Commercial real estate will never be the same again ...

John Walkup

Talking Manhattan on
Ah zerohedge ... churning the facts into fear. Who knows what's coming? Macro is as macro does. Focus on your micro and you'll be alright.

David Goldsmith

All Powerful Moderator
Staff member

Shopping Center Buyers Eye Parcel Strategies​

As distressed buyers collect shopping center assets, look for them to shave off out parcels.​

Eventually, a lot of distressed non-grocery anchored shopping centers will start hitting the market.

But the buyers of these centers may not keep them in one piece for long. Instead, in an effort to pay down the debt or execute other strategies, they could sell off the out parcels, according to Jonathan Hipp, principal, U.S. Capital Markets and head of U.S. Net Lease Group at Avison Young.

“That’s a strategy that I think will gain a lot of momentum as some loans start to go to the special servicers and people buy them at a discount,” Hipp says. “One of the strategies will be to try to peel off some of the PADS and pay down the debt. Or existing owners may peel off some of the PADS as opposed to selling the whole center.”

These PADS, or out parcels, could be home to any number of restaurants or retailers, such as AutoZone, McDonald’s, CVS, Bank of America or Sherwin Williams.

By selling off a PAD, private equity and opportunistic funds can generate returns as quickly as possible.

“It gives them the ability if they choose to pull out some cash and pay down the loan, return of capital to some of their investors or pay down some of their basis,” Hipp says. “It gives them the opportunity to try to do blend and extends, increase the value off of the PADS and help prop up the inline [retail].”

If there is a vacancy among the inline retailers, selling off the PADS could bring down the overall basis, according to Hipp.

There could also be other scenarios that play out.

“Maybe the investor does a blend and extend with those existing tenants, or maybe they put in capital after the other owner didn’t give them some tenant improvement dollars,” Hipp says. “Then they’ll extend the lease 10 years, increase the value in the lease, and pay down their basis on the loan. Or they can pay a dividend to their investors immediately.”

Hipp says the strategy, which was employed during the Global Financial Crisis, has come up in recent conversations with special servicers. “It’s something that is picking up more steam, as you start to see more loans go back because there’s been so much capital raised from guys waiting to buy distress,” he says.

While buyers might quickly sell the out parcels, transforming the rest of the shopping center could take time.

“I’m not sure today that everybody has all the answers, but I think that there will be some smaller footprints that are created, and there will be some new brands,” Hipp says. “Retail has always shown that it is adaptable and smart people find ways to readapt good pieces of real estate.”

David Goldsmith

All Powerful Moderator
Staff member
Values of Class A malls down 45% from 2016 levels

Shares in country’s biggest mall owner, Simon Property Group, fell 32% last year​

The value of America’s luxury malls is roughly half what it was in 2016, a worrying sign for an industry that has long considered such malls to be safer than lower-tier alternatives.
A-rated malls, which generate an average of $750 in sales per square foot, made a strong comeback after the last financial crisis, according to CNBC. But a new report from Green Street estimates that the value of such malls has fallen about 45 percent since 2016 levels.

One reason for the decline is the flagging fortunes of department stores, which traditionally brought a lot of customers into malls. More recently, the pandemic led to temporary closures and a shift away from in-person shopping.

“A mall is a fragile ecosystem,” Green Street said. “When conditions deteriorate markedly, a mall can enter a ‘death spiral’ — where the lower sales productivity leads to falling occupancy, which results in fewer visitors attracted to a diminishing group of retailers, which continues the cycle of decreasing sales and occupancy.”

“This vicious cycle can continue until the mall becomes obsolete.”
CNBC noted that shares in the country’s biggest mall owner, Simon Property Group, fell 32 percent last year. The company owns a large number of the country’s roughly 1,000 Class A malls.
However, Green Street reserved its biggest concerns for B- and C-rated malls, which it predicted will need to be repurposed in the next few years.

David Goldsmith

All Powerful Moderator
Staff member
Mall REITS soar as they walk away from debt and hand keys over to lenders.

Largest US Mall Landlord Simon Property Group Sent Jingle Mail to Deutsche Bank Which Foreclosed on Mall, But Got No Bids​

Becoming a prolific jingle-mailer to dump malls. Holders of CMBS eat the losses. On the positive side, you can now buy your socks at Deutsche Bank.

Deutsche Bank this week foreclosed on a $177.5 million mall mortgage. The mortgage had been securitized and spread over two commercial mortgage-backed securities (CMBS) in 2012. The collateral is 560,000 square feet of retail space at the 1.2 million square-foot Town Center at Cobb, in Kennesaw, Cobb County, Georgia. The regional mall has over 170 stores, including a Macy’s, a JCPenney, and a Belk (just filed for bankruptcy).
The mall was owned by Simon Property Group, the largest mall landlord and mall REIT [SPG] in America, which, in one of its acts of jingle mail, had returned the mall to the lenders.
“Jingle mail” was engraved into the American lexicon during the housing bust, when homeowners voluntarily turned their homes over to lenders, presumably by mailing them the house keys. Most home mortgages are recourse loans, and banks can drag the homeowner to court over any deficiency after the foreclosure sale – except in the 12 “non-recourse” states. But commercial real estate mortgages are non-recourse; all the lender gets is the collateral, and the owner walks away.
At the time of securitization in 2012, the collateral for the loan was valued at $322 million, according to Trepp, a data firm that tracks CMBS. And everything was hunky-dory. In October 2020, the value was slashed by 60% to $130.4 million.

The legal notice by Deutsche Bank of the foreclosure sale, reported by the Marietta Daily Journal on January 27, specified that the mall would be sold on February 2 “at public outcry to the highest bidder for cash before the Courthouse door of Cobb County.” The opening bid would be $130.4 million.
And this is what happened on February 2, according to the Marietta Daily Journal:
[Attorney Matthew Norton of the law firm Polsinelli] “read the legal notice in full on the southern steps of the county’s justice center, a recitation that took over half an hour to complete. The bargain hunters who attended the morning’s residential foreclosure auctions left hours before, leaving Norton to conduct the “public outcry” on the courthouse steps across the street from an empty Flournoy Park.
And there were no bids. So Deutsche Bank and other CMBS holders are now the proud owners of the mall. Simon Property Group has washed its hands off it, letting the CMBS holders eat the losses. And the new owners, Deutsche Bank and holders of CMBS, will now get to manage the mall.
The foreclosed mortgage is spread over two CMBS deals: a $115.4 million portion makes up 12.8% of WFRBS 2012-C7 and a $62.1 million portion makes up 6.8% of WFRBS 2012-C8, according to Trepp.
The brick-and-mortar meltdown, brought on by the switch to ecommerce which hit department stores particularly hard and has been wiping them out one after the other, predated the Pandemic by years. Sales at department stores, which form the critical anchors of malls, peaked in 2000 and have since plunged by 57%, despite 20 years of inflation and population growth.
Even before the Pandemic, Simon attempted to lease out portions of the Town Center at Cobb mall as office space to bring in some cash, according to a source cited by the Marietta Daily Journal.
And even before the Pandemic, Simon has shed malls via jingle mail, letting lenders take the losses, including the 1-million square foot Independence Center in a suburb of Kansas City, MO, in 2019. When the mall was sold in a foreclosure sale, the $200-million CMBS backed by the mall generated a loss of $149.7 million – a loss of 75%! – “the largest loss ever incurred by a retail CMBS loan,” according to Trepp at the time.
Simon Property Group also wants to turn its 426,761-square-foot Springfield Plaza in Springfield, MA, over to lenders and walk away from the $28.3 million mortgage, according to special servicer notes reported by Trepp last August. When the mortgage was securitized in 2013, the property was valued at $39 million.
In addition, according to Kroll Bond Rating Agency, cited by MarketWatch in November, Simon was planning to send jingle mail of four other malls to lenders and walk away from $411 million in mortgage debt backed by those malls: the Mall at Tuttle Crossing in Dublin, Ohio; Southridge Mall in Greendale, Wisconsin; Montgomery Mall in North Wales, Pennsylvania, and Crystal Mall in Waterford, Connecticut.
On its website, Simon has a more or less flashy webpage for each of its malls. But the doomed jingle-mail malls eventually get their webpages on Simon’s website taken down, and the old links, such as this one for the Mall at Tuttle Crossing (, are redirected to a generic “oops” page — a form of accidental SPG jingle-mail humor.
Simon together with the second largest mall landlord Brookfield Property Partners have acquired J.C. Penney’s stores out of bankruptcy, along with other stores. J.C. Penney stores are anchor stores. When an anchor store closes, in this environment when no other department store will jump in behind it to fill the space, the mall spirals down quickly, as foot traffic to the other stores dies down further, and those stores close too.
By controlling the J.C. Penney anchor stores, and other key stores, Simon slows down the decline of its malls and gains some time – which makes sense. And if the math doesn’t work out, jingle mail is sent to the lenders

David Goldsmith

All Powerful Moderator
Staff member

Owner of Westfield, Buckling under $32 Billion in Debt, Plans to Dump its US Malls After Huge Losses​

“A management team that remains prisoner of its failed strategy that started with the acquisition of Westfield.”

Unibail-Rodamco-Westfield (URW), which, in addition to many properties in Europe, owns 27 malls in the the US, including the upscale Westfield San Francisco Center, reported a loss of €7.6 billion for 2020, after large write-downs. Its net rental income dropped by 28%.
The company, Europe’s biggest property REIT, is heavily leveraged and is in all the wrong markets at the wrong time. Besides its exposure to the ravaged brick-and-mortar retail sector, URW has a portfolio of airport shopping centers, office towers, hotels and conference halls, all of which were hammered by lockdowns, closures, travel restrictions, and cancellations.
The company’s shares responded to the news by sliding 12% on Thursday, to €57 a piece. They are now down 55% year over year and 78% from a peak of €257 in February 2015.
Now URW faces the challenge of reducing its debt in the midst of a global economic crisis. It has axed stock dividends for the next three years. It also tried to pull off a €3.5 billion rights issue last October. But that plan was shelved after a large bloc of shareholders led by French billionaire Xavier Niel and Unibail’s former CEO Leon Bressler voted down the proposal. Bressler blasted the rights issue as “a misguided act by a management team that remains prisoner of its failed strategy that started with the acquisition of Westfield.”

Unable to raise fresh capital, the company is trying to sell off a chunk of its assets before 2022, as values in the market are tumbling. On Wednesday, it announced that it will try to dump its U.S. properties that it had acquired in 2018 from Australian mall operator Westfield. In effect, it placed a €16 billion bet on a sector that was already grappling with the threat posed by e-commerce.
This left it with 27 malls in the US — 16 in California, three in Maryland and two a piece in Illinois, Florida and New York City, where it owns the Westfield World Trade Center. It also has 10 shopping centers in some of America’s biggest airport terminals, including JFK, LAX, Miami International Airport and Chicago O’Hare. It also aims to dispose of €3.2 billion in European assets by 2022.
The company’s financial report makes for painful reading, even by current standards: in 2020, URW’s malls were shut for 93 days. There were only 70 days in the entire year when they were not subject to some form of restriction. Even today, the company says that roughly half of its centers remain closed.
Headquartered in Paris, URW owns 40 assets in France, including malls, airport retail centers, conference centers, office complexes and even the odd hotel or two, such as the Salomon de Rothschild in Paris. Its portfolio also includes 9 malls and one office complex in Germany; 8 malls in Spain; 6 in Poland; 4 a piece in the Netherlands and Sweden; 3 in the Czech Republic; 2 in Austria; and one a piece in Italy, Belgium and Denmark. In the UK it owns four London malls.
In 2019, the total value of all of URW’s assets was €65 billion; by the end of 2020, it had fallen 11.6% to €56 billion. Revenues crumbled as its tenants’ sales plunged 37%. In Continental Europe, the group’s revenues fell 19%. In the US they tumbled 28%. In the UK, which went through two full-blown national lockdowns last year (and is now on its third), they plunged by 49.3%.
The UK’s brick-and-mortar retail sector was already deep in crisis before Covid. The lockdowns have merely intensified a shift from brick-and-mortar retail to e-commerce that was already well under way while also leaving a trail of bankruptcies in their wake. Long-struggling retail groups such as Arcadia and Debenhams were tipped over the edge. They behind left an even larger hole in the UK’s already decimated retail property landscape.
With many of its tenants unable to open their shops and eviction moratoriums in force across its international markets, URW suspended rent collection for some of 2020. By the end of the year, it had collected around 80% of rents and had extended just over €400 million of rent relief to its tenants.
“These negotiations are typically not about permanently changing lease structures or changing the basis for rent calculations (e.g., replacing Minimum Guaranteed Rent with Sales Based Rent only leases), but rather focus on providing appropriate rent relief to achieve a fair burden sharing,” it said.
URW is one of a number of large retail property landlords that refuses to give in to pressure from tenants to move to sales-based leasing. That would further erode the value of its properties, which in turn would make it even more difficult to continue servicing its debt, said Colm Lauder, a real estate equity analyst at Goodbody.
“If you are servicing debt, you need a clear income profile. If your rental income has a much smaller fixed component, far more significant variable component, naturally, your debt will be more expensive, more complex or not available at all,” Lauder said.
That would be a major problem for URW, given the size of its debt load, which reached €26.4 billion ($32 billion) last year. This is in large part a legacy of its purchase of Westfield’s US and UK assets, for $16 billion. The acquisition significantly expanded the company’s global reach but it also increased its exposure to brick-and-mortar retail at the worst possible time, when the sector was on the cusp of a deep structural downturn — particularly in the U.S. and the UK, the two markets it had just expanded into.

David Goldsmith

All Powerful Moderator
Staff member
Maybe the Fed is finally catching up with me.

Fed Sounds Alarm on Commercial Real Estate, Business Bankruptcy​

Commercial real estate prices ‘susceptible to sharp decline’
Pandemic exposes vulnerability of money market mutual funds
The Federal Reserve warned of significant risks of business bankruptcies and steep drops in commercial real estate prices in a report published on Friday.

“Business leverage now stands near historical highs,” the central bank said in its semi-annual Monetary Policy Report to Congress. “Insolvency risks at small and medium-sized firms, as well as at some large firms, remain considerable.”

David Goldsmith

All Powerful Moderator
Staff member

Macy’s Brick & Mortar Sales -35%, Digital +21%. Walmart Online +69%, US Ecommerce +32%. Online Furniture, Grocery, Clothing Sales Explode as Brick & Mortar Melts Down​

44% of Macy’s total sales are now ecommerce. Mall landlords, even the biggest, are turning malls over to their lenders.

Macy’s, when it reported earnings this morning, confirmed its own brick-and-mortar meltdown, and it showed the benefits of Macy’s decision years ago to go after ecommerce in a serious way, knowing that its brick-and-mortar stores – despite what it was telling the public – were on the slow way out, attested to by its countless and ongoing store closures. The Pandemic accelerated that trend by a quantum leap. But it’s messy and tough, and Macy’s is losing the edge in its digital sales growth.
Macy’s [M] ecommerce sales in the fourth quarter, ended January 31, rose by 21% year-over-year, to $3.0 billion, to account for 44% of its total net sales. Ecommerce sales are those sales that originated online, regardless of how the merchandise got into the home, whether through delivery or pick-up at the store.
But its brick-and-mortar sales in Q4 collapsed by 35% to $3.8 billion, accounting for only 56% of Macy’s total sales. At this rate, brick-and-mortar sales will be down to less than half of Macy’s total sales by the end of this year. The downward spiral has now picked up critical mass.
And total sales in Q4 fell by 19% year-over-year to $6.8 billion, as the increase in ecommerce sales could not make up for the decline in brick-and-mortar sales.

That Macy’s ecommerce sales were already 44% of its total sales, a huge feat, shows two things:
  • Years of investing heavily in ecommerce, including building out its fulfillment infrastructure, rather than counting on the miraculous rebirth of its brick-and-mortar stores.
  • The plunge of sales at its brick-and-mortar stores, which increased the share of ecommerce sales within total sales.

But Macy’s digital sales growth of 21% is relatively weak in the Pandemic era of ecommerce.

Walmart [WMT] – it got ecommerce religion way too late and inexplicably gave Amazon two decades of head start but in recent years has become deadly serious about it – reported that Walmart US ecommerce sales in Q4 soared by 69% and Sam’s Club sales jumped by 42%.
Bed Bath & Beyond [BBBY] reported that in the quarter ended November 28, its ecommerce sales soared by 75% year-over-year, accounting for about one-third of its total sales, as sales at its brick-and-mortar stores plunged, and overall sales fell by 17%.
Best Buy [BBY], which benefited from work-from-home and learn-from-home equipment purchases, hasn’t reported Q4 yet. But in Q3 it reported that online sales soared by 174% year-over-year to $3.8 billion, nearly tripling from $1.4 billion a year earlier, and accounting for 35% of its total sales.
Target hasn’t yet reported Q4 either, but in Q3, its ecommerce sales soared by 155%.
The Commerce Department reported last Friday that US ecommerce sales – sales by pure ecommerce players as well as sales by the ecommerce channels of brick-and-mortar retailers, such as Macy’s – soared by 32% in Q4 compared to a year earlier, to $245 billion, not seasonally adjusted, accounting for 15.7% of total retail sales:

In terms of dollars, the last three quarters – the Pandemic quarters – show the accelerated shift to ecommerce sales with gigantic year-over-year jumps in the range of $55 billion to $61 billion, including by $60 billion in Q4:

But total retail sales include the notoriously online-resistant sales at new and used vehicle dealers, grocery and beverage stores, and of course gas stations. Together they account for over one half of total retail sales. So the remaining brick-and-mortar stores, accounting for less than half of retail sales, have caught the brunt of the shift to ecommerce.
This is most painfully the case for department stores, once an iconic American institution. This is the 20-year progression of the demise of department stores that has accelerated in 2020 and is closing in on completion:

Some Pandemic Ecommerce Winners.
The Commerce Department started releasing “experimental” data last year on select categories of ecommerce sales, going back to 2019. This data is illustrative: it shows just how much certain categories of sales, including sales that were long considered very resistant to ecommerce, have moved to the internet.
Ecommerce sales of grocery and beverage stores have nearly quadrupled since Q1 2019, to $7.3 billion, after ineffectually trying for years – including efforts by Safeway, Amazon, and Google – to get Americans to buy groceries online:

Ecommerce sales of motor vehicle and parts dealers rose by 42% since Q1 2019, to $13 billion, with a concentration on used vehicles, including by several online-only used vehicle retailers, such as Vroom and Carvana:

Ecommerce sales of clothing and accessories have more than doubled since Q1 2019, to $10 billion:

Ecommerce sales of furniture and home furnishings have also more than doubled since Q1 2019, to $5 billion:

The biggest impact of this shift to ecommerce is on commercial real estate, two ways: Industrial properties, such as warehouses, fulfillment centers, and delivery centers, have become a red-hot segment. But retail properties, particularly malls with department stores as anchors, sinking into the mire, with mall landlords defaulting on their mortgages and letting the malls go back to lenders.
This includes the biggest mall landlord in the US, Simon Property Group, which is becoming a prolific jingle-mailer to dump its malls. Holders of CMBS eat the losses. ReadLargest US Mall Landlord Simon Property Group Sent Jingle Mail to Deutsche Bank Which Foreclosed on Mall, But Got No Bids

David Goldsmith

All Powerful Moderator
Staff member

Starwood Property Trust’s Q4 earnings fall 38%​

Q4 revenue rose 1.5% to $291M​

Barry Sternlicht was in such a good mood during Starwood’s earnings call on Thursday that he joked he was taking all of the company’s cash and buying bitcoin.
Sternlicht, chairman and CEO of Starwood Property Trust, said that while real estate is still just recovering from the effects of the pandemic, nearly all of the real estate investment trust’s business lines are in a “prime position.”

He called the company’s collateralized loan obligations (CLO) and energy book business a “gamechanger.” On other segments of the real estate market, he said: industrial is “fine;” multifamily is “weak, but will be OK;” and office is a “question mark” but he believes people will return to the office on some scale. Retail is still “really difficult” to underwrite. And the single-family rental market is “crushing it.”

Greenwich and Miami Beach-based Starwood reported $107 million in fourth quarter 2020 earnings, or 37 cents per share, down 38 percent from the same period in 2019. The REIT reported $290.6 million in revenue for the fourth quarter, up 1.5 percent from $286.4 million in the same period of the previous year. The company’s stock fell about half a percent to $22.74 per share as of 12:50 p.m. Thursday, following the earnings call.

Commercial rent collections were high at 98 percent in 2020, executives said. Jeff DiModica, president and managing director of Starwood, and Sternlicht said the company plans to grow the residential lending business.
Sternlicht also said that while New York will continue to struggle, it is “not going away.”

Large 2,000-room hotels reliant on business travel will continue to struggle, especially mid-week, he said. Sternlicht predicted that big-box hotels won’t return to normal occupancy levels until 2024 or 2025.

“Other parts of the hotel market will recover much faster,” he said, citing Starwood’s Miami Beach property that’s reporting 94 percent occupancy at $1,600 a night. Starwood co-developed and operates 1 Hotel South Beach.
During the pandemic, the company deployed $3 billion, and now has more than $700 million in cash, said Rina Paniry, the company’s CFO. Starwood’s commercial loan portfolio totaled a record $10.2 billion at the end of 2020, including $335 million in new loans and $250 million in loan repayments. For loans secured by hospitality, some borrowers are still receiving short-term modifications, including partial interest deferrals.

About $5 billion in loans were transferred to special servicing during Covid, and Starwood ended the year with an active servicing portfolio of $8.8 billion, Paniry said.

David Goldsmith

All Powerful Moderator
Staff member

These are real estate executives’ worst worries for 2021​

Survey shows 90% see remote work having long-term effect on office market​

After an awful year for much of the real estate world, executives see full recovery not happening this year or even next, yet are optimistic about their own firms’ immediate future.
A survey of real estate executives found 85 percent see 2021 as a year of opportunity for their companies, but 70 percent said that the commercial real estate sector will not return to pre-Covid levels until at least 2023.

“You scratch your head,” said Ron Gart, a partner and chair of its Washington, D.C., real estate practice at law firm Seyfarth Shaw, which conducted the survey. “They think the rest of the economy, the rest of commercial real estate, is going to take two to three years to recover. But they’re extraordinarily optimistic for themselves. And I don’t have a good answer as to how you reconcile the two.”

The email survey drew responses from 144 owners, developers, investors, asset managers, brokers, lenders and consultants.

Their most pressing concerns were the shuttering of restaurants, gyms and other businesses; eviction and foreclosure moratoriums; and a recession in the United States.

Moreover, 90 percent believe that the shift to work-from-home will have long-term impacts on the office market, while 70 percent think the same for the residential market.
The industry was divided on the Biden administration, with 54 percent saying it will not have a positive impact on commercial real estate in 2021. (In last year’s survey, only 4 percent believed Biden to be the most favorable candidate for the real estate industry.) In 2017, more than two-thirds of survey respondents believed the Trump administration would have a positive impact on the market.

Although Biden has talked of doing away with 1031 exchanges, 62 percent of respondents did not expect tax reform to have a significant effect on the industry this year.

David Goldsmith

All Powerful Moderator
Staff member
Moody's expects things will get worse after eviction moratoria expire.

For multifamily, office landlords, worst is yet to come: Moody’s​

2021 forecast predicts trouble for some CRE sectors​

For landlords across different commercial real estate sectors, Moody’s Analytics has some potentially distressing news: The worst may be yet to come.
A new report by the economic research firm looks at the state of commercial real estate in the wake of the pandemic, and what to expect in 2021. The report looks at four CRE sectors — multifamily, office, retail and industrial — and while there are some reasons to be optimistic about the year to come, more distress is on the horizon.

“Though there is distress on the income side, with landlords and owners having to deal with deteriorating rents and occupancies, there is much less recorded distress on the pricing side, as fewer owners are pressured to sell,” Victor Calanog, chief CRE economist at Moody’s Analytics said in a statement.
Multifamily is one area where more trouble is possible: Rents declined substantially in many major markets in 2020 — notably by 15 percent in San Francisco and 12 percent in New York — and the vacancy rate hit 5 percent by the end of the year. It’s expected to top out around 6.5 percent next year, and with eviction moratoriums expiring, some tenants may not be able to pay back rent owed — which leads to trouble for landlords who rely on those payments for operational expenses.

But pandemic-related construction stoppages helped the sector; just over 150,000 units came online throughout 2020, a 43 percent decline compared to the firm’s forecasts in the fourth quarter of 2019. The lack of supply glut may be temporary, though, with 200,000 units expected to come online in 2021.
When it comes to the office sector, the national vacancy rate rose from 16.8 percent in 2019 to 17.7 percent. Vacancies are expected to continue to rise to what Moody’s Analytics says will be “near-record levels” by 2024, at which time it believes the rate will slowly go down. It expects effective rents to fall by about 7.5 percent this year, but the firm says it has revised its forecast for the coming year — to “less severity” in the short term, according to the report.

And for retail, Moody’s Analytics said that the lockdown accelerated the trend of shoppers pivoting to e-commerce, with the report noting that the jump in online shopping throughout the second quarter alone represented “about a decade’s worth of evolution compressed into a couple of months.”
The report notes that some property types performed better than others, namely retail centers that have grocery stores or pharmacies as their anchors. Malls, however, had a 10.5 percent vacancy rate at the end of the year — a historic high.

Unsurprisingly, the industrial sector — cited by many experts as the one bright spot for CRE amid the pandemic — performed well, by Moody’s Analytics’ metrics. The national vacancy rate for warehouse and distribution properties declined in the fourth quarter to 10.5 percent, despite 140 million square feet of new space coming online. Rents, meanwhile, went up, suggesting more resiliency going into 2021.

David Goldsmith

All Powerful Moderator
Staff member

Mall owner Washington Prime Group prepares for bankruptcy​

Set back by failure to convert unsecured bonds to preferred equity​

Washington Prime Group CEO Louis Conforti (Twitter, iStock)
A major mall owner is preparing for bankruptcy after it failed to make an interest payment on its debt.
Washington Prime Group, a real estate investment trust which owns more than 100 malls, has been negotiating with its lender to reduce its debt — but the talks are not going well, Bloomberg News reported. The mall owner has said Covid-19 could impair its ability to repay debt going forward or threaten its ability to stay afloat.

In November, Lou Conforti, the mall REIT’s chief executive officer, had said filing for bankruptcy was off the table.

But a month later, the mall had a setback. It sought to convert about $260 million in unsecured bonds to $175 million of preferred equity, but was unable to after it failed to reach an agreement with debt holders.
Washington Prime reported that its rent collections fell to 52 percent in the second quarter of 2020, although by the third quarter, collections had risen to 87 percent.

Two of the Ohio-based REIT’s competitors, CBL & Associates Properties and Pennsylvania Real Estate Investment Trust, filed for bankruptcy last year.
Malls have struggled during the pandemic as shoppers have stayed either because they felt safer shopping online or because indoor shopping was suspended to stop the spread of the coronavirus.

David Goldsmith

All Powerful Moderator
Staff member

Had American Dream “burned down,” it would have been better: exec​

Star-crossed New Jersey project costs owners 49% stake in other mega malls​

The nightmare continues for owners of New Jersey’s American Dream retail complex.
Facing a cash-flow crisis, the Ghermezian family is set to lose almost half of its stakes in two other mega malls: the West Edmonton Mall in Canada and Mall of America in Minnesota, according to Axios.

The family’s Triple Five Worldwide had used those malls as collateral to finance the $5 billion New Jersey project.
“It would have been much better if American Dream would have burned down or a hurricane had hit it, financially, because we would have been covered by insurance,” said Kurt Hagen, an executive at Triple Five, speaking in Bloomington, Minnesota. The comments were first reported by Axios.
Located in East Rutherford, New Jersey, American Dream broke ground in 2004 and soon ran into financial trouble. The Ghermezians assumed ownership about a decade ago. The project was finally starting to come together when the pandemic hit.

Like other malls, American Dream closed for several months last year. It reported just $54 million in sales for the year, including $34 million in the fourth quarter after it reopened with capacity restrictions.
Hagen called the pandemic the “worst-case scenario imaginable.” But he said it’s unlikely the lenders want to seize full ownership, as they “have no interest in running a shopping mall.”

John Walkup

Talking Manhattan on
Gotta think the bottom is in for malls. The recovery may not be vertical, but I would guess we've already seen the worst.

David Goldsmith

All Powerful Moderator
Staff member

The Whistleblower Trying to Stop the Next Financial Crisis​

One insider says that big banks have been quietly engaging in the same behavior that precipitated the crisis of 2008.​

If you were reading the news back in 2008, then you probably remember how residential mortgage backed securities fueled by subprime mortgages tanked the global economy. Now John Flynn, a veteran of the mortgage securities market, says it’s happening all over again — this time in the commercial real estate market. Flynn joins Ryan Grim and The Intercept’s Jon Schwarz to discuss.

Noah Rosenblatt

Talking Manhattan on
Staff member
Not sure how the Fed will stave off cmbs this time around other than buy it all up via QE. This is an everything bubble, when it pops, thge decline will be fast and fierce. Some saying summer

David Goldsmith

All Powerful Moderator
Staff member

40 Wall’s valuation chop means tax savings for Trump Org​

Office building’s value fell 29% to $130M​

The market values of office towers have plummeted during the pandemic, declines that could equal discounts for Donald Trump.
The former president’s family firm could pay nearly $1.7 million less on property taxes for the office tower at 40 Wall Street after the building’s value slumped 29 percent to about $130 million for the coming fiscal year, Bloomberg News reported.
The break would offer the Trump Organization some reprieve from the revenue declines that rippled across the firm’s portfolio this year.

The Wall Street building’s revenue fell $27.7 million from January through September 2020, or around $37 million for the year in total, Bloomberg found in an analysis of loan documents. That’s a 11 percent drop year-over-year.

The tumultuous end to the Trump presidency also left a mark. Tenants have considered leaving the property, while broker Cushman & Wakefield has distanced itself from the developer after the Jan. 6 Capitol riots.
The building has also been the target of a state probe into whether Trump falsely reported asset values to obtain tax benefits. The investigation stemmed from claims last year by Trump’s former personal lawyer Michael Cohen.

Trump isn’t the only developer set to benefit from tax cuts. Building owners across the city should receive similar breaks, said Martha Stark, professor at New York University’s Robert F. Wagner Graduate School of Public Service. Manhattan office towers saw a median 25 percent drop in market value, according to a May report from the city’s Independent Budget Office, cited by Bloomberg.

The state will release final assessments for the upcoming tax year later this month. Figures could show greater reductions than those listed in January’s initial assessments.

David Goldsmith

All Powerful Moderator
Staff member

Brookfield posts record FFO in Q1 — but not because of real estate​

Income boosted by $13B of asset sales; market “tone” for CRE still “negative”​

A year ago, as the impact of the pandemic was just starting to sink in, Brookfield Asset Management reported funds from operations of $884 million.
For the first quarter of this year, the asset manager’s FFO more than tripled to $2.8 billion — a record high, and a promising sign for the company’s post-pandemic outlook.
“This was a result of strong operating performance, significant realized carried interest and gains generated from capital recycling initiatives,” chief financial officer Nick Goodman said in a statement Thursday. “The balance of the year looks strong, with planned asset sales, ongoing capital deployment, and the continued economic recovery all expected to bolster operating results.”

More than half of the quarter’s FFO came from the company’s private equity ($992 million) and asset management ($636 million) segments, which saw big year-over-year gains — 500 percent and 67 percent, respectively. Brookfield’s real estate segment produced FFO of $250 million, a 14 percent increase from the same period last year.
While the firm’s fundraising is booming, Brookfield executives acknowledged challenges facing the commercial real estate space — or at least the public’s perception of it.

“Real estate stocks have been trading as though no company will ever occupy an office again, no person will ever set foot in a store and nobody will ever travel again, for either business or leisure,” CEO Bruce Flatt wrote in his letter to shareholders, also published Thursday. “We do not believe that any of these will be the case, and so we are investing accordingly.”

This negative “tone in the market” is also driving the company to take its Covid-challenged real estate arm private. The $6.5 billion deal to acquire all of Brookfield Property Partners’ outstanding shares is expected to close around the end of the second quarter.
“We should be able to do more with BPY’s assets once they’re privately owned than BPY could do with them under the constraints affecting a public entity,” Flatt wrote.
For its part, Brookfield Property Partners reported $125 million in FFO in the first quarter, less than half of the $309 million recorded in the same period last year.

“While we continue to experience challenges in certain of our operations and markets due to the ongoing consequences of the pandemic and global economic slowdown, we remain encouraged by a recovery in activity in select sectors within our business,” Brookfield Property Partners CEO Brian Kingston said in a statement last week.

Due to the pending privatization deal, BPY announced last month that it would not be hosting a conference call for the quarter.
In his investor letter, Flatt sought to make the case for the enduring importance of office space, by citing a self-help book that discusses how Roman emperors were able to manage a far-flung empire without modern technology: “Culture was the only way to make sure this happened.” And culture, Flatt’s argument goes, requires physical office space.

Looking at the broader economic recovery, Flatt also pointed to macroeconomic factors that would favor Brookfield’s business in the coming years: low or “lowish” interest rates continue to push institutional investors to alternative investments, while central bank stimulus has made it a good time to sell assets at favorable prices. Brookfield recorded $13 billion in asset sales in the past quarter.

Furthermore, the massive amounts of debt governments have taken on to battle the pandemic is likely to lead to greater privatization of infrastructure, Flatt argued. And the need for new infrastructure investment is huge, driven by trends like the rollout of new 5G technology and efforts to decarbonize coal-dependent economies worldwide.
“Even with an extremely positive backdrop, business is never easy; others have observed these same trends and are investing directly or raising third-party capital to invest into infrastructure,” Flatt wrote. “As a result, we have to be creative with our deals, but as always we will utilize our global reach and scale of operations to differentiate our capital from that of others. We think the odds favor a good decade ahead.

David Goldsmith

All Powerful Moderator
Staff member

Chetrit Group falls behind on Soho portfolio mortgage​

Declining occupancy and rising property taxes are blamed​

Between nonpaying tenants and antsy lenders, commercial landlords have been under increasing pressure throughout the pandemic, and even a major player is not an exception.
The Chetrit Group, one of the biggest privately held real estate companies in New York, is a month behind on payments for the $76.5 million mortgage backed by its mixed-use buildings at 427 and 459 Broadway in Soho, according to Trepp.
The problem is a drop in tenant occupancy and an increase in real estate taxes, according to the securitized loan’s servicer, KeyBank.

When the two-building portfolio was assessed shortly before the loan’s origination in December 2014, its 70,500 square feet of retail and office space was fully leased. The loan was underwritten assuming that net operating income would be 1.39 times its debt service. But from 2015 to 2019, the figure hovered between 1.11 and 1.33.
And in 2020, the portfolio’s net operating income fell to $2.9 million — some $2 million less than in 2019. That left net operating income at 0.75 times the debt service, according to Trepp.

Part of the issue was a 13,000-square-foot retail vacancy at 427 Broadway that had persisted since July 2017 when American Apparel, in bankruptcy, shut down the store. In addition, Psyop Media Company, a major office tenant in the building, left during the pandemic with five years remaining on its lease. The portfolio-wide occupancy was about 64 percent as of April.

Psyop is required to pay the landlord a $4 million early termination fee, according to KeyBank’s commentary. The tenant has already paid a half of it to Chetrit, which reportedly passed it along to the lender. Psyop will pay the rest over a 24-month period.
The Chetrit Group and Psyop Media did not return phone and email messages seeking comment.

David Goldsmith

All Powerful Moderator
Staff member

Investors Bet on Commercial Real Estate, Undeterred by Empty Offices and Hotel Rooms​

Government support, help from banks keep landlords from suffering steep losses​

High-rise buildings in San Francisco, where the share of office space available for lease is the highest on record.
More than a year into the pandemic, high-rise office buildings are largely empty. About one of every two hotel rooms is unoccupied. Malls are struggling to attract shoppers.
And yet by most measures, the U.S. commercial real-estate market is in remarkably solid shape. Prices fell far less than after the 2008 financial crisis and are already rising again. The number of foreclosures barely increased. Pension funds and private-equity firms are once again spending record sums on buildings.

The market’s resilience shows how the federal government’s aggressive efforts to support the economy kept landlords from suffering steep losses. Banks have also offered delinquent property owners some slack, rather than foreclosing aggressively.

This support won’t last indefinitely, and there could be a rude awakening for investors when it starts to wane. Real-estate owners will have to contend with remote work’s threat to the office market, the dearth of business travel and the broad decline of the mall business.

But a number of big global pension funds have been raising their allocations to commercial real estate, which should bring plenty of cash into the market, and prices are already rebounding.
Between March and May last year, commercial real-estate prices fell 11%, according to commercial real-estate analytics firm Green Street. Prices since July have increased 7%, erasing more than half their pandemic declines.

That turnaround stands in sharp contrast to the 2008 financial crisis, when commercial real-estate prices in the U.S. fell 37%, Green Street said, and took years to recover.
This time around, the office, retail and lodging businesses look worse off than in 2009 in many parts of the country. But public spending has been much more robust. Wealthy people are also largely employed, but being cooped up at home led them to save more of their earnings. Much of that money went into stocks and bonds, pushing prices up and interest rates down. That has made real estate look cheap in comparison.

And with the prospect of inflation fast becoming the financial community’s biggest worry, more investors in the future could turn to commercial properties with leases that include rent increases that keep pace with inflation.
“People view it as inflation-protected,” said Eric Rosenthal, managing partner at real-estate investment firm Machine Investment Group.
Private investment funds focused on real estate are already feeling flush. They had $356 billion in cash reserves in April, according to Preqin, which was about double what these funds held at the end of 2009. In a recent survey by Hodes Weill & Associates and Cornell University, 29% of large institutions said they want to put a bigger share of their wealth into real estate, while 5% said they want to reduce exposure.

Despite the tech industry’s broad shift to remote work, Facebook is doubling down on physical office space in New York. It signed a major deal during the pandemic making it one of the city’s largest corporate tenants. WSJ takes an exclusive look inside Facebook’s future NYC offices. Photo Illustration: Adam Falk/The Wall Street Journal
Big public pension funds in California, Kansas and Iowa have raised their target allocation to real estate over the past couple of years. Alecta, a Swedish pension fund with around $130 billion under management, last year increased to 20% its target allocation for alternative assets, which include real estate and infrastructure, up from 12%. Real estate is a hedge against the ups and downs of public markets, and low bond yields make it look “relatively attractive,” said Frans Heijbel, head of international real assets.
Banks have also largely spared property owners. Normal recessions often produce a vicious cycle of foreclosures. When rents and property values fall, building owners stop paying their mortgages and lenders foreclose, which pushes prices down further.

That hasn’t happened this time. Regulators allowed banks to delay loan payments without having to declare a default. Consequently, lenders have been in no rush to foreclose or sell loans.
Christopher Coiley, head of Valley National Bank’s commercial mortgage division in New York and New Jersey, gets two calls a day from funds looking to buy troubled loans. But he doesn’t have anything to sell. “It’s almost comical,” he said.

Government and lender support for the market has masked deeper problems. The prices of malls and hotels are down significantly. Loan defaults and foreclosures are expected to increase as forbearance periods end and some lenders finally lose patience. Overall property returns would be worse without booming warehouses, up 25% over the past year.
In a March report, Fitch Ratings said that if remote work lowers demand for office space by 10%, building valuations could fall by more than 40%.

Even signs of inflation aren’t entirely positive for real-estate owners, who borrow heavily and benefit from low rates. Rising consumer prices could push up interest rates and cause any real-estate momentum to peter out.
“Instead of that cliff, we just go sideways,” said Mark Zandi, chief economist at Moody’s Analytics, who is cautious about the property market. “Maybe down a little bit, maybe up a little bit, but nowhere fast for quite some time until we work through these adjustments.”

Still, technical reasons are compelling some large investors to buy real estate regardless. When stock and bond prices rise faster than those of other assets such as real estate, their share of a pension fund’s holdings automatically increases. That means the fund has an incentive to buy more real estate just to rebalance.
Some investors are buying places hardest hit by the economic crisis. In San Francisco, where the share of office space available for lease is the highest on record, according to CBRE Group Inc., Dropbox Inc. recently put up for sublease a big part of its headquarters. Yet the building sold in March to private-equity firm KKR & Co. for $1.1 billion, the most expensive sale of a San Francisco office building in more than a decade.
KKR’s head of real-estate equity in the Americas, Justin Pattner, said he likes the local market. The building’s lease runs for an additional 13 years and any vacancies can be converted to high-demand lab space.