Scotsman Guide - June 2011 Commercial Edition

Property TypeCast By Victor Calanog

vice president of research and economics, reis inc.

MALL VACANCIES SEE FIRST-QUARTER SPIKE

In this past April’s column ( sctsm.in/4541), we discussed how neighborhood and community centers across the country likely would face rising vacancies this year. Based on first-quarter results, it looks like larger retail properties such as regional malls were not spared from this fate.

Mall vacancies spiked by 40 basis points to reach 9.1 percent this past first quarter — the highest vacancy level on record since Reis began covering the property type 11 years ago. This increase was particularly galling because vacancies began declining from a previous high of 9 percent in the second quarter of 2010 and were down to 8. 7 percent by the end of the year. These slight declines in vacancies heralded what appeared to be a recovery, but the message is now decidedly mixed.

Asking rents also declined by 0.1 percent, reversing slight increases posted in late 2010. Mall rents have deteriorated so much in the past couple of years that they have reverted to levels last seen in 2006.

What happened? Large blocks of space went vacant this past January through March in several properties; several were from tenants that had given word earlier in 2010 that they were scaling back or vacating their occupied spots entirely. Furthermore, although retail sales might be increasing overall, individual retailers still face many challenges, and bankruptcies and store closures are still ongoing.

A closer look at property-level data reveals that much of the newly vacated space has hit malls that lost an anchor tenant in 2009 or ’ 10. What we’re seeing appears to be echo effects of malls having lost anchor tenants in the last downturn, and now we’re seeing blocks of nonan-chor or other anchor tenants giving up their leases.

REGIONAL AND SUPER-REGIONAL MALL VACANC Y AND RENT TRENDS Source: Reis Inc.

On the supply side, there was far less overbuilding in regional malls compared to neighborhood and community centers in the last business cycle. This doesn’t mean that regional-mall tenants are scaling back on their space requirements entirely, however. For example, some big-box retailers have announced plans to build smaller stores. Best Buy, for instance, will build “Best Buy Mobile” stores, which will average less than 1,500 square feet. In comparison, their existing stores have an average footprint of almost 30,000 square feet.

In terms of sales, the latest data from the Department of Commerce indicate that consumers are opening their wallets again. The 12-month change figure for retail sales grew by 8.87 percent this past February and averaged 7.95 percent in the past six months.

12-MONTH CHANGE IN RETAIL SALES

This resurgence in retail sales has yet to reflect itself in increasing demand for retail space, however.

As revenues increase, retailers will try to service new business from existing facilities, deciding to lease space only when excess capacity has been exhausted. Even if demand begins to increase, low occupancy rates imply that it will take a while before space leases up and vacancies tighten enough for landlords to feel confident about raising rents and taking away concessions.

Source: Reis Inc.

In contrast to strong recoveries from multifamily buildings and a dip in vacancy for office properties, expect this to be another difficult year for retail properties.

Victor Calanog, vice president of research and economics at Reis Inc. ( reisreports.com), writes a monthly column on property types for Scotsman Guide. He and his team of economists are responsible for data models, forecasting, valuation and portfolio services for clients in commercial real estate. Reach him at victor.calanog@reis.com. Scott Rappaport, retail analyst for Reis’ quality-assurance group, contributed to this article.

bytony stasiek

Steve Smits associate administrator, office of capital access u.s. small business administration

In addition to getting the word out in mainstream media about small-business owners’ new ability to refinance through the U.S. Small Business Administration’s (SBA’s) 504 program, the SBA scheduled a 13-city tour to evangelize this and other changes that came via the Small Business Jobs Act. Between tour stops, Steve Smits of the administration’s Office of Capital Access shared more about brokers’ market opportunities with the SBA.

You managed SBA-loan operations for a few
banks before joining the SBA. Why did you
move?

Well, they asked me. Honestly, I hadn’t considered working for the government. But I have spent 22 years working with these programs. I believe in them, and I believe it’s a critical time for these credit enhancements for small businesses.

Why now?

[There] are two challenges to small-business owners of commercial real estate: First, many of these conventional commercial mortgages are structured with balloon payments or shorter maturities. So when the loan comes up again, the lender is challenged because the value has deteriorated to the point where it is difficult to refi. In addition, small-business owners are facing a more challenging cash-flow scenario. Refinancing to the 504 — with below-market interest rates that are fixed for a long term — really opens them up.

Congress has authorized $15 billion for 504
refis. Do you foresee the program reaching
this volume?

It’s hard to tell. It takes a little time for lenders to submit requests, because of the appraisal element involved, and to see if the economy continues to improve. I see need in certain pockets of the country — Michigan, parts of California, Florida, certainly — but it’s still too early to see if we’ll fully hit $7.5 billion [each year].

You’ve incorporated a “lender roundtable” in
your Jobs Act tour. What are lenders saying?

We’ve really heard from two types of lenders. There are those who are active with us and understand how [SBA’s] programs work. Then there are about 1,250 lenders who have not done an SBA loan for several years [and are] doing this for the first time since the recession. It poses a challenge for us to make sure we are providing education and support to our lenders.

What’s your advice to brokers adding 504 re-
fis to their business?

When I was originating 504 loans, I was successful because I had a strong relationship with my [certified development company (CDC)]. I’d strongly encourage brokers to make contact with one of their district offices and develop a working relationship with a lender at a CDC. They are a resource for you. Use them.