Commercial Real Estate Market Update

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Mortgage and Lending with America One Mortgage Advisors CA DRE #02062657

Commercial Real Estate Update

U.S. chain-store sales up 1.6 percent in March

U.S. chain-store sales posted a modest gain of 1.6 percent year on year for March, according to ICSC’s index. ICSC Research had expected higher growth because of an earlier Easter this year, but extraordinarily cooler weather across the U.S. compared to March 2011 proved to be a drag on sales. “Sales numbers over the past two months have been softer due largely to cooler weather patterns,” said Michael P. Niemira, vice president of research and chief economist for ICSC. “I am optimistic that April’s numbers will have a more positive outlook, as warmer temperatures should drive demand for seasonal apparel.” ICSC research anticipates that the April sales pace will increase by about 2 to 3 percent.

Landlords ponder Penney's future after CEO departure
In the wake of CEO Ron Johnson’s departure from J.C. Penney Co., observers are wondering what course the chain will take moving forward. Will it continue executing Johnson’s vision of divvying up the sales floor into a set of smaller, branded “shops”? How will the company reverse a sales and traffic slide that resulted in a $552 million fourth-quarter loss? Interim chief Myron Ullman — a seasoned retail executive who ran Penney for seven years before Johnson’s arrival in 2011 — has revealed no specifics.

“While JCPenney has faced a difficult period, its legacy as a leader in American retailing is an asset that can be built upon and leveraged,” Ullman said in a press release. “To that end, my plan is to immediately engage with the company’s customers, team members, vendors and shareholders, to understand their needs, views and insights. With that knowledge, I will work with the leadership team and the board to develop and clearly articulate a game plan to establish a foundation for future success.”

Johnson, a former executive of Apple and Target, has instituted changes at Penney that were bold but have yet to improve sales or traffic. He attempted to revamp the pricing policy last year, replacing promotional sales with a three-tier system of set prices. Customers revolted, and Johnson returned to Penney’s practice of driving traffic through promotional sales. Investors blamed these moves in part for some $4 billion in revenue losses last year. Penney’s shares fell 50 percent during Johnson’s 17 months as chief. 

Liquidity is a looming concern for Penney, according to Standard & Poor’s analysts, who told investors that the company could seek additional capital soon to finance operations. Penney may need as much as $1 billion to finish out the year, according to Piper Jaffray. “I’m not really concerned about their ability to pay their rent, because they don’t pay very much rent,” said Daniel B. Hurwitz, CEO of DDR Corp., on CNBC’sFast Money, on Tuesday. “I am very concerned about their ability to pay vendors for goods, which are absolutely critical for future growth.”

Some speculate that a sale of real estate could help fill the coffers. Penney owns 429 of its 1,104 stores. Analysts have estimated the value of its owned stores at somewhere between $5 billion and $10 billion. Hurwitz says it will be a challenge for Penney to unlock that value. “It’s not easy to get out of leases; it’s not easy to sell buildings,” he said. “But they can reduce their selling square footage, reduce their inventory, increase their sales per square foot. They can increase their profit per square foot, and preferably their margins per square foot, because all retailers pay their rent with margins more than comp-store sales.”

General Growth Properties is watching the three joint ventures it has with Penney. “We would be a buyer for two of those,” said General Growth CEO Sandeep Mathrani on an earnings call. Should the turmoil result in store closures, landlords will be ready, Hurwitz says. “In most cases, most retail landlords would be able to re-lease space at better rates than Penney’s paying,” Hurwitz said, “because Penney pays very, very little.”

 

Investors target urban retail
Thor Equities’ purchase of 680 Madison Avenue, a 17-story, 33,000-square-foot retail condo in New York City, for a whopping $8,236 per square foot last December was a near-record price for Madison Avenue retail. Jaws dropped yet again when local real estate owner Jeff Sutton joined Thor, the Adjmi family and Aurora Capital to buy 529 Broadway, in the SoHo district, for nearly $147 million, or $9,180 per square foot. And then Richemont North America, owner of luxury jewelers Cartier, Montblanc, Piaget and Van Cleef & Arpels, purchased a 24,800-square-foot retail space at the St. Regis Hotel for $375 million — about $12,000 per square foot.

Record deals like this have become the new normal for selected retail properties in Manhattan. “The numbers look ridiculous until you interpret them into dollar volume, how many people per minute walk that street, and how much volume they do per square foot,” said Adelaide Polsinelli, who heads the Eastern Consolidated retail sales group.

“Urban retail is basically under assault by capital right now,” said Dan Fasulo, managing director of New York City–based Real Capital Analytics. “The demand [in New York City] is completely outstripping supply, both on the investment side and on the leasing side.” Sales of urban and luxury retail in the U.S. doubled to $8.4 billion in 2012 from 2011. In the fourth quarter alone, sales nearly quadrupled to nearly $4.9 billion from the year-ago quarter. Manhattan sales of urban retail properties jumped from $670 million in the second quarter of 2011 to $3.2 billion in the fourth quarter of 2012.

Despite all the deal making, it is unlikely that the nation’s urban retail markets have peaked or that the major buyers are ready to sit contentedly on their piles of cash, observers say. “They all certainly have a lot of money, so I don’t see this stopping,” said Faith Hope Consolo, chairman of retail leasing and sales for Prudential Douglas Elliman. In travels to Miami, Dallas and Houston, Consolo says she kept hearing the names Sutton and Thor. “In every place, they were all talking about the same investors,” she said. “It doesn’t matter what city you are in now, they are everywhere. And they continue to look at things that can be redeveloped not just for now but 18 months to three years down the road.” This is also becoming a global phenomenon. Thor has opened an office in London and is looking to ramp up retail projects in countries as far-flung as Iran and Ecuador. “This is a global investment — it’s New York and beyond,” said Consolo.

Retailers are broadening their gaze too, and are on the hunt for properties in locations that have been less desirable but which may now be on the way up. “It’s becoming more about how to make other locations just as good,” said Polsinelli. In Manhattan many luxury retailers are starting to look away from Broadway and toward peripheral areas where rents are lower and where they can create new submarkets. And this could lead to a new round of record-setting deals in the months ahead — proof of the old adage: Records are meant to be broken.

 

ICSC NEWS
• Ralf-Peter Koschny, CRE, FRICS, is a recipient of this year’s ICSC Researcher Award for Outstanding Service. Koschny is a member of the directory board at research and consulting firm BulwienGesa AG. He has been involved in property research since 1996, having joined ICSC’s European Research Group in 2003 and the group’s program-planning committee in 2004. He headed the 2006 ICSC European Research Seminar and was elected chairman of the European Research Group in 2009. Koschny joined ICSC’s European Advisory Board in 2010 and remains a chairman of the European Research Group’s membership and steering committees. 

“I feel proud to be part of this group, because of the networking opportunities,” Koschny said. “I am happy that I can contribute to bring market transparency and understanding for the benefit of the wider European shopping center industry.” Koschny will receive the award at the ICSC European Conference, in Stockholm, next week. ICSC established the Researcher Award in 2007 to recognize professionals who demonstrate commitment and make significant contributions to ICSC’s research programs. This would include writing, planning, speaking at ICSC Research events, advising and playing a role in fostering industry benchmarking through data sharing, among other things. Any ICSC member can make a nomination; the nominations are reviewed by the committee chairmen and vice chairmen of ICSC’s five research advisory groups: North America, Canada, Europe, Mexico and the Asia-Pacific.

• Irving Wolf, SCMD, SCSM, who spent nearly four decades teaching shopping center professionals through ICSC’s education programs, died Tuesday. He was 100. Wolf founded Irving Wolf & Associates, a Los Angeles–based leasing, management and marketing consultant firm. Before that, he was executive vice president of Monumental Properties Inc., a Baltimore, Md., firm that built 25 regional centers, including Miami–Dade County’s Dadeland Mall, in Florida. Wolf, a 52-year member of ICSC, coined the “IRV” formula now used throughout the industry: (Net operating) Income divided by (cap) Rate equals (shopping center) Value. He was also responsible for such quotable observations as “Vacancy is an obscenity” and “Short terms make great tenants.”

 

TRANSACTIONS
Tampa, Fla.–based DeBartolo Development and a Canadian pension fund acquired the 257,000-square-foot Poplar Creek Crossing, in Hoffman Estates, Ill., from an undisclosed seller for $28 million. MichaelsOfficeMaxPetSmartRossT.J.Maxxand World Market anchor the center.

MMG Equity Partners and Global Fund Investments bought the 347,000-square-footBiscayne Plaza, in Miami, from an undisclosed seller for $12 million. DD’s Discounts,Family Dollar and Tropical Supermarket are tenants.

 

RETAILING TODAY
• Minneapolis–based Caribou Coffee plans to close 80 of its 636 Caribou Coffee stores this month and convert 88 more to the Peet's Coffee & Tea banner. Caribou was acquired last year by German investment firm Benckiser Group GmbH, which also holds a majority stake in Peet's. The conversions will occur over the next 18 months in Washington, D.C., and in Ohio, Michigan, Pennsylvania, Maryland, Virginia, Georgia, Illinois and Wisconsin.

• Seattle-based Nordstrom will open a full-line department store in Toronto in the fall of 2016, making its foray into that country a two-store debut. The three-story, 188,000-square-foot store, planned for Toronto's Yorkdale Shopping Centre, will join a previously announced, smaller store in the city's Sherway Gardens mall. Nordstrom said last year that it would open four full-size Nordstrom stores in Canada — in Calgary, Ottawa, Vancouver and Toronto — starting in the fall of 2014. The company said it would open more full-line stores and some discount-priced Rack shops later.

 

THE COMMON AREA
• It appears digital photography is killing the in-store photo studio. Apparently, consumers would rather snap their own shots at home than drive the family to the local department store to pose in front of a drop cloth or other scenic background. CPI Corp., which ran photography studios inside almost 2,000 American stores, including Sears,Babies ‘R’ Us and Walmart, announced that it will go out of business. Walmart says St. Louis–based CPI operates portrait studios in 20 percent of its stores. Sears says the firm had operated in its stores since 1959 and had studios in all 788 stores in the U.S. and Puerto Rico. At press time none of the affected retailers had decided whether they plan to lease photo studios to other operators or convert them to other uses.JCPenney and Target outsource the operation of their photo studios to Lifetouch Portrait Studios Inc.

• New York City’s American Museum of Natural History is opening its first outpost outside New York at Merrill Cos.’ $430 million Prairiefire mixed-use development, in Overland Park, Kan. The 41,000-square-foot Museum of Prairiefire will be the first venue outside New York City to feature American Museum of Natural History traveling exhibitions. About 80 percent of the 207,000 square feet of retail space in the complex’s initial phase is preleased. REI and The Fresh Market will open at Prairiefire in October, along with other first-to-market dining and entertainment venues — including CinetopiaPinstripesGene Simmons’ Rock & BrewsWasabi SushiBarCoCoBolos Wood-fired Grill — set to follow in the spring of 2014. Prairiefire’s initial phase, which involves 35 of the site’s 58 acres, will also include 300 luxury apartments and a hiking/biking trail that winds through an educational wetlands park and around the entire development. The project’s second phase will include a boutique hotel, an outdoor arbor plaza, about 280,000 square feet of offices and approximately 150,000 square feet of additional retail space.

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Christopher Shearer is a multi-family / commercial real estate consultant achieving property owners the highest possible NOI through the implementation of optimal rents for the property, accomplished through careful market, property, comparison grid analysis, effective cost control and revenue improvement programs; identify and analyze trends and recommending appropriate strategies to increase a properties maximum efficiency. Expert at Preparing new investment analysis presentations, offering memoranda and marketing materials, including key investment metrics. IRR, COC, DCR, CR etc.

A seasoned professional, with over 15 years' experience in real estate and finance management. A real estate broker licensed in Florida and Virginia specializing in real estate and asset management of multi-family and commercial properties. Christopher is currently pursuing his M.B.A. in real estate, he holds a B.A. in business as well as an A.A. in business management. Christopher has the following state licenses; Virginia Real Estate Broker, Florida Real Estate Broker, Florida Mortgage Broker and Colorado Mortgage Broker.

Contact me for a consultation and analysis of your commercial or multi-family properties.

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