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

David Goldsmith

All Powerful Moderator
Staff member

CRE investors hedge bets in suburbs despite hope for urban office revival​

Majority of survey respondents believe major city office leasing will recover within 4 years​

Commercial real estate investors have high hopes that major office markets will return to normal in the near future, but most aren’t betting on it just yet.
Nearly three-quarters of real estate industry professionals believe that office leasing velocity in major cities will return to pre-pandemic levels within the next four years, according to a new survey by law firm Morrison & Foerster, which polled over 500 CRE stakeholders across the U.S. in April and May.
When asked which markets are currently best suited for commercial real estate acquisitions, however, just 47 percent respondents ranked primary markets as one of their top choices, closely followed by suburban areas of primary markets at 46 percent and secondary markets at 37 percent.

A full 21 percent of respondents predicted that office leasing velocity in major cities will never return to pre-pandemic levels. Taken together, the results signal that investors may be finding value in new markets after the pandemic.
The office market has been hard hit by remote work, a trend that has inspired some employees to move away from cities — or buy secondary homes — as more companies embrace hybrid work models even as vaccines proliferate. Survey respondents were split on whether out-migration from urban centers represents a temporary shift: 59 believe it does, while 30 percent indicated that it is a permanent trend.

Even so, as office workers gradually return to their desks — with some companies directing 100 percent of their employees to come back as soon as next month — thoughts about working from home have evolved.
Though 77 percent of respondents of the May survey expect, in three years, to be working from home more than they did before the pandemic, that figure is down slightly, from 85 percent, when the survey was last conducted in October 2020. Seventy-three percent of respondents believe that a majority of office workers will return to the office full-time at some point after the pandemic.

Respondents predicted a quicker recovery for retail. Eighty-four percent expect in-person shopping, entertainment and travel to return to pre-pandemic levels within the next two years, and 51 percent expect it to happen within one year.

A minority of respondents were unconvinced. “Never. Consumers found new ways to shop,” one respondent wrote. “Retail patterns permanently changed,” said another. “Streaming movies will have some impact on theater experience.”
Still, it’s not all doom and gloom. The vast majority — 83 percent — believe the worst of the economic downturn is behind us.

David Goldsmith

All Powerful Moderator
Staff member

LA was top spot for commercial property investment in Covid-ravaged year​

Foreign investors target Sun Belt as REIT investment and CMBS lending saaw large declines​

Commercial real estate investment fell across the U.S. in the year since the coronavirus pandemic began, with Houston, Seattle, New York and San Francisco seeing the biggest declines.
Greater Los Angeles was the top recipient of CRE investment, with more than $30 billion in deals in the 12-month period ending in March, according to a new report from CBRE. That’s a 39 percent year-over-year decline, less severe than the 57 percent drop in Houston, the 50 percent declines in Seattle and the New York region or the 47 percent slide in the San Francisco Bay area.

“Markets like New York and San Francisco were harder hit as remote working and pandemic uncertainty led to large declines in office investment,” CBRE analysts wrote in the report. The top 20 markets saw a 38 percent decline in investment volume on average.

(Click to enlarge)
Meanwhile, markets like Boston, Phoenix and Raleigh-Durham, North Carolina “appeared more resilient due to relatively strong job growth,” according to the report.

Investment in Boston office and industrial properties increased over the past year. Richmond, Virginia and Raleigh-Durham recorded large increases in office investment, while multifamily deal volume rose significantly in markets like Indianapolis, Jacksonville, Florida and Charlotte, North Carolina.
In the first quarter alone, U.S. CRE investment volume fell 28 percent from the first quarter of 2020 to $92 billion. “Among major property types, industrial and multifamily continued to outperform,” CBRE analysts wrote, noting that they expect a strong recovery in the latter half of the year.

The struggling hotel sector saw investment pick up as well, although half of the quarter’s hotel deal volume came from a single megadeal — Colony Capital’s $2.8 billion sale of a 197-property, 22,676-room portfolio to Highgate Hotels, which was announced last fall and closed in March.

Different types of investors have also responded differently to the pandemic. Investment by public companies and real estate investment trusts fell 75 percent year-over-year to $5.6 billion in the first quarter, while deal volume declined by 19 percent for private investors and 18 percent for foreign investors.

Three countries — Canada, South Korea and Singapore — accounted for more than half of all foreign investment in U.S. commercial real estate in the first quarter. “Foreign investors increasingly allocated capital to growing office markets in the Sun Belt, such as Austin and Charlotte,” according to the report.

Commercial mortgage-backed securities lending fell 29 percent in the first quarter from a year earlier and down 53 percent for the 12 months ended in March. Meanwhile, multifamily mortgages from government agencies like Fannie Mae, Freddie Mac and the HUD all rose by double digits.

Another challenge facing the CMBS sector is elevated delinquency rates. While 7.5 percent of CMBS loans are currently delinquent, delinquency rates for loans from banks, life insurance companies, Fannie and Freddie were all around 1 percent or lower.
“Despite small upticks, all bank loan delinquency rates remained low compared with the last cycle,” the report notes.

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​

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.
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.
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.


David Goldsmith

All Powerful Moderator
Staff member

Wall Street’s Cooked Books Fueled the Financial Crisis in 2008. It’s Happening Again.

“IT’S ONLY WHEN the tide goes out that you learn who’s been swimming naked,” the billionaire investor Warren Buffett has famously said.
During the crash of 2008, the whole world learned just how dangerously nude Wall Street was. Now evidence is accumulating that suggests that many financial institutions are skinny-dipping once more — via similar types of lending that could lead to similar disasters as the water recedes again due to the Covid-19 pandemic.
A longtime industry analyst has uncovered creative accounting on a startling scale in the commercial real estate market, in ways similar to the “liar loans” handed out during the mid-2000s for residential real estate, according to financial records examined by the analyst and reviewed by The Intercept. A recent, large-scale academic study backs up his conclusion, finding that banks such as Goldman Sachs and Citigroup have systematically reported erroneously inflated income data that compromises the integrity of the resulting securities.
The analyst’s findings, first reported by ProPublica last year, are the subject of a whistleblower complaint he filed in 2019 with the Securities and Exchange Commission. Moreover, the analyst has identified complex financial machinations by one financial institution, one that both issues loans and manages a real estate trust, that may ultimately help one of its top tenants — the low-cost, low-wage store Dollar General — flourish while devastating smaller retailers.

This time, the issue is not a bubble in the housing market, but apparent widespread inflation of the value of commercial businesses, on which loans are based.
Those who remember news coverage at the time know that the tale of the 2008 financial implosion involved an enormous swirl of numbers and acronyms. But when boiled down to its essence, the story of the housing bubble of the 2000s, and plausibly Wall Street’s actions today, is simple: It’s counterfeiting.
Traditional counterfeiters print money: pieces of paper that supposedly are worth their face value but in fact are worth nothing.
Wall Street counterfeiters during the housing bubble printed securities: pieces of paper that supposedly were worth their face value but in fact were worth much less.
This time, the issue is not a bubble in the housing market, but apparent widespread inflation of the value of commercial businesses, on which loans are based.
In the mid-2000s, companies like Countrywide Financial Corp. issued so-called liar loans. Often without informing the borrowers themselves, Countrywide and other loan companies would claim that, say, a bartender was making $500,000 a year, allowing them to borrow enough money to buy a home that they couldn’t possibly afford. The originating banks then took the loans, which could never be paid back on the bartender’s real income, and securitized them — i.e., bundled them together into a trust, which was then sliced up into bonds called residential mortgage-backed securities. These securities behave similarly to regular bonds, coming with a quality rating and an interest rate that they pay out. These securities, sold to credulous investors such as pension funds, were the counterfeit paper of the period, remaining valuable as long as home prices rose, which allowed the bartender to refinance or sell the property when the payments got out of hand.
When prices stopped rising, the housing bubble collapsed, and those at both ends of the transaction were ruined. Borrowers, unable to sell or refinance, were thrown out of their homes. Many investors, who generally thought that they were buying risk-free bonds, lost huge sums. But by then, middlemen like Countrywide’s CEO Angelo Mozilo had taken home hundreds of millions of dollars from the fees for originating and packaging the mortgage loans.
Now it may be happening again — this time not with residential mortgage-backed securities, based on loans for homes, but commercial mortgage-backed securities, or CMBS, based on loans for businesses. And this industrywide scheme is colliding with a collapse of the commercial real estate market amid the pandemic, which has business tenants across the country unable to make their payments.

JOHN M. GRIFFIN and Alex Priest are, respectively, a prominent professor of finance and a Ph.D. candidate at the McCombs School of Business at the University of Texas at Austin. In a study released last November, they sampled almost 40,000 CMBS loans with a market capitalization of $650 billion underwritten from the beginning of 2013 to the end of 2019.
“Overall,” they write, “actual net operating income falls short of underwritten income by 5% or more in 28% of loans.” This was just the average, however: Some originators — including an unusual company called Ladder Capital as well as the Swiss bank UBS, Goldman Sachs, Citigroup, and Morgan Stanley — were significantly worse, “having more than 35% of their loans exhibiting 5% or greater income overstatement.” The below graph from the paper illustrates just how prevalent this issue is with some of Wall Street’s biggest names:

Overstatement by originator.

Image: “Is COVID Revealing a CMBS Virus?” by Professor John M. Griffin and Alex Priest, McCombs School of Business, University of Texas at Austin
The paper explains that the authors are “interested in studying intentional income overstatement.” In an interview, Priest said that “we find that the direct inflation of past financials is common practice in the industry” and “our tests demonstrate that this really doesn’t seem to be a pattern that’s driven by coincidence. … It’s hard to argue that these originators are just naive,” making innocent mistakes.
One way the authors approach the issue is by examining whether lending institutions overstated borrower income more or less frequently during the first half of the seven years it covers (i.e., 2013-15) compared to the second half (2016-19). Unintentional overstatement should have occurred at random times. Or if lenders were assiduous and the overstatement was unwitting, one might expect it to diminish over time as the lenders discovered their mistakes. Instead, with almost every lender, including Ladder, the overstatement increased as time went on.
These income overstatements might cause defaults under any circumstances. But it has been particularly dangerous in a severe economic downturn like the one caused by the coronavirus pandemic. “There is an economically and statistically significant relation,” Griffin and Priest write, “between originator income overstatement and distress.” That is, loans where the fundamentals were misstated are, unsurprisingly, more likely to go bad during this crisis. All these banks are swimming naked.
The level of distress in the industry can be seen in this graph created by Trepp, a company that produces a specialized database for the commercial real estate and structured finance industries. The overall delinquency rate for commercial mortgage-based securities shot up last year to the same level as the peak during the last economic collapse. And CMBS delinquencies for retail and lodging businesses reached unprecedented heights.

CMBS delinquency rates.

Image: Courtesy of Trepp
THIS IS NOT just the conclusion of academics.
John Flynn has worked in commercial real estate for decades, including stints at GMAC Commercial Mortgage and the ratings agencies Moody’s and Fitch. He now provides advisory and consulting services for CMBS investors, borrowers, and lawyers.
In conversation, Flynn comes across much like the investor Michael Burry in “The Big Short,” combining a love for financial arcana with deep outrage at how the system screws the little guy. “I’m not a perfect angel,” says Flynn. “But there has to be a limit.”
Flynn’s whistleblower complaint filed with the SEC states that he has identified “about $150 billion in inflated CMBS” issued since 2013 by banks such as Wells Fargo and Deutsche Bank and the “shadow bank” Ladder Capital.
But it’s easiest to understand what seems to be happening in the CMBS market by looking at a single trust.
Take one called “LCCM 2017 LC26,” which Flynn has examined in fine-grain detail. What he’s found appears similar to the residential mortgage trusts of the 2000s, with some newfangled twists.
LCCM 2017 LC26 consists of 57 commercial real estate loans bundled together, with a total unpaid principal balance of $625 million. LCCM stands for Ladder Capital Commercial Mortgage Securities, the trust depositor. 2017 is the year the trust was created. LC stands for Ladder Capital Finance, the trust’s sponsor and mortgage loan seller. 26 means it’s the 26th in a series.
Ladder Capital is best known for being one of former President Donald Trump’s biggest creditors.
LCCM and LC are both subsidiaries of Ladder Capital, a small Wall Street firm best known for being one of former President Donald Trump’s biggest creditors. According to Trump’s 2020 financial disclosure, companies he controls owe Ladder a minimum of $110 million, including a mortgage on Trump Tower for at least $50 million. Jack Weisselberg, the son of Trump Organization Chief Financial Officer Allen Weisselberg — considered the architect of Trump tax and financial strategies — is a director at Ladder and reportedly a senior loan-origination officer there.
Ladder was founded by three former executives who all worked at Dillon Read Capital Management, an internal hedge fund at UBS that collapsed in 2007 after making investments in the subprime housing market. Ladder is a real estate investment trust that also produces and sells commercial mortgage-backed securities. It’s the type of nonbank financial institution that has proliferated since Congress passed the 2010 Dodd-Frank Act in an attempt to rein in Wall Street in the wake of the financial crisis. Ladder Capital did not respond to several requests for comment.
According to the documentation for a memo Flynn produced for journalists, he found notable problems with historical reporting for 12 of the 57 loans in LCCM 2017 LC26. The 12 loans were worth $189.5 million, or 30.2 percent of the total value of the trust’s unpaid principal at the date of loan sale. Finding those problems took enormous legwork, not the type of diligence typically conducted by investors who acquire these securities. The documents that undergird trusts like LCCM 2017 LC26 are publicly available but only with access to a premium subscription service. The documents produced to vouch for the quality of a loan are not typically investigated by investors — or, in most cases, ratings agencies — who rely on the word of the summary and prospectus produced by the issuer of the security. The offering circular for LCCM 2017 LC26 is 407 pages long, plus hundreds more pages of appendices.
The circular includes standard “safe harbor” language emphasizing that Ladder cannot predict the future performance of the bonds issued by the trust. But as Flynn found, the issue was Ladder’s representations of the past.
First, Flynn compared 12 loans that had previously been packaged into other trusts, which allowed him to compare how previous lenders had characterized the loans versus how Ladder was now characterizing them. For instance, if a previous lender had said a property had generated a certain amount of income in 2015, you would expect that Ladder would provide the same numbers for that year. But in many cases, it didn’t. Sometimes the numbers weren’t even close.
If a previous lender had said a property had generated a certain amount of income in 2015, you would expect that Ladder would provide the same numbers for that year. But in many cases, it didn’t.
Even if investors did attempt to scour the documents for anomalies, doing so would have been extraordinarily difficult. Flynn had to engage in laborious detective work, as the names or addresses of the 12 relevant borrowers in LCCM 2017 LC26 were often different from their listings in previous trusts. In order to find previous loan documents to compare to current ones, Flynn often had to get creative. For instance, Flynn looked for matches between tenants or square footage of the property being purchased to determine that a loan in LCCM 2017 LC26 was the same as the one in a previous trust.
Flynn then looked at two key financial metrics for each loan: the property’s net operating income, or NOI, and net cash flow, or NCF. In the world of commercial mortgages, a property’s NOI and NCF hold a significance similar to a borrower’s income for residential mortgages. The higher the numbers, the more creditworthy you are, allowing you to borrow more at lower interest rates.
The previous trust’s servicers had reported the NOI and NCF. Then when Ladder Capital packaged them into a new trust, Ladder also reported the NOI and NCF. But the numbers didn’t match.
By Flynn’s calculations, as of April 2019, the 12 anomalous loans had, in aggregate, total inflated NOIs of $2.0 million and NCFs of $3.29 million.
This makes them look much like the loans of the housing bubble. Flynn alleges in his SEC complaint that companies like Ladder Capital have an incentive to exaggerate a business’ income. As Flynn explains in his memo, Ladder “takes profits and fees from originating, arranging, and selling the loans into CMBS trusts, and then selling the securities.”
Flynn also alleges in the complaint that changes in names and addresses when loans are moved out of old trusts and into new ones are not an accident but suggestive of deliberate obfuscation. “The correlation of name and address changes with inflated numbers,” he says, “is something like 95 percent.”
Ironically, Ladder Capital’s website describes commercial real estate underwriting — i.e., the accurate assessment of the creditworthiness of borrowers — as its “core competency.”

THAT’S THE PART of the story that’s similar to the 2008 crisis. But it gets even stranger.
Ladder Capital does not just make loans. As its website explains, it does indeed engage in “originating senior first mortgage fixed and floating rate loans collateralized by commercial real estate.” But it also makes money “owning and operating commercial real estate.”
The money for the loans that make up LCCM 2017 LC26 did not come from Ladder. Rather, it borrowed the money on a short-term basis from Wells Fargo, and then one of its subsidiaries, Ladder Capital Finance LLC, loaned it to companies that wished to take out a mortgage to buy commercial property (or refinance an existing mortgage). It then packaged these 57 loans into the trust. But of the 57 loans, 23 of them, totaling $76.7 million, were made by Ladder Capital Finance LLC to another Ladder subsidiary in the real estate business, Ladder Capital Finance Holdings LLLP. In other words, contrary to the admonition to neither a lender nor a borrower be, Ladder was both in the same transaction.

In LCCM 2017 LVC26, 21 of the 23 loans were used by Ladder Capital to purchase properties where Dollar General is Ladder Capital’s sole tenant. (The other two loans Ladder Capital made to itself were used to buy properties with tenants including Bank of America and Walgreens.) Ladder’s relationship with Dollar General is significant for the company: During a 2020 earnings call, Ladder’s co-founder and president Pamela McCormack stated that “our three largest tenants are Dollar General, BJ’s, and Walgreens.”
This, Flynn contends in his memo, could allow Ladder Capital to make money coming and going. First, Ladder subsidiaries would get the fees for originating and packaging the loans. Next, the seemingly exaggerated NOI and NCF numbers for the 12 problem loans push down the interest rates for the entire trust, including Ladder Capital’s loans to itself.
That’s where Dollar General comes in. Because Ladder Capital is paying the trust a lower interest rate on its mortgages than it would be if the cash flow and income numbers had not been increased, its monthly loan services costs for its properties logically must be lower. And if that lower cost is then translated into a cheaper rent for the tenant — in this case Dollar General, though the logic would apply generally — that means the store’s overall costs would go down significantly, especially compared to other retailers operating in the same areas.
Rent is the largest cost for many retailers, particularly understaffed stores run by underpaid employees and stores with low-margin sales of low-priced consumer products.
Daniel Stone worked for four years for Dollar General as a market planning analyst, where he was responsible for finding prime locations for new stores. He said the rent at a potential store was the most significant factor he would look at. “Rent was the largest year-to-year cost,” he said, noting that many stores employed just two or three full-time workers. If the rent on a potential location was too high, he said, the company would push back, explaining that they could only open a location at a particular price. Often, he said, as much as $10,000 a year would be knocked off the annual rent by the would-be landlord, and the store would be opened.
He was fired in April 2020, he said, after expressing concerns about the way workers were being treated in the midst of the coronavirus pandemic. “They classify you as a manager so they don’t have to pay you overtime,” Stone said.

Tom Barrack, a close friend of Trump’s and a leading real estate investor, made the same point about the significance of rent costs for low-margin retailers earlier in 2020 — and warned about the fragility of the CMBS market during the pandemic. “When commerce stops and they can’t pay rent,” Barrack said on Bloomberg TV, “and they can’t pay interest on the debt, and then the banks or the intermediaries can’t pay the investors, it all collapses.”
Moreover, the spread of Dollar General stores and stores like it is widely understood to be bad for the health of communities where they’re located. They sell snacks, drinks, and canned foods — which makes regular supermarkets reluctant to open locations nearby — but limited or no produce or fruit, thereby creating food deserts. Communities across the U.S. have tried to stop the opening of dollar stores.
Nonetheless, Dollar General’s stock has gone up almost 150 percent in the past five years. Now, as tens of millions of Americans still face economic hardship and are desperate to spend as little as possible, Dollar General is trading near its highest level ever.
SO WE KNOW who seemingly benefits from LCCM 2017 LC26. The victims of it are more diffuse but just as real.
There are the investors, including pension funds and college endowments, who will be left holding the bag if borrowers received larger loans than they could service and end up defaulting.
“Just in the commercial mortgage market, you have $4.5 trillion,” Barrack said. “And that money needs to keep recycling to keep people moving and to keep employers in their buildings so that they can hire employees. If that stops, margin calls at the banks, to all the intermediaries. We talk about the nonbank banks and the shadow banks that after Dodd-Frank were instituted in order to create more liquidity in the system for mortgages — when that stops, everything stops.” That is, if stores can’t pay their rent, their landlords can’t pay their mortgages, less money flows into the trusts created from those securitized mortgages, investors in the trust don’t get paid, and the whole system freezes.
Other victims include the businesses that are forced to raise capital without the advantage of artificially low interest rates. “Misrepresentations made in the loan sales allow complicit lender/owners to subsidize and decrease interest rates payable for their own loans,” Flynn argues in his memo, which gives them “a competitive advantage over competing retailers.”
That brings us to today. “The pandemic has justifiably renewed concerns about the fragility of the CMBS market and the possibility of a new, commercial, mortgage crisis,” according to a memo from Quinn Emanuel Urquhart & Sullivan, an international white-shoe law firm that specializes in large-scale, complex lawsuits.
There’s been, the firm warns, “a steady drumbeat of warnings regarding troubling origination and underwriting practices impacting the long-term stability of the market.” This has already translated into litigation similar to that during the 2008 meltdown: In February, the SEC filed a lawsuit against a credit rating agency for allegedly manipulating its CMBS rating methodology. Last September, another credit rating agency paid $2 million in fines to settle a similar SEC suit.
Flynn believes that a reckoning is coming, one way or another. “It’s incredible but not surprising that Wall Street is repeating the same kind of shenanigans, given there were no real repercussions after the subprime crisis,” says Flynn. “CMBS borrowers and investors will face more frequent defaults and higher losses from these kinds of issues as CMBS 2.0 credit and loan quality is laid bare by Covid-19.”

David Goldsmith

All Powerful Moderator
Staff member

Mall owner Washington Prime files for Chapter 11 bankruptcy protection​

  • Mall owner Washington Prime Group filed for Chapter 11 bankruptcy protection on Sunday after the Covid-19 pandemic forced it to temporarily close some of its roughly 100 shopping centers across the United States and businesses were unable to pay its rent.
  • The company's estimated assets ranged from $1 billion to $10 billion as did its estimated liabilities, according to a filing made in the United States Bankruptcy Court for the Southern District of Texas.
  • The company was in talks for roughly $100 million of so-called debtor-in-possession financing to aid operations during bankruptcy proceedings, Reuters reported earlier on Sunday.

David Goldsmith

All Powerful Moderator
Staff member

Starwood bailing on the mall business​

Barry Sternlicht has cut shopping center portfolio by 75% — and counting​

Barry Sternlicht’s Starwood Capital Group is moving away from its mall portfolio as values on the properties continue to plunge.

The investment firm has been selling off shopping centers at a loss across the United States, Bloomberg News reported. While Starwood owned 30 malls before the pandemic, it is now down to eight — and those are being run by outside companies and may seek new owners.

Starwood had been the fifth-largest mall landlord in the United States, although retail properties only made up about 5 percent of the firm’s investments. Selling off the retail properties could clear more than $2 billion in commercial mortgage-backed securities debt. The loans are non-recourse, meaning Starwood could walk away from the malls without owing the unpaid balance.

Covid-19 lockdowns had a devastating effect on shopping centers, many of which were already struggling as consumer habits changed. The price index of U.S. malls has fallen 18% since the pandemic began and 46% from their peak in February 2017, according to Green Street.

Starwood began building up its portfolio of retail properties in 2012, maxing out in 2017. At one point, it paid $3.2 billion for 19 properties over just 18 months.

Sternlicht is reportedly still willing to invest in retail properties, if the prices are right. But it says something that one of the largest asset managers — one with great financial wherewithal and access to capital — is dumping malls rather than trying to reposition them.

Starwood has $80 billion in assets and shows no signs of going away. The company recently made an unsolicited rival bid to acquire Monmouth Real Estate Investment, despite the latter already reaching a deal months earlier to be acquired by Sam Zell’s Equity Commonwealth.

David Goldsmith

All Powerful Moderator
Staff member

Chetrit Org’s 850 Third Avenue heads to foreclosure auction​

Mezzanine lender Harbor Group International initiated process​

The Chetrit Organization’s 850 Third Avenue is headed for the auction block.
The UCC foreclosure auction, scheduled for Sept. 14, was initiated by an entity associated with Harbor Group International, an investment firm headquartered in Norfolk, Virginia.
The firm holds a $25 million junior mezzanine loan backed by a Chetrit entity that owns the 21-story, 617,000-square-foot office building between East 51st and East 52nd streets, according to a public notice reviewed by The Real Deal.

David Goldsmith

All Powerful Moderator
Staff member

New York malls’ foot traffic still has not recovered​

Shopping hubs lag behind 2019 levels​

Nearly a year after malls in New York reopened, they are still not back to where they were.
Foot traffic for several major shopping hubs across the city remains behind 2019 levels, according to July data from location analytics firm

At Westfield World Trade Center, foot traffic is 48 percent below the typical year. Meanwhile, key tenants are in litigation with the landlord: Victoria’s Secret and Starbucks are being sued by mall operator Unibail-Rodamco-Westfield.

Rockefeller Center is also on thin ice with foot traffic 47 percent lower than 2019 levels. However, overall retail foot traffic in the Fifth Avenue Business Improvement District is up 65 percent.
The president of the Fifth Avenue Association, Jerome Barth, attributes that to a return in local and domestic travelers, in addition to the openings of new retailers such as the Lego Store.

“The stores are starting to expand their hours again and bring back more sales staff,” Barth said.
The SoHo BID has also done well. Foot traffic has skyrocketed 115 percent, according to data.

“Seeing our local streets so lively is very encouraging for the prospects of the district’s economic recovery and we are hopeful that these positive trends continue into the fall and winter,” said Brandon Zwagerman, director of planning and community engagement, in an email. He credited SoHo’s retail mix, historic architecture and street life.
The Shops & Restaurants at Hudson Yards, part of the Related Companies’ megadevelopment, has also experienced heightened foot traffic compared to 2019, when the mall first opened. In July, traffic was up 29 percent.
The Shops at Columbus Circle, also owned by Related, however, has seen foot traffic fall 32 percent.
At Brookfield Place in Lower Manhattan, traffic is down 31 percent, according to Still, a Brookfield spokesperson insisted that the mall’s performance indicators are strong.

“Despite a period of unprecedented challenges amidst the pandemic, we have seen record sales for several retailers, a continuous rise in foot traffic and across the entire complex, [and] sales figures have tripled in the last six months,” the spokesperson said, adding that new leases have recently been signed.
In the outer boroughs, consumer activity is also mixed. At the Staten Island Mall, foot traffic is up 2.6 percent from July 2019 levels. At Queens Place Mall, it is down 8.4 percent.

Queens Place Mall had 524,000 visitors in June and 425,000 in July, according to its owner, Madison International Realty.
“Traffic at Queens Place has remained at robust levels, even during the months of Covid restrictions, as many of our tenants are essential businesses,” Ehud Kupperman, director at Madison International Realty, said in a statement. “Queens Place is an important local retail center that continues to draw shoppers throughout the neighborhood.”

David Goldsmith

All Powerful Moderator
Staff member

Malls Bounce Back, but Brace for Tough Fall Season​

Nicer weather got people out of the house, while newly vaccinated Americans felt better being around strangers in enclosed spaces, analysts say​

Increased foot traffic in U.S. malls has been positive news for investors, many of whom feared reversals caused by the Covid-19 pandemic.

U.S. shopping malls have enjoyed a busy summer despite the spread of the Covid-19 Delta variant, providing a much-needed boost to retailers and property owners.
In July, mall foot traffic surpassed 2019 levels for the first time since the pandemic started, according to data analytics firm Mall visits overall were up 0.7% from July 2019, led by trips to outdoor malls, which were up 2.1%.

Warm weather drew people out of their homes, while newly vaccinated Americans felt more comfortable being around strangers in enclosed spaces, analysts said.
“After a year and a half of staying inside there was a pent-up demand for doing something, and that something could have been just going to a mall,” said Sarah Helwig, an assistant vice president at Morningstar Credit Information and Analytics.
The increase in visits lifted retail sales, helping drive up the share prices of the country’s biggest publicly traded mall owners. Some, such as Macerich Co. and Simon Property Group Inc., are up more than 50% year-to-date, easily surpassing the S&P 500 index’s roughly 19% return for the year.

The rise in foot traffic is also good news for mall investors who in the early months of the pandemic feared a battering. Justin Kennedy, managing partner of the property lender and investor 3650 REIT, said his firm’s investments in mall-mortgage-backed securities fared better than he initially feared.
The company is now looking for more malls to invest in, he said.
Still, the sector faces fresh challenges in the months ahead. Colder weather often weighs on outdoor shopping centers, while the rise in Covid-19 infections could make more shoppers hesitant to visit indoor malls, analysts said.

David Goldsmith

All Powerful Moderator
Staff member

What 3 big mall bankruptcies say about the state of retail​

Trio of restructurings produce wildly different results​

In “Mallrats” — the quintessential movie about ’90s mall culture — a character is driven mad trying to find a sailboat hidden in a Magic Eye poster.
Assessing the state of American malls today can trigger the same frustration.

Three of the country’s largest mall landlords — all coping with similar problems even before Covid shuttered their doors last year — went into bankruptcy during the pandemic. But the trio emerged from their restructurings with wildly different outcomes, in some ways leaving more questions than before.

Some experts chalk up the divergent results to the companies’ ability — or lack thereof — to steer their properties toward relevance. How intact a mall owner comes out of the process depends on how much faith creditors have in its vision.
“It represents the investors’ belief in the likelihood of success,” said Michael Haas, co-head of the real estate group at the law firm Latham & Wakins.

The three mall owners — Pennsylvania Real Estate Investment Trust, CBL & Associates Properties and Washington Prime Group — were already flirting with bankruptcy prior to 2020.
Malls, especially the B- and C-quality properties that the three specialize in, were losing business to internet retailers and newer, higher-grade shopping centers. The pandemic just pushed them over the edge.

Pennsylvania REIT, which owns 20 shopping malls concentrated in the Mid Atlantic region, was the first of the three to enter bankruptcy, a year ago last November. It was relatively quick: In a little more than a month, the company reorganized and effectively kicked the can down the road.
Instead of reducing what it owed, as many companies do through bankruptcy, PREIT took on $150 million more debt and pushed back its maturity dates. But its equity investors were allowed to keep their stakes.One explanation for the relatively painless process is that the company’s reimagining of its portfolio was well underway when Covid arrived.

“It was one of the first to be really aggressive trying to divest itself of those lower-performing properties,” said Carmen Spinoso of Spinoso Real Estate Group, which invests in and manages struggling malls. “They were ahead of the curve a bit.”
Next into Chapter 11 was CBL, which owns 44 malls in the Southeast and Midwest.

It also filed that November but only exited bankruptcy last week. The company reduced its debt by about $1.7 billion as investors handed over ownership to bondholders.
CEO Stephen Lebovitz called it a “fresh start” and said CBL is focused on shoring up its balance sheet.
“While the restructuring reduced overall interest expense significantly, a major priority is to continue to lower borrowing costs and enhance cash flow,” he said in a statement last week.

The last to enter bankruptcy was Washington Prime Group, which underwent the most drastic restructuring of the three.
The owner of 101 properties across the country filed for Chapter 11 protection in June. When it came out four months later the REIT was in the hands of distressed debt investor Victor Khosla’s Strategic Value Partners.

Washington Prime CEO Lou Conforti stepped down and Khosla de-listed the REIT from the New York Stock Exchange, taking it private.
Observers said Washington Prime’s portfolio may see the greatest overhaul, with properties being redeveloped or sold off.
“As a privately held company, there might be a bit less scrutiny and a little bit more flexibility,” Latham’s Haas said.

Bankruptcy and mall experts noted that the three restructurings might have less to do with the properties and more with the REITs’ ownership structures — whether debt investors could get enough control of a company to throw their weight around in bankruptcy.
The three companies are now preparing for Act II as they head into the crucial holiday shopping season and the post-Covid future.

Terrence Grossman, a director at the turnaround consulting firm AlixPartners, said mall landlords face the same strategic issues as before the pandemic. That is, trying to re-imagine their properties in a world of fewer retailers with fewer stores to occupy their malls.
“Even though the capital structures may be more conservative out of bankruptcy,” he said, “the real issue is making the economic model work, given the disruption and changing dynamics in the retail industry.”

David Goldsmith

All Powerful Moderator
Staff member
US mall values plummeted by one-third in 4 years

Strip center values increased, but interest in retail pales alongside other sectors​

New data on United States mall values are the latest sign of how far the once-glorious retail centers have fallen.
Malls have lost a third of their value in the past four years, according to Green Street data reported by Bisnow. Class-B and Class-C regional malls reportedly suffered the greatest value declines.
The findings are similar to a Fitch Ratings report in June that said valuations of CMBS specially serviced retail-associated loans dropped 34 percent from the start of the pandemic, Bisnow noted.

Mall values declined 60 percent in appraisals in 2020, according to Bloomberg analysis reported in March. Across 118 shopping centers with CMBS loans, nearly $4 billion was lost due to delinquencies, defaults or foreclosures.
The grim state of among U.S. malls does not appear to include strip centers, however. Though the properties pale in comparison to increased interest in sectors including self-storage and industrial, Bisnow reported strip centers’ values have increased by nearly 5 percent since a 2016 peak and 13 percent since the start of the pandemic, per Green Street data.

The lower valuations come as a slew of mall owners have retreated from the struggling properties. Green Street data show 20 malls have been relinquished to lenders since the onset of the pandemic.

In 2020, five malls braced themselves as valuations dropped by more than 75 percent. Crystal Mall in Waterford, Connecticut, was hit hardest as its valuation was slashed by 88 percent, forcing the Simon Property Group to hand the keys to its lender after defaulting on an $83 million loan, per Trepp.
Meanwhile, three of the country’s largest mall landlords went into bankruptcy during the pandemic.

Pennsylvania REIT spent about a month in bankruptcy, reorganized and took $150 million in additional debt while pushing back maturity dates. CBL spent about a year in Chapter 11 before reducing debt by about $1.7 billion by handing over ownership to bondholders and exiting bankruptcy.
Washington Prime Group saw the biggest changes as it was taken over by distressed debt investor Victor Khosla’s Strategic Value Partners before its CEO stepped down and the firm de-listed the company from the New York Stock Exchange.

David Goldsmith

All Powerful Moderator
Staff member
I think they made a mistake from the beginning with parking fees, which they have partially fixed. I think they need to take a page from Atlantic City and buy visitors with free transportation and perks at least until they look busy enough to stand. And as much as I don't like "influencers" it might be a good idea to give away some space which is vacant anyway to some collective as long as they agreed to produce content there.

American Dream mall down to its last reserves​

Triple Five Group's property drained $9.3M for payment due on Feb. 1​

The American Dream mall is nearly down to its last dollar, a startling reality for the $5 billion retail attraction.
The beleaguered mall needed to pull $9.3 million from a reserve account on Tuesday to make a payment on about $290 million in debt, Bloomberg reported. A securities filing says only $820 is left in the account, leaving the mall in danger of missing its next payment due Aug. 1.

Failing to make a payment doesn’t necessarily doom the mall, but failing to keep bond servicer Trimont Real Estate Advisors apprised of the mall’s costs and performance might. The securities filing included a letter from the servicer, saying remediations for violations “range from specific performance to a special redemption of all the bonds.”

“The developer has provided Trimont with minimal information despite specific requests for additional items reasonably necessary to accurately track and understand certain aspects of the project’s performance,” Trimont wrote in a Jan. 18 letter, according to Bloomberg.
Developer Triple Five Group has also sold $800 million in debt, backed by payments it would make to bondholders in lieu of property taxes.

The mall in New Jersey’s Meadowlands has had a nightmare track record since opening. In August, the mall used a $9.3 million draw from its reserves to make a bond payment. The municipal bonds were issued in 2017, backed by 75 percent of sales tax receipts from mall purchases.

Retail stores in the mall didn’t open until October 2020. In the second quarter of 2021, the mall was 76 percent leased and reported $78.1 million in gross sales. As of Jan. 1, the mall was only 77 percent leased, according to Bloomberg, while leases for another 5 percent of the mall were being negotiated.

For the first three quarters of 2021, sales were at approximately $220 million. In 2017, a forecast projected the mall would bring in $2 billion in its first year, which would’ve required an absurd $1.8 billion in sales in the fourth quarter.
In a statement to Bloomberg, American Dream spokesperson Melissa Howard forecast an optimistic year for the mall, which is set to “open over 100 new retail, entertainment and restaurant concepts,” including a restaurant from Hasbro and a Gucci flagship.

Cash flow problems have plagued the mall even before its opening, when it borrowed more than $1 billion in construction loans. The difficulty in paying off those loans resulted in senior construction loan holders taking minority stakes in other Triple Five properties, such as the Mall of America and the West Edmonton Mall.

David Goldsmith

All Powerful Moderator
Staff member

Mall giant Westfield to shed US assets, focus on Europe​

Paris-based parent has 10 properties from LA to San Diego totaling 12M sf​

Unibail-Rodamco-Westfield is shedding its U.S. assets as it narrows its focus to its core markets in Europe.
The Paris-based company told investors last month it would “complete a radical reduction of financial exposure to the U.S.” through this year and next and “emerge as a focused European pure play.”

Southern California is Westfield’s largest U.S. market, with 10 malls from Los Angeles to San Diego totaling about 12 million square feet of retail space.
Unibail’s recent disclosures to investors are more extreme than a strategy detailed last year. In July, the company said it was planning a “radical reduction” of regional malls and would focus on its flagship locations.
The company owns six malls in the Los Angeles area: in Century City, Culver City, Sherman Oaks, Canoga Park, Arcadia and Valencia. Westfield had spent more than $1 billion renovating and expanding the 1.3 million-square-foot Century City complex, before the company was acquired by Unibail-Rodamco in 2018.
A roster of high-end retailers — including Kate Spade, Ted Baker and Tiffany & Co., and status gym Equinox — all lease space at Westfield Century City, making it more high-end than Westfield’s other U.S. properties.
Further south, the company owns malls in Mission Valley and La Jolla in San Diego, Escondido in North County and National City in San Diego’s South Bay.
Unibail has already started offloading properties in Southern California and across the country.
Last month, the company sold the 34-acre Woodland Hills Promenade to Los Angeles Rams owner Stan Kroenke for $150 million.
In San Diego, the company sold a 300-unit residential tower at UTC Westfield, its property in La Jolla, for $238 million, according to investor materials. Unibail held a 50 percent stake in the project, with JPMorgan also holding a stake. The owners spent $200 million building the project in 2019, taking advantage of under-utilized retail space.
On the other side of the U.S., the company has already handed over the keys to four Florida malls in foreclosure.
The fate of another U.S. flagship remains to be seen. On Market Street in San Francisco, the company owns a Westfield mall through a partnership with Brookfield. Unibail also has malls in New Jersey and Illinois. In New York City, the company operates and manages the Westfield at the World Trade Center, which is owned by the Port Authority of New York and New Jersey.