Saturday, July 19, 2008

The Life-style Mall is dying.

I've been turning my attention to the Commercial Real Estate Bubble, lately.

The Housing Bubble done popped.

Despite my dire warnings, up until very recently, I still harbored a belief that my house was going to retain some of the bubble value. I find that I don't believe that anymore. I think my house is going to end up near what I paid for it, or possibly even lower.

That's O.K. It's a fixed mortgage, I intend to live in it for the foreseeable future, and I've made enough payments over the last five years or so to make it unlikely I'll be upside down.

Meanwhile, I think the CRE bubble is heading toward us like a runaway freight train.

I stumbled across a webside that is extremely revealing. Keypoint Partners Retailer Roundup. It's a commercial real estate blog, that is strangely factual, as far as I can tell. It seems to be willing to discuss negative developments, or at least reproduce articles from elsewhere that are negative. Not sure what to make of it, frankly, because that's pretty unusual. Certainly haven't seen it with any of the residential real estate blogs. Possibly, they just assume the public isn't paying attention to them, and they can talk turkey.

One of their latest entries is below. "Hard times for open-air shopping."

What's interesting about this, is that it brings up two of my favorite theories.

One: the shopping environment is shaped as much by fad as by any hard numbers.

Two: the whole chain-store phenomenon is a ponzi scheme.

So...come to find out that many of these chain-stores are backing out of opening in these new malls. (As a 'cluster', me-too, lemming like behavior.)

But if they are ponzi schemes, as I maintain, how can they afford not to open new stores?

I'm going to bet that they CAN'T open new stores because they can no longer BORROW THE MONEY!

A couple of weeks ago, I talked about how the Commercial Mortgage-backed Securities, which account for 70% of all CRE financing, was down 96%

96% ! ?

That's more or less a complete stoppage on the part of the financial credit availability for commercial properties.

So we're going to find out just how many of these chain-stores, like Steve and Barry's are ponzi schemes, and how many are legitimate businesses.

But I'm going to carry the point a couple of steps further. Think of all the people who were building those malls.

Then think of all the people who were going to work in those stores.

And then think of all the product that was going to fill those stores, and the people who produce them.

None of that is going to happen, now.

We've got a long ways to go.

Hard times for open-air shopping

The hottest trend this decade in shopping-center development has gone cold.

Known as lifestyle centers, the open-air shopping venues offer small parks, fountains and cafes amid name-brand retailers selling fashion apparel, housewares and other discretionary fare.

Developers raced to add new ones as they became popular with shoppers, especially women between 20 and 50 years old, a coveted category. Meantime, construction of traditional enclosed malls all but stopped.

But now, with the economy slumping and shoppers spending less, retailers that had flocked to the centers — like Chico’s FAS Inc., AnnTaylor Stores Corp. and Talbots Inc. — have begun canceling expansion plans and even shutting stores. Others, such as Linens ’n Things Inc., have sought bankruptcy protection.

This couldn’t happen at a worse time for lifestyle-center developers, which were putting up more of the shopping centers than ever. Last year they built 37 centers totaling some 12 million square feet, or roughly 40 percent of the total lifestyle-center square footage added this decade, according to market-research firm Portfolio & Property Research Inc. Double the 2007 total is now under construction, and three times as much is in the planning stages.

The economic slowdown, of course, means many of the planned projects won’t leave the drawing board. But many centers where constuction has begun will probably have difficulty leasing space when they open. That raises the specter that eventually they may not be able to pay their debt, adding to the strain on the already ravaged finance sector.

Leasing problems have clearly begun. Developer M.G. Herring Group opened its Uptown Village regional lifestyle center in the Dallas suburb of Cedar Hill in March with only half the space occupied and the rest walled off with wood panels bearing the center’s marketing images. President Gar Herring says he has so far signed retailers for 60 percent to 70 percent of the 725,000-square-foot project, though it remains only half occupied five months after its opening.

In Brighton, THF Realty Inc. has filled most of its new Prairie Center retail project with such big-box retailers as Dick’s Sporting Goods Inc. and PetSmart Inc. But Prairie Center’s small-shop space — erected in a lifestyle-center format nearby — is mostly empty. Half a dozen tenants, including Heidi’s Deli, Verizon Wireless and Elite Nails, are sprinkled among vacant storefronts sporting “for lease” signs.

Herring and THF executives say they anticipate no difficulties paying their debt service on the projects.

Some believe that the lifestyle-center craze was about to run its course in any case. The metropolitan locations that are best suited to the centers are mostly taken. “There were a number of projects proposed in markets that didn’t really have the (sales) demand to support the projects,” said Stephen Lebovitz, president of mall owner CBL & Associates Properties Inc., which has built two open-air centers.

Certainly the centers being built now show an evolution in the approach to the centers. Recent versions have larger formats and more diverse tenant rosters, including department stores and movie theaters. Few developers now propose the original format, which offers only small shops and spans 200,000 square feet or less.

“Those are dead,” said Maury Levin, a retail-property broker at commercial real estate firm KLNB Inc. in Baltimore.

Construction of other retail-property formats is also slowing as consumer spending wanes. Portfolio & Property Research forecasts that in 2009, retail-space construction in the top 54 U.S. markets will drop 48 percent, to 71 million square feet, from this year.

Existing properties are hurting, too. Vacancy rates at U.S. malls and shopping centers have climbed to 7.4 percent this year, the highest level this decade, according to market-research firm Reis Inc.

Many developers that have the option are canceling or scaling back projects. Citing slow progress in leasing, Opus Corp. opted to proceed in phases at a lifestyle center in the Seattle suburb of Issaquah, Wash., scheduling the opening of 150,000 square feet of shops in 2010. It had planned to open three times as much space in 2009.

In Canonsburg, Pa., developer Cullinan Properties Ltd. has delayed by a year, to 2010, the opening of 200,000 square feet of small shops intended to accompany a 14-screen movie theater as it struggles to lease the space.

What’s tripping up many developers is the tendency of lifestyle-center tenants to travel in packs. The centers often don’t have big anchor stores, so many retailers insist that several complementary stores agree to open in a given center before they will do so. “You may have 10 tenants you want to get, but eight are waiting until the fall to make a decision and the other two are waiting on those eight,” said Frank Natanek, Cullinan’s group president of real estate and marketing.

Poag & McEwen Lifestyle Centers LLC, which has developed 10 lifestyle centers, recently scrapped plans for one in Boise, Idaho, after five retailers reneged on signing leases there and then several more did the same. The Memphis, Tenn.-based developer proceeded with construction of a lifestyle center in Plainfield, Ill., only after tenants there waived the requirement that certain fellow retailers such as Chico’s join the project. Chico’s has pared its expansion markedly to 45 new stores this year from 118 last year.

Despite these stresses, most new lifestyle centers aren’t in danger of immediate foreclosure. Developers and lenders typically structure construction loans to carry fledgling projects through lease-up periods, and they’re hoping that the economy will rebound by the time those reserves are depleted.

“You’re not really going to see these projects get turned over to the lenders until later this year at the earliest,” said Ben Yang, an analyst with Green Street Advisors.

Source: Rocky Mountain News

No comments: