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Why Some Shopping Malls May Be in Deeper Trouble Than You Think

January 15, 2018

 

 

Why Some Shopping Malls May Be in Deeper Trouble Than You Think

 

The damage inflicted on America’s malls by the rise of e-commerce may be worse than it appears. As embattled retailers announce store closures at a record pace, some tenants are shrinking their footprints more quietly by choosing not to renew expiring leases, according to a report from property-research firm Green Street Advisors LLC. Of 2,468 in-line stores that closed in 2017 -- a category that excludes department stores -- 979 weren’t announced, the report produced by the firm’s advisory and consulting group shows. “When leases expire, they just don’t renew them, as opposed to breaking leases and doing something a bit more aggressive,” Jim Sullivan, president of the advisory group, said in an interview. The study examines the downsizing trends of the top 25 national retailers lining the hallways of malls across the U.S. These tenants have a bigger impact on landlords’ profitability than the large anchors such as Macy’s or Bloomingdale’s, which typically pay minimal rents or own their stores. “While the department stores take up a lot of space, they don’t generate much revenue for the mall owner,” Sullivan said. “The mall owner makes most of its money from the in-line tenants.” Even retailers that aren’t outwardly struggling are constantly evaluating their options and making strategic decisions about closing stores, according to Green Street. Because in-line tenants have higher rent burdens and shorter lease terms than anchors, they are more likely to leave a center where sales are sagging, and can be better indicators of future problems at a property, the analysts wrote. More than two-thirds of U.S. malls saw a decrease in national retailers, including chains such as Wet Seal, Bebe and Rue 21, which announced a combined 427 store closings last year, Green Street data show. Companies that closed stores without making public statements include Stride Rite, which shuttered 160 locations, and Hallmark, with 101 closures. There are still merchants that are expanding, such as fast-fashion retailer H&M and cosmetics chain Ulta Beauty, according to Green Street. Still, these companies are growing at a slower rate than successful retailers of the past, and are more selective about the malls they enter, the analysts wrote. The best malls are faring relatively well when it comes to national retailers, though they haven’t escaped unscathed, while the worst centers have already lost many such tenants, according to Green Street. It’s the malls in the middle of the quality spectrum where the departures of in-line tenants could prove most telling, the data show. “Those are the malls that are going to make it or get a lot worse over the next 10 years,” Sullivan said. (Bloomberg)

 

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2017 Was a Year of Commercial Real Estate Growth for Metro Denver, Says CBRE

New commercial construction was a big component of 2017 for metro Denver, with over 5 million square feet of new space delivered in just the industrial sector alone, the highest amount since 2001. That's according to a new report from CBRE Group Inc. (NYSE: CBG). According to the fourth quarter report for CBRE, most of the new commercial construction in metro Denver is taking place in the Airport and North submarkets. The year 2017 also saw a lot of high-profile sales of newly constructed office space, said Jenny Knowlton, CBRE's vice president with capital markets, institutional properties in Denver. "From 1401 Lawrence to the Triangle Building, Granite Place, the Arrow Building, INOVA and more, we’ve never seen this many new-construction deals sell, which in turn set several records for the city on a price-per-square-foot basis," Knowlton said. "These sales also attracted significant new capital to Denver that have never owned property in our market before.” The research showed that of the 4.5 million square feet of office space under construction in Denver last year, 51.6 percent of it is pre-leased, indicating tenant demand. Some other metro-Denver highlights from the report:

▪Over 1.6 million square feet of retail space was under construction in the fourth quarter — the highest amount since 2009.

▪4 million square feet of new industrial projects remain under construction.

▪Direct asking lease rates increased to a record high of $26.54 per square foot.

▪Total office investment sales for 2017 hit $2 billion, a 7.1 percent increase from last year.

▪Lease rates in retail space were up 4.4 percent year-over-year. (Denver Business Journal)

 

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Metro Denver Expects Another 12,000 Apartments Come on the Market in 2018

Are apartment developers hitting the accelerator as a cliff of demand approaches or are they simply trying to keep up in a housing market that continues to defy expectations? Metro Denver should see another 12,000 apartments come on the market in 2018, continuing a long and unprecedented streak of multi-family construction, said Greg Willett, chief economist with RealPage, a real estate technology and analytics firm. Builders delivered 10,854 new apartments in metro Denver last year, and tenants soaked up 10,201 of them, keeping the occupancy rate stable at 94.3 percent, according to RealPage. RealPage estimates apartment rents in metro Denver rose 3.2 percent in 2017, the 15th-fastest gain in the country and ahead of the U.S. gain of 2.5 percent. The company puts the typical monthly rent at $1,404 in metro Denver. The new supply should keep landlords and managers busy attracting tenants and also dampen any rent spikes. “It could be tough for property owners and operators to push rents much in the neighborhoods that will get the most new product, including the urban core,” Willett said. Overall, U.S. apartment rents climbed a modest 2.5 percent in 2017 to $1,330, according to RealPage. As is usually the case in the fourth quarter, landlords boosted discounts to attract tenants. “While the apartment rent growth pace has slowed from the performance seen a couple years ago, it’s the longevity of the current cycle that’s so impressive,” Willett said. Abodo, an apartment-finding service, estimates the median one-bedroom apartment rent statewide topped $1,000 last year. Abodo puts the median rent for a one-bedroom Denver apartment listed on its site in January at $1,476, and $1,843 for a two-bedroom unit. Apartment rents nationally have risen for eight consecutive years, but the rate of increase has slowed. Sacramento, Calif., at 6.5 percent, Las Vegas at 5.6 percent, and Jacksonville, Fla., at 5.3 percent, were the metro areas with the biggest gains in rents last year, according to RealPage. Two years ago, Portland, Ore., led the country with a 12-percent gain in rents. Last year, rents there climbed a modest 1.9 percent. Apartment rents rose less than 1 percent in Kansas City, Mo.; Nashville; San Antonio; Pittsburgh; West Palm Beach, Fla.; and Washington, D.C. Austin, once a hot market, suffered a 0.4 percent decline in apartment rents. (Denver Post)

 

Investor Sentiment Indicates More Pros Think CRE Cycle Is in Expansion Phase

The percentage of NREI readers who believe the current real estate cycle is in expansion/recovery phase has jumped to 41 percent this January, from 26 percent during our last reading in November. At the same time, the percentage of survey respondents who think the cycle is now at its peak took a sharp downward turn, to 45 percent from 59 percent in November 2017. The percentage of NREI survey respondents who pegged the cycle at being at either the recession point or the trough stayed roughly the same, at 3 percent for both in January vs. 2 percent for recession and 3 percent for the trough in November. Nine percent of respondents indicated they were not sure about which stage of the cycle the industry is in. In November, the percentage was 10 percent. (National Real Estate Investor/Elaine Misonzhnik)

 

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Broomfield Office Building Scooped Up for $47.1 Million

An office building at 105 Edgeview Dr. in Broomfield was sold to Invesco Advisers for $47.1 million. Gogo, the inflight media and entertainment provider, occupies 65 percent of the 186,231-square-foot, four-story building. NKF represented Hines Holdings, a Houston real estate investment company, in the sale to the Atlanta investment company. The building has solar panels, 10-foot floor-to-ceiling windows, 18 vehicle charging stations and a 2,500-square-foot fitness center. "The Gogo Building represented a fantastic opportunity to acquire the newest, highest-quality office asset in Northwest Denver at below replacement cost," said Kevin Shannon president of West Coast Capital Markets. "In addition, the property includes an adjacent 1.07 acre development parcel that can be used to provide additional surface parking or retail development." (Denver Business Journal)

 

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CURRENT

1 MONTH PRIOR

1 YEAR PRIOR

FED TARGET RATE

1.50

1.25

.75

3 MONTH LIBOR

1.70

1.57

1.02

PRIME RATE

4.50

4.25

3.75

10 YEAR TREASURY

2.55

2.42

2.34

30 YEAR TREASURY

2.85

2.79

2.92