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In today’s current economic climate, landlords are being inundated with lease restructuring requests from retailers. The landlords are gearing up for battle. Many of the landlords don’t recognize certain factors that might make them more cooperative and interpret these potential negotiations as something that is in their best interest instead of adversarial.
First, industry experts were forecasting a Tsunami of store closings in 2009 that in many cases were anticipated at over 14,000. In particular, many articles anticipated huge numbers of closings for the beginning of 2009. Why haven’t we seen these huge numbers of closures? Retailers are undertaking the lease restructuring effort first and foremost in order to try and stave off store closings. This is a positive for the landlords. Less stores will close due to many successful lease restructurings. Although many stores will still close due to underperformance or from bankruptcy, the numbers will likely be significantly less than initially anticipated. When these closures do occur, landlords will be even more vulnerable, as tenants that want to renew early now may not want to renew when they observe additional vacancies.
Retailers focused efforts now on lease restructuring, store closures, store transfer sales and other important decisions will not only reshape their real estate portfolio, but will also be a catalyst to expedite the recovery of the industry as a whole. If the retailers are calling to renew two or even three years ahead of the lease expiration and are willing to give extended term, then the landlords ought to listen and perhaps consider granting reasonable requests for reductions. Why, you ask? We are really in the early stages of commercial real estate devaluation. If the landlords tell the retailers to call back in a year, the market rents are likely to be lower and vacancies higher. This result doesn’t increase a landlord’s leverage. The best leverage they have is to work something out now. The retailers will be looking to obtain market rents when they call back and those most certainly will be lower than the market rents today.
Let’s look at it from an economic historical perspective. One of the last things to recover in a recession, as most know, is job growth. It might even be fair to say, if all goes well, that positive job growth probably won’t be seen until mid-2010. Typically, real estate recovery trails job growth. During the last recession real estate didn’t commence a recovery until a full 18 months after the first month of positive job growth. This means that vacancies will rise and rents will likely continue to decline through the end of 2011 or even into early 2012 (even beyond if a broad based recovery doesn’t start soon).
In other words, retailers are calling the landlords early in the downturn. Landlords will also benefit by renewing tenants early, even if it means lower rents. Doing nothing and letting time pass, will likely have a detrimental impact on landlord’s assets. By no means am I recommending that landlords accept unreasonable or meritless requests. Retailers and landlords need to work closely with one another to come to reasonable values, especially since the market is rather subjective currently due to a lack of recent comparables (since expansion has been slow for some time now).
Retail rents, prior to the present decline, were like many other asset classes - very high and perhaps near or at a bubble. It’s not like a pendulum has swung to the landlords and is now back with the retailer. Many articles suggest that tenants have all the leverage in this market. Perhaps for a select few that is accurate. However, most retailers don’t have the sales to support the current rents they are paying. I believe we are entering a “new economy” where all asset classes are revalued and upward movement comes at a more reasonable pace. Retailers, as part of their survival now and into the future, need to have rents that reflect the times and the economic realities.
If the retailer is willing to give extended term in exchange for a market rent (or thereabouts), it seems a prudent business decision for the landlord to accept even if lease expiration is two years or more away. It potentially solidifies the landlord’s other tenancies, as well as the overall asset. It even might enhance the landlord’s ability to finance or refinance the asset. Ability to finance is going to become increasingly more important, as lenders have been entering into a large number of one year extensions. Many landlords may need to raise cash through the sale of real estate assets in a year or so if the lenders become less willing to give short-term financing. Accordingly, landlords will need assets with viable tenants that have decent term commitments. This economy gives landlords the opportunity when retailers call to restructure leases, to solidify an otherwise shaky asset. Clearly, there will be winners and losers in the process, but landlords need to recognize the symbiosis that exists between themselves and retailers, and start working with retailers more as these requests are made. I am hearing of stories where some large landlords are just saying “no” to helping tenants. I worry for the future of those landlords. Again, I am not suggesting landlords make senseless deals. However, there may be a silver lining for the landlords if they recognize how much worse things might get and act now when the retailers come calling.
Weiner is the president and CEO of Lake Success, NY-based Excess Space Retail Services. Opinions are the author’s own.
Sperry Van Ness International has specialist in all disciplines of commercial real estate. Members of the Sperry Van Ness Multi Family Team, Auction Team, Sale-Lease back, Asset Recovery and other teams are comprised of Commercial Real Estate brokers of the highest caliber. Neil Victor, CCIM is Senior Advisor with Sperry Van Ness Huntsville Office. Being part of the SVN organization allows us to help our clients make sound real estate decisions.
The good news is we have yet again secured Dr. Mark Dotzour to speak to us on our West Coast / Central Region Deal Making Call this Thursday! Many of you will remember when he spoke to us last year and we were all very impressed! For those of you that missed that call, Dr. Dotzour is the Chief Economist at the Texas A&M Real Estate Research Center and is a frequent guest on many National TV shows and is in all the National publications. He tells me he is now making 5 to 6 speeches a week relating to commercial real estate. Unfortunately, we could not secure Dr. Dotzour for our Regional Conference as many of you requested do to schedule conflicts, so this is your opportunity to hear his point of View compliments of the Dallas Professionals!
As always, we will “tailgate” 10 minutes before the call for those that want to catch up!
Sperry Van Ness International has specialist in all disciplines of commercial real estate. Members of the Sperry Van Ness Multi Family Team, Auction Team, Sale-Lease back, Asset Recovery and other teams are comprised of Commercial Real Estate brokers of the highest caliber. Neil Victor, CCIM is Senior Advisor with Sperry Van Ness Huntsville Office. Being part of the SVN organization allows us to help our clients make sound real estate decisions.
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Consumer-lending activity has increased in numerous midsize cities in the U.S., a sign they are riding out the recession better than big cities and rural towns, an analysis of credit data shows.
As banks pull back on risk taking across the nation, consumer-loan balances in places like Huntsville, Ala., are rising. In Huntsville, a metropolitan area of 376,000 that is home to many government contractors, borrowing increased 13.2% per household in last year's fourth quarter, compared with the year-earlier period, according to data provided to The Wall Street Journal by Moody's Economy.com and Equifax Inc.
Huntsville's increase was the largest among 207 U.S. metropolitan areas tracked by the two data-gathering firms. Similar-size cities such as McAllen and Brownsville, Texas; Yakima, Wash; Provo, Utah, and Lafayette, La., also saw consumer-loan balances rise by more than 8% year-over-year.
Marc Joseph, owner of Foreclosures 'R Us real-estate company, displays a map of foreclosed properties to prospective buyers as they motor down a canal during a foreclosure boat tour on March 26 in Cape Coral, Fla.During the economic crisis, the banking industry has been criticized for not lending enough, contributing to the slowdown in economic activity. The data show that in some places, banks feel comfortable enough about local economies to lend more to consumers. Across parts of California, Florida and Michigan, on the other hand, consumer-credit balances have been falling, the data indicate.
"The large metro areas are definitely hit by the finance or housing problems," says Steve Cochrane, managing director of Moody's Economy.com. "The smallest are often going nowhere." But, "many midsize metros in the country's midsection should come out of this all right."
The data from Equifax and Moody's encompass mortgages and home-equity, credit-card, auto and student loans. The numbers aren't a pure reflection of new lending. Balances could grow if consumers draw down existing credit lines. Increases could also reflect the sort of reckless borrowing that contributed to the current crisis, or desperation borrowing as bills become more difficult to pay.
But Equifax Vice President Jim Powers says such scenarios aren't the norm. "Most lending these days is pretty tight," he says. "Anyone that is getting a new loan, the bank deems a pretty low risk."
It is one of the few times in recent economic history when so many midsize cities are outperforming their larger counterparts, says Ross DeVol, director of regional economics at the Milken Institute, a Santa Monica, Calif.-based think tank. The new lending patterns, he says, reflect more disciplined economic-development strategies in those cities, more diverse employment and lower costs. Many of the higher-lending areas appeared on the institute's list of "best-performing" cities for 2008, measured by job, wage and salary increases. Provo, Huntsville and McAllen were all in the top 10.
The Geography of Risk
"The medium-size metros that have done the blocking and tackling are better positioned during the downtown," he says.
Banks based in some cities with rising consumer-loan balances hold relatively low levels of nonperforming commercial and consumer loans, according to FIG Partners of Atlanta, a bank consulting firm. Problem commercial and consumer loans at Huntsville-based financial institutions, for example, represented 2.2% of total loans in the fourth quarter, compared with the national median of 4.92%.
Some of the better-performing cities didn't experience speculative real-estate bubbles, leaving them with more solid household-credit conditions, which are conducive to lending. Others are benefiting from major government spending, such as massive infrastructure projects and military bases. Many have unemployment rates below the national average and rank among the nation's best job creators.
Downtown Lafayette, La., where consumer-loan balances have climbed by more than 8% year-over-year.
At the opposite end of the spectrum lie metropolitan areas such as Merced, Calif., where consumer-loan balances dropped 8.5% year over year. According to FIG Partners, problem commercial and consumer loans there shot up to 11.4% of the total. The unemployment rate in Merced in January was 19%. One of every 74 Merced households faced a foreclosure filing in February, according to RealtyTrac, compared with one in every 2,319 households in Huntsville.
Cape Coral, Fla., where consumer-loan balances dropped 6.8%, lost more than 9% of its jobs last year, according to data from the U.S. Bureau of Labor Statistics. One in 65 households received a foreclosure notice last month. Another city near the bottom was Vallejo, Calif., a city forced to declare bankruptcy in the spring of 2008. Its consumer-loan balances dropped 4.5%, while its unemployment rate rose to 10.1% in January.
Some regions where loan balances have grown are creating jobs in the midst of the national recession. McAllen, which is near the U.S.-Mexico border, increased employment by 0.6% in the 12 months through this January. Over the past five years, employment there grew 21.1%.
Lafayette, which picked up population displaced by Hurricane Katrina, increased employment by 0.2% in the year ending January 2009, and 15.2% over the past five years.
Employment in Mobile, Ala., a southern port metropolitan area of 404,000, is down just 0.6% for the year ending in January, after rising 8.4% over a five-year period. Government-sponsored spending could explain why consumer-loan balances are on the rise there, as work continues on a $4.5 billion ThyssenKrupp AG steel plant.
Many of the cities where consumer lending has risen "have longstanding specializations in industries that have not been as affected by the downturn," notes Alan Berube, senior fellow and research director with the Brookings Institution, a Washington think tank.
Huntsville, located about 100 miles north of Birmingham, Ala., has long been strong in aerospace and technology due to a military base and an influx of engineers and scientists. Its unemployment rate was 6% in January, well below the national rate of 8.5%.
Huntsville is the National Aeronautics and Space Administration's center of planning for a return trip to the moon. It also serves as headquarters for the U.S. Army Aviation and Missile Command. The Boeing Co., which employs more than 3,000 locally, is one of many government contractors with a major presence.
"We are very blessed," says Joe Newberry, president and chief executive officer of Huntsville's Redstone Federal Credit Union.
When Larry Anderson needed $420,000 last fall to purchase a new building for Alatec Inc., his military-weapons analysis company in Huntsville, he was expecting trouble because of the national credit crunch. Instead, local ServisFirst Bank approved the loan, and kept a $2 million line of credit open to fund expansion of the 80-employee company. Mr. Anderson has been adding workers over the past six months.
Andy Kattos, president of ServisFirst Bank Huntsville, says federal spending and contracting work was a big reason for a 69.4% increase in the bank's total loan balances during 2008.
Redstone Federal Credit Union made $17 million in auto loans in January, the fifth-highest monthly total in its 57-year history. In February, Redstone originated $43 million in mortgage loans, a one-month record.
Among the recent Redstone borrowers is 28-year-old James Clutts, who took out a $2,000 loan in November to pay some outstanding bills. A crisis may be weighing on other cities, he says, but "I don't think we are seeing it here."
Write to Dan Fitzpatrick at dan.fitzpatrick@wsj.com
Jim Andrews
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Sperry Van Ness International has specialist in all disciplines of commercial real estate. Members of the Sperry Van Ness Team are true Commercial Real Estate Advisors. Neil Victor, CCIM is Senior Advisor with Sperry Van Ness Huntsville Office. Being part of the SVN organization allows us to help our clients make sound real estate decisions.
Commercial real estate broker. CCIM, Specializing in multifamily, retail, office and industrial properties. Senior Advisor and Associate Broker with the Sperry Van Ness office in Huntsville, Al.
Neil Victor, CCIM, serves as senior Advisor and associate broker for Sperry Van Ness|Avat Realty, LLC specializing in the sale and leasing of multifamily and retail properties. Also involved with office, industrial, land and hospitality projects he is licensed in Alabama, Tennessee, Mississippi and Louisiana. Prior to joining Sperry Van Ness Victor owned office machine and computer businesses for more than 27 years selling out to a national vendor in the early 1990's. In addition to being a community business leader, Victor has lived in the local area since 1969 after being transferred from his overseas military assignment to Huntsville, Alabama.
Victor has earned the prestigious Certified Commercial Investment Member (CCIM) designation and attends several continuing education classes in order to remain up-to-date in the industry; budgeting 20 percent of his time for meetings, seminars and continuing education.
Additionally, Victor is a member of the National Association of Realtors, the Huntsville Board of Realtors, the Institute of Real Estate Management, and the Alabama Chapter of CCIM. Victor also teaches real estate classes. He earned a bachelor's degree in Business from Athens College in Athens Alabama and is an honored Army Veteran, having earned a Bronze Star while serving in the Vietnam War.
His wife and partner is Ava Terry, Sperry Van Ness Advisor and Broker. Ava and Neil have been married since 1992. They have worked together in marketing and sales since the mid-1980's
CCIM, National Association of Realtors, National Multi-Family Team, Chamber of Commerce, Licensed in Alabama, Tennessee, Mississippi and Louisiana. National Retail Team. Consulting, Opinion of Values, Full cooperation with ALL realtors. I have been a resident of North Alabama since 1969.
Neil Victor is an honest, straightforward, professional agent. He understands the needs of the real estate investor and bends over backwards to make your deal work. He knows that your success is his success, and that long-term relationships are the most important. I have at times been interested in deals that he could have made a nice commission on, but instead he informed me that the deal really wasn't what I was looking for and why. He then found me what I did need. Integrity is the cornerstone of a successful business relationship, and Neil Victor has it!
Dr. Mike T Oregon
Dr. H Huntsville Al
I've been working with Neil Victor for the last 5 months, in those months I've purchase the following properties from him 31 units & 44 units apartment complex, 2 4-PLEX and a single residential home. What I admires most about him is he values the friendship and go out his way to get you a good deal, he compares and let you know his view to stay away from bad ones and recommends what to purchase when good properties came along. I truly recommended Neil to anyone that I like to purchase real estate investment properties in Huntsville area.!
Ricky... San Jose CA
R.W. Long Beach CA
Thank you Neil so much for taking the extra effort to make our first home purchase successful. You were there guiding us through all the crucial and important steps!
Kiet N. Tampa Fl
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MindMatrix, as outlined in Kevin Maggiacomo's 100 Day Plan, is a feature that will provide Advisors with a cutting edge, best in class multi-media publishing and marketing tool. This output feature will be fully integrated with OTS. Training sessions for MindMatrix has begun. On March 25th a training call was held which previewed the MindMatrix technology. If you were unable to attend this training, you can download the recorded meeting from the Company Intranet > Training > Online Training > MindMatrix Tech Preview 3/25/09.
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