And the new developments continue...

Prime Retail has begun development of a $156 million, 120 store-outlet mall in Livermore California. About 30 minutes from San Francisco, this outlet mall will be called "Prime Outlets Livermore Valley".

http://www.bizjournals.com/baltimore/stories/2008/12/22/daily2.html

Undaunted by the slowing retail environment President of Prime Retail Dale Kaye says “People are looking for bargains... They want to buy brand names at a lower price.”

This type of thinking is silly as in a recessionary environment people will shop at outlet malls less. Just as real estate does not "always appreciate" and buyign does not mean you "build equity" over renting, this mentality is what is going to make the commercial real estate crash long and deep.

In an economic-boom environment it is completely logical for a retailer to setup an outlet, as an outlet allows the retailer to move excess inventory without diminishing the brand value as there is a great price differentiation between "boutique" and "outlet" stores allowing the retailer to price discriminate.

However, in a recessionary environment when consumer spending slows, the retailers are forced to both reduce "boutique" retail prices as well as reduce order commitments. This creates two problems. First in a recessionary environment many retailers are simply struggling to survive. This usually means monetizing brand equity, aka "whoring out the brand." Many retailers are already engaged in this, for example Movado, Coach, and Burberry heavily discounting their products in their boutique stores while rapidly eroding perception of brand-value. As sales price nears product cost, this necessarily reduces the spread between "boutique" and "outlet" price thus reducing the attractiveness of an outlet. Second as order volume decreases and product lines are eliminated, excess retail square footage is created in their boutique stores. In order to maintain profiability retailers must fill this excess square footage with products normally destined for the outlet further impairing the attractiveness of an outlet.

While consumers are still flocking to outlets with the belief of a rapid price spread between "boutiques" and "outlets" it is becoming more evident that this spread is rapidly eroding. As consumers catch on outlets will become less and less attractive.

Hopefully Prime Retail and Dale Kaye catch on before the consumers do...

Retail sales up? Hmmmmmm....

Major news outlets have been touting exceptional after-thanksgiving sales helped in part by aggressive discounting. Such reports include ShopperTrak's claim of 3% rise in sales over 2007.

http://www.marketwatch.com/news/story/black-friday-sales-chalk-up/story.aspx?guid=%7B0522EC5F-4058-46A3-B8F4-32ABF67831D9%7D&dist=msr_1


While black friday may have experienced a 3% pop, it is highly questionable whether the sales momentum can continue.

Take for example the venerable South Coast Plaza, the third largest shopping mall in the United States, located in the heart of wealthy Orange County California. This mall which was virtually immune to the dot-com-bust of 2001, has probably seen better times.





At first glance the mall was fairly packed today (12/8/08). But compared to previous years Southcoast Plaza was surprisingly devoid of shoppers just 2 weeks from Christmas. There were no massive traffic jams from Bristol and Bear exits spilling onto the 405 and 55 freeways - in fact there was no traffic at all. The parking lots were fairly empty. Here's a picture of the Sak's Fifth / Bloomingdales parking lot - locations that would have been completely packed in previous years.



Inside the mall told a similar story. Yes, Bloomingdales was quite busy with people actually making purchases. The other department stores (Sak's, Macy's, Sears) also drew a bit of traffic (but lighter). Traffic was heavy at certain stores such as Sephora, but fairly light at last year's darlings such as Bath & Body works. At the high-end there was exactly 0 people and five very bored sales inside Harry Winston's and only a few people in Gucci and Cartier. Traffic in Anne Klein was sparse.



Overall the mall traffic was what I would consider heavy for most malls but fairly light for Southcoast Plaza during christmas season.

But most shockingly, unlike previous years where you could not help but bump into shoppers with multiple and massive shopping bags, most shoppers were not carrying anything!I was hard pressed to find ANY shoppers with multiple bags. It seemed like most of the shoppers had come out just for the mall experience, but were not purchasing.







This may indeed confirm indications of a US consumer firmly battened down for a bad recession and refusing to spend. If true, this will be devastating for commercial real estate, especially mall operators. Having made aggressive investments over previous years, many of the mall operators like Simon Property Group (SPG), Westfield, General Growth Properties (GGP), Macquerie (MAC) are relying on increasing rental income to facilitate debt re-financing and to avoid asset write-downs. However with a large chunk of debt due in the coming years and the likelihood of decreasing operating income as consumer spending decreases, it is very likely that most of the heavily leveraged mall operators will start running into big trouble. Furthermore, aggressive over-expansion in the last few years coupled with retail contraction can leave millions of premium retail space devoid of tenants, further putting downward pressure on operating income. Already with many anchor tenants such as Mervyns, Circuit City, Linens N Things either exiting or getting ready to exit their leases, and other big name retailers such as Macy's, JC Penny, Sears, etc. all in trouble this disaster is only beginning to unfold.

-gh
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Looking for Commercial Real Estate Investment opportunities in Costa Mesa California?
http://www.orealo.com/wsp/city_details.php?c=Costa+Mesa

Looking for Commercial Real Estate buildings to purchase in Chino, California?
http://www.orealo.com/wsp/city_details.php?c=Chino

Industrial Warehouses for lease in La Mirada, California
http://www.orealo.com/wsp/city_details.php?n=2&c=La+Mirada

Owner-Tenants begin to liquidate their holdings

Owner tenants are beginning to get feel crash-fever and are attempting to sell their real-estate aholdings. A good example is Printronix of Irvine California. Printronix is a manufacturer of printers, bar coders, and other business inventory solutions. With revenues of $127 million, this business is based in a sprawling 539,316 sqft campus in Irvine, California.

The property, while held by a shell company, has recently been posted for sale at a price of $40 million, a 100%+ premium over it's assessed value of $19 million.

There's several interesting aspects of this property. Firstly, in a brilliant move by the Printronix CEO, the company was acquired in late 2007 by Vector Capital - just months before the US officially entered a recession. Furthermore, Printronix is not moving, they are promising a 7 year NNN lease to any purchaser.

Since it is apparent that Vector Capital completely missed recessionary warnings by making big acquisitions late into 2007, it is questionable whether Vector Capital perceives a CRE bust in 2009 or is simply raising cash for other operations as credit tightens.

Either way this property represents a continuation of the ridiculousness of southern california

commercial real estate. With a NOI (net operating income) of approximately $2.8 mil, the asking price of the property represents a 7% cap rate. With today's interest rates in order to maintain a 1.25x DSCR, investors would have to poney up a whopping 35% downpayment ($14 mil)

Gentleman, when will the silliness stop???

Because of its relative size and the players involved, this property is definitely one to keep an eye on.

LandAmerica screws 1031 exchangors!

"LandAmerica Financial has sent a notice to its 1031 exchange customers this morning informing them that it was terminating these operations. The problem, it said, was that a portion of the 1031 funds are invested in illiquid auction rate securities that it cannot access. “Our inability to sell or borrow against these securities have precipitated our decision to terminate operations,” according to the letter."

Click here for full article

This is huge news and will impact the investment real estate community significantly! Too bad Bounty can't clean up this mess...

What is a 1031 exchange?

A 1031 exchange is a simple strategy and method for selling one property, that's qualified, and then proceeding with an acquisition of another property (also qualified) within a specific time frame. Investors exchange properties to avoid paying capital gains tax on any gains realized from the sale of a property. 1031 exchanges are also known as a tax deferred exchange.

How does a 1031 exchange work?

In a 1031 exchange, the exchangor (seller) who has a realized gain never touches the funds once escrow is closed with the buyer. Instead, the money is held with a Qualified Intermediary (aka QI, accomodator, etc.) until an exchange property is identified. The exchangor has 45 days after the close of escrow of the sale to identify several properties as potential exchange prospects.

Theoretically, the QI should hold such funds in safe, interest bearing accounts such as money market or treasury funds. However, LandAmerica decided to get cute and invest in "illiquid auction rate securities". I'm not sure what these illiqid securities are, but just the fact that QI's were able to invest the exchange funds freely is ridiculous.

Who is Land America Financial Group (NYSE: LFG)????

According to Google Finance:

"LandAmerica Financial Group, Inc. (LandAmerica) is a holding company and operates through its subsidiaries. The Company’s products and services facilitate the purchase, sale, transfer, and financing of residential and commercial real estate. These products and services are provided to a broad-based customer group, including residential and commercial property buyers and sellers, real estate agents and brokers, developers, attorneys, mortgage brokers and lenders and title insurance agents. The Company operates through approximately 700 offices and a network of more than 10,000 active agents, and conducts business in Mexico, Canada, the Caribbean, Latin America, Europe and Asia. Its principal business operations are organized under three operating segments: Title Operations, Lender Services and Financial Services. In August 2007, LandAmerica announced the acquisition of Chisholm, Nurser & Partners Limited (CNP), a United Kingdom-based independent building and project consultant."

Land America, at its heyday, offered just about every real estate related service you can imagine, ranging from title insurance to financing. They generated $3.7 billion of revenue in 2007 and were lauded as one of Fortune's "Most Admired Companies" (in fact, they promote this fact all over their website).

However, as of this post, I believe they are about to go Bankrupt. With real estate transtactions down and what seems to be miscalculated investment ideologies, Land America has been praying for a buyout by Fidelity National Financial Inc. (NYSE: FNF.N). But Fidelity backed off from the purchase and Land America's stock price dropped about 80% to close at $0.91 per share.

I just hope that Land America's 1031 clients will get some recourse. There is probably hundreds of millions of dollars frozen in Land America's QI accounts.

What can you do to protect your exchange?

In order to protect your assets in an exchange, don't choose your QI based on fees alone. As QI's are not regulated very closely, there is a large discrepancy of quality. Questions to ask include:

• How many years have you been administering 1031 exchange transactions?
  
  
• How many 1031 exchanges have you administered (individual 1031 exchange officer and 1031 exchange Qualified Intermediary)?
  
  
• Do you maintain fidelity bond insurance coverage to insure against employee theft, embezzlement or misappropriation of the 1031 exchange funds?
  
  
• What is the policy limit of your fidelity bond coverage?
  
  
• Is your fidelity bond coverage “per occurrence” or merely “in aggregate”?
  
  
• Will you provide me with copies of your insurance binders and the contact information for your insurance agents so I can verify that your insurance coverage is still in full force and effect?
  
  
• Do you maintain sufficient errors and omissions (E&O) insurance coverage to insure against any 1031 exchange Qualified Intermediary error or omission?
  
  
• What is the policy limit of your errors and omissions insurance coverage?
  
  
• Do your fidelity bond and errors and omissions (E&O) insurance policies cover just the 1031 exchange Qualified Intermediary or do they also cover numerous other related entity operations that might diminish the overall protection to me in the event of multiple losses throughout the consolidated entity such as title insurance, escrow, etc.?
  
• What type of internal processes and internal audit controls have you implemented to protect my 1031 exchange assets?
  
• Do your 1031 exchange administrators call me prior to the disbursement of my 1031 exchange funds to ensure that I want the funds disbursed (as opposed to disbursing when escrow calls).
  
• Where are my 1031 exchange funds held or invested?
  
• What type of specific investments do you use for my 1031 exchange funds?

-ML

It sucks to be a REIT

"LONDON -- Lack of financing and a deteriorating U.K. economy are forcing funds and real-estate investment trusts to boost cash flow by selling assets at rock-bottom prices."

Full article here

The number of institutional asset sales have nearly doubled in 2008. English REITs have started selling assets at a discount to increase their equity positions. Increased liquidity is needed to address the implications of the current economic downturn as well as the redemption requests of investors. This trend will likely continue through 2009.

According to the article, British Land Company PLC (LON:BLND) has disposed of over US$1 billion of assets. It would be safe to assume that the "fire sales" will continue.

The problem of insolvency of REITs worldwide is starting to become apparent. Earlier this year, Australian REIT, Centro Properties Group (ASX: CNP), filed for bankruptcy protection to reorganize. Centro has until December 15 (approximately 2 weeks) to pay off a US$5 billion debt. If they are not successful in negotiating an extension, federal regulators will begin the process of taking back the 700+ retail malls owned by Centro.

I'm wondering when American REITs will start selling off significant chunks of their holdings. There is significant pain in all product types (office, industrial, retail, multifamily), but we have not seen any "fire sales" yet.

This is surprising considering the state some of these REITs are in.

General Growth Properties (NYSE: GGP), the nations former largest retail REIT, was well on the path about to file chapter 11. However, with Morgan Stanley (NYSE: MS) investing a 5% stake in the company (announced 5 hours ago), GGP might get the refinancing they need to stay afloat... for now.

Prologis (NYSE: PLD), the nations largest industrial REIT, has halted all construction. With significant vacancies looming in the horizon, investors are scared that they will not be solvent in the months to come.

Both GGP and PLD have seen over 90% declines in their market capitalization.

-ML

CMBX Spreads

CMBX spreads have softened slightly on the back of the Federal Reserve's decision to purchase $600 billion of asset backed securities from Fannie and Freddie which essentially gives the two GSE's a little bit of breathing room.

http://www.bloomberg.com/apps/news?pid=20601087&sid=ai_aErzotzx8&refer=home

Conforming 30-year fixed mortgage rates responded immediately by dropping almost 50bps. CMBX rates have also declined slightly across the board.

But perhaps the move was largest on the REIT side, where ultra short real-estate ETFs such as SRS collapsed from a high of $295 to $131 a whopping 55% move in just 3 days.

For those that think the worst is over, as I always say increases in amplitude and frequency usually indicate imminent system failure. CMBX spreads are still at all-time highs, the economy is faltering, and builder are still building...

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Here's a great commercial real estate search for the Southern California area.

This site focuses on Industrial Warehouse properties, mostly on the smaller side (less than 15,000 sqft). It has a unique user interface and pictures that are much better than typically seen on the MLS.

Warehouses / Industrial Properties for Lease in Torrance California

http://www.orealo.com/wsp/city_details.php?n=2&c=Torrance

Warehouses / Industrial Properties for Lease in Burbank California

http://www.orealo.com/wsp/city_details.php?n=2&c=Burbank

Warehouses / Industrial Properties for Sale in Rancho Cucamonga

http://www.orealo.com/wsp/city_details.php?c=Rancho+Cucamonga

-GH

The biggest bets in Las Vegas

Real estate developers such as MGM-Dubai, Las Vegas Sands, Boyd Gaming, and Wynn are engaged in some of the biggest bets in Las Vegas.

Today the Las Vegas skyline looks like Shanghai 2005 as dozens of new hotels, corporate centers, and luxury condos are currently under construction - a shocking site as the US slides into the most severe recession it has seen in decades.

Leading this construction is the MGM-Dubai $11 billion "City center" project.

CITY CENTER LAS VEGAS UNDER CONSTRUCTION

This massive 72 acre, 18,670,000 sqft project is the largest construction project in the United States. Scheduled for completion in 2009, the city center will contain over 7000 suites and condos.

Another monster project under construction is the Cosmopolitan Resort Casino, a $3 billion 6,900,000sqft project containing rooms and studio condos. These studio condos are "projected" to sell for $559k to $1.2 million.

The larger project is the Echelon hotel project being developed by Boyd gaming. This $5 billion project is a 1,890,000sqft project, featuring 5300 rooms and a convention center.

Fontainebleau Las Vegas is being built north of the Riviera hotel, with 3889 rooms, 850,000sqft, and at a cost of $3 billion.

Additions

Not to be outdone, the existing hotels are all adding to their properties.

Donald Trump well known for his beautiful hair, is doubling down and adding a duplicate 1282 hotel tower to match his existing 1,500,000 sqft $600 million hotel. However in the planning process he somehow forgot to add a casino in his property.

Not to be outdone, Wynn well known for his belligerence is adding a new "Encore" wing at the Wynn. This project with 2032 rooms, 1,500,00 sqft, will cost $2.1 billion and be built on the existing golf course of the Wynn.

And of course Caesars has decided to add a $1 billion dollar, 263,000 sqft, 665 room addition to their property.

This doesn't even include the massive amount of office building, off-strip luxury condos, shopping centers, and other projects being built in Las Vegas.

SO WTF?

WTF is a very fair reaction to this construction. In 2007 Vegas contained about 132,947 rooms. The existing construction (including 2008 completed projects such as the Palazzo) will add a whopping 42,000 rooms to this number, increasing a 32% increase!

During the roaring 2005's this might have been workable, with US consumers HELOCing hundreds of thousands of play dollars out of their houses and mortgage brokers pocketing $50,000 kickbacks. However one has to seriously question whether Las Vegas will simply implode under the weight of this additional occupancy. MGM, Las Vegas Sands, and other operators are already in trouble. Vacancy is up, occupancy revenue is down, casino revenue is down (not that it matter's for Trump how doesn't have a casino), and all other entertainment revenues are down. Las Vegas Sands already posted a Q3 loss of $32 million, and MGM and the rest of the operators are all teetering on the edge.

With over $40 billion of existing projects, many projects not yet completed, the US economy in recession, the ability for these debt-laden operators to service their existing debt seriously comes into question.

The best bet on the strip right now might be to take a short position on these operators (except they are so beaten down already).

-GH