursday, November 7, 2013

Are Retailers Making Up for Over-Reacting Three Years Ago?

Continued healthy demand for retail space is driving strong occupancy increases for many of the nation’s shopping center landlords and is even beginning to show up in rent increases.

"We’ve seen occupancy increase for a couple of years now and landlords are showing increasing net operating incomes and some are starting to see rents pop,” said Ryan McCullough, senior real estate economist CoStar Group (PPR division), speaking at CoStar’s 2013 Q3 Retail Review & Outlook webinar last week. "However, rents for most retail space are still low to the point that they are not an undue burden on the tenant," a positive for both sides, said McCullough.

In fact, he added, the decline in vacancy appears to be accelerating. Net absorption of retail space reached its highest point since the start of the recovery with 19 million to 20 million square feet of net absorption per quarter, the best results in years.

McCullough said there is still plenty of upside for quarterly net absorption, which remains well below the height of the market in 2007 when national net absorption per quarter was approximately 50 million square feet.

With the increasing net absorption, retail rents are even starting to tick up.

"We’re just talking about a 0.8% gain over the year, not a huge number,” McCullough said, but also noting that some of the stronger U.S. markets are seeing retail rent gains of from 4% to 5% and even higher.

McCullough’s comments on the CoStar webinar are backed up by other comments made by senior executives for some of the largest publicly held retail REITs in their third quarter earnings conference calls.

Demand Coming from National, Regional Tenants
“We're still not seeing the formation of new mom-and-pop businesses; and most of our new leases are coming from national, regional or franchise operators. These tenants want to be in Weingarten properties because our top tenants, supermarkets and discount closing retailers, continue to drive sales and traffic to our centers.

Rent growth for new leases continues to accelerate. We produced an increase of 9.4% in the third quarter and 12.6% year-to-date. We do see leverage slowly shifting to the landowner, particularly in urban markets that have more depth of retailer demand.
Johnny L. Hendrix, Chief Operating Officer and Executive Vice President of Weingarten Realty Investors

New Retail Outlet Concepts Spur Growth
We love all the new outlet concepts that are coming. There are several that have announced plans to expand, such as Francesca's, Asics, Talbots, Vince Camuto, Cache. We're also working with folks like Helzberg Diamonds, Joe's Jeans, MaxStudio, Theory, Andrew Marc. There seems to be an ever-increasing list of high-quality designer and brand names that want to enter or expand in the outlet space.
Steven B. Tanger, President and CEO of Tanger Factory Outlet Centers

Demand Driving Tenant Turnover
The demand we're seeing is from domestic retailers looking to expand the existing footprints to scale up new concepts, international retailers seeking to enter or expand within the U.S. market and the traditional destination retailers that are coming into the mall.

It is also an opportunity for us to replace lower productivity tenants with a higher productivity tenant, thereby supporting a continued growth in sales at the malls.
Sandeep Lakhmi Mathrani, CEO of General Growth Properties

Occupancy Increases Up for both Anchors and Small Shops
Quarter over last quarter, overall occupancy was up 30 basis points pro rata and 20 basis points gross. Anchor occupancy increased 40 basis points to 97.4%; small shop occupancy was up 40 basis points to 84.7%, an 80 basis points increase from third quarter of 2012. The increase in small shop occupancy continues to be driven by positive net absorption from the disposition of riskier assets.

Given that demand for large boxes is very strong, and occupancies are high for this space across our sector, Kimco is benefiting from this trend through higher rents for a larger portion of our portfolio. Additionally, we continue to see the advantage of old leases in our portfolio coming to the end of their term.
Conor C. Flynn, Chief Operating Officer and Executive Vice President of Kimco Realty

Retailers Making Up for Over-Reacting Three Years Ago
You know everybody probably overreacted in terms of closures in 2010. And so a lot of [what] you see is a lot of these national guys who are really scrambling to find space.

There has been a real strong increase really across the board and demand from national tenants. A good example is Starbucks as an example. Eighteen months ago people would say 'they're done, they’re closing stores, they’ve got too many stores.' Now Starbucks is opening lots of stores or re-opening stores that they [had previously] closed.
John Kite, CEO of Kite Realty Group Trust

Lease Terms Also Becoming More Landlord Favorable
On a same-property basis, the operating portfolio is nearly 95% leased at the close of the quarter, and shop space occupancy stands at roughly 89%, the highest it's been since 2008 and a 130-basis-point improvement over 2012. With this increase in occupancy, aided by strong tenant demand and limited new supply, we continue to gain pricing power. Rent growth returned to double digits this quarter. Average rents for side-shop tenants continue to trend upward and are now 34% above the trough.

And not only are starting rents improving, but we're also seeing more favorable lease terms as a whole, including better rent steps and more aggressive commencement dates.

Retailers are acting on this positive sentiment. Many are making significant investments in their current spaces, as well as in new ones. Given the underlying strength of tenant demand, we see no slowdown in the positive momentum in all of the key operating metrics.
Brian M. Smith, President, Chief Operating Officer of Regency Centers

8% Rent Increases in Core West Coast Markets
We have seen a considerable increase in retailer demand across each of our core markets this year, coming from a broad range of large national retailers, as well as regional and local tenants. Needless to say, we have been working very hard to capitalize on the increased demand and as a result, our overall portfolio occupancy has risen to 95.3% as of September 30.

In terms of same-space comparative numbers, cash rents increased by approximately 8% on average for the third quarter.

Richard K. Schoebel, Chief Operating Officer of Retail Opportunity Investments. ROI owns 51 shopping centers encompassing approximately 5.5 million square feet of gross leasable area geographically diversified across the West Coast.
Copyright © 2013 CoStar Realty Information, Inc.  All rights reserved.

Tuesday, November 5, 2013

Are the Best REO Homes Gone?

It’s entirely possible that institutional investors have picked off the best of homes to be had from REO assets held by the Federal Deposit Insurance Corp.

So far this year, the FDIC has sold 281 single-family homes for a combined $23.3 million for an average of $82,986. That compares noticeable to the 451 single-family homes sold last year for $85.4 million last year at an average of $189,290.

It’s most likely that homes in the best market are also thinning out noticeably. Last year, 92 of the FDIC’s sales were for California homes with an average home price of $324,976. Eighty-two homes were sold in Washington at an average of $232,190. This year, there have been only two homes sold in California; one for $370,000 and one for $128,000. There have been no homes sold in Washington.

2012 doesn’t even compare to 2011, when the FDIC sold 1,113 residences for a combined $316.8 million for an average of $284,667. Buyers were buying homes in the hundreds in Florida, Georgia, Washington and Michigan at an average of $316,233, $238,815, $385,510 and $150,918 respectively. Of those markets, sales were fairly active this year in Georgia where 64 homes have been sold at an average of $96,929.

Monday, November 4, 2013

Checking in on the Swan and Dolphin (Hotels) in Orlando

Bank of America is securitizing two loans totaling $345 million backing the Walt Disney World Swan Hotel (also known as the Westin Swan) and the Walt Disney World Dolphin Hotel (also known as the Sheraton Dolphin). The Westin Swan and the Sheraton Dolphin are upscale resorts adjacent to each other in the Epcot Resort area within Walt Disney World in Orlando, FL.

The combined properties include 2,267 guestrooms, 329,000 square feet of indoor meeting space, 17 restaurants and lounges, five resort-style swimming pools, two health clubs and an array of other amenities.

The Westin Swan and the Sheraton Dolphin are the only non-Disney owned resorts that are permitted to use the “Walt Disney World” designation as part of their hotel name. Affiliates of Tishman Hotel & Realty LP and Metropolitan Life Insurance Co. own the properties.

In a presale report on the upcoming offering, Morningstar valued the hotels at $478.8 million (calculated using an 8.15% capitalization rate. The Morningstar value, which equates to $211,217 per room, is 24.9% lower than the appraised value of $638 million.

According to Morningstar, the properties have been well maintained, with more than $94.3 million ($41,608 per room) invested on capital upgrades and renovations on both hotels since 2007. Work included: $39 million in room and bathroom renovations, $23.5 million in upgrades to restaurants, meeting space, and public areas, and $31 million in mechanical systems and other.

Between now and 2018, Tishman and Metropolitan Life are planning another $117.4 million ($51,782 per room) in improvements, primarily related to hotel guestrooms to include new soft goods, case goods, mattresses, carpeting, and wall coverings. Other renovations will include upgrades to restaurants, meeting space, and public space as well as ongoing upgrades to the mechanical and other back-of-the house systems. About $48 million is expected to be spent in the coming year.

According to Morningstar, the properties perform much better relative to their peer groups. The occupancy for the Westin Swan and Sheraton Dolphin combined was higher than the hotels in the appraiser’s identified competitive set identified in the appraisal by 10.4% and 10.8% points during 2011 and 2012.

Average room rates at the subject hotels were lower than the competitive set by $3.05 during 2011 but were $1.94 higher than the competitive set during 2012.

Overall the RevPAR for the Westin Swan and Sheraton Dolphin achieve more than their fair share of both demand and revenue reflecting a penetration rate of 112.8% and 116.8% during 2011 and 2012, respectively.

The CMBS offering is expected to close later this month.

Friday, November 1, 2013

JCPenney-, Sears-Anchored Mall Suffers a 100% Loan Loss

The largest CMBS liquidated loan loss in September was sustained by the Eagle Ridge Mall, a 508,976-square foot regional mall in Lake Wales, FL, (Tampa area), according to credit rating agency Morningstar. The three largest tenants include Sears, Dillard’s and J. C. Penney. The former General Growth Properties-owned center was taken REO via a deed-in-lieu of foreclosure in September 2010, and accumulated nearly $10 million in additional exposure related to servicing expenses since that time.

Ten Largest Realized Losses - September 2013
PropertyCityStateProp TypeLoan BalanceRealized LossCMBS
Eagle Ridge MallLake WalesFLRetail$44,499,386$44,499,386WBC05C22
Prium Office Portfolio (13)VariousWAOffice$27,296,011$25,642,478MLT04BP1
Nemours BuildingWilmingtonDEOffice$55,719,062$24,467,200GCC06GG7
Ashford PerimeterAtlantaGAOffice$31,504,544$18,003,829ACM0501
Holiday Inn Dallas NorthRichardsonTXHotel$14,894,166$14,894,166CSM08C01
St. Joe - Windward PlazaAlpharettaGAOffice$47,586,456$11,619,792JPC07L12
Tech Ridge Office ParkTulsaOKOffice$30,450,446$11,588,110BSC07P17
500 & 700 Parker SquareFlower MoundTXOffice$11,107,583$11,107,583LBUB04C1
Creekside Corporate CenterBolingbrookILOffice$11,852,851$9,415,353JPC06C15
Acworth Crossing Shopping CenterAcworthGARetail$18,596,206$9,113,249MLCF0708
Source: Morningstar