I’m a member of Minnesota Shopping Center Association.  It’s a great association with tons of information.  I don’t know many people there, I get to a few meetings, but I always read the newsletters.  Their annual State of Retail report is quite an unveiling every year.   Especially now with the decline in retail that has permeated the last several years.  There is always optimism at these meetings though.  Maybe that’s why I like real estate so much…mandatory optimism!   Here are some excerpts from their newsletter:

“There have been efforts to improve the economy with the stimulus program, but in reality not a lot of money has been spent.  The financial accounting rules have changed from “mark to market” to “mark to model” or term.  Banks are wary of lending and demand personal guarantees.  They are utilizing new tactics such as extending loans and utilizing new fee structures to create profits, for example “a loan that rolls, grows no loss.”  Life company lenders have become very selective, want perfect deals, low loan-to-value ratios and big spreads.  In the equity markets, the only active investors in 2009 have been the entrepreneurs.  The only active players in the market tend to be equity capital investment advisors, REITS and entrepreneurs.  Nationally, the actual amount of deals in the first 6 months of 2009 totals only $16.4 billion vs. $132 billion in 2008 and $443 billion in 2007.  The forecast is that CMBS transactions will come back in a different form.  Expect fee-driven Wall Street to “Re-REMIC” bad CMBS traunches, few distressed sales and money being allocated to stabilized deals.

Drew Johnson of RJM Construction spoke from an owner or development perspective – with optimism still reigning from over 3.5 million sf of retail development still advertised on MNCAR.  Currently the market is dominated by negative absorption, a decrease in sales, and an increase in retailer backruptcy.  The resenct fallout has delivered some lessons to the developer:

1. Be wary of the small shop proforma trap (watered-down cap rate anchor ratio decrease); small shops are hard to lease and expensive to build, avoid the “over-build” stigma.
2. Cycle will be back; developers will forget as the Met Council projects the area will add another million people by 2020.

There are three types of properties:  “The good, the bad and the ugly”:

• The good – credit tenant, shop not overbuilt, time tested, and value has decreased 35-45%.
• The bad – newer development with vacancy in third ring markets, weak demographics, junior-box exposure, and correct reposition if not sunk by refinance.
• The ugly – unanchored with vacancy, soft goods retailer with con-tenancy clause, bank owned and built on “irrational exuberance”.

John Johanson of NAI Welsh discussed the facts, hopes and trends from the retailier/broker perspective.  As for the current market, there are no deals to recall, the last being over 18 months ago.  He asks if the landlord will be able to carry the costs from the economic crisis to to get to market value again.  The current retail property will be inventory for how many years?  The last new development, West End, is opening at 65% occupancy.  There are some bright points after many retailers have downsized or been forced out of the market.  The surviving retailers should be stronger such as Best Buy and Bed Bath and Beyond.  Property types on the market – too much big box, tenants are moving up fro c-b and b-a, they are paying lower rents, regional malls are uncertain who is the next anchor, lifestyle centers could be a big change for landlord’s lifestyle.  There are new deal terms coming: co-tenancy is history, kick outs will occur less frequently, there will be more sharing of cost, and renewals will see rents falling or flat exchange for adding lease term.  He forecasts that new development will be cost prohibitive based on “market rents” and land costs and that inflation is coming.  John questioned if this recession will change an entire generation’s habits.  Will our children learn to shop?  The upper Midwest has trailed the rest of the country during the entire recession.  Is our recovery coming?  We are experiencing things that other regions experienced last year.  The good news is that historically retail and food service sales have never fallen.  We have even experienced a .08% rate of growth in 2009.”

Source:  Minnesota Shopping Center Association newsletter Dec. 2009