Reflections on ICSC’s RECon 2008
Amid slumping market, dealmakers are still hopeful
Randy S. Gold, CPA
May 28, 2008
After suffering the blistering heat and breathing the exceedingly oxygenated casino air, I returned, as many of us did, from ICSC’s RECon in Las Vegas with a great deal of energy to bolster these questionable market times. Indeed, there was much to be seen and heard, including great insights from our real estate colleagues around the country. The overwhelming take-home was that although the market is experiencing a noticeable dip and deal flow may be slowing, the right deals can still get done – with the right mix of diligence and funding.
As Rob Hellman, Managing Director at Ackman-Ziff in Manhattan said, “I’m not going to tell you life’s easy; we have turned away more business than ever before because we don’t think the deal is structured properly to get enough funding. Additionally, it is clear that sellers have not adjusted prices for the market.”
Hellman, who is responsible for sourcing debt for client transactions and whose group put together $7.4 billion in financing last year added, “We are being very selective. We don’t want to mislead clients if we can’t get the job done, so we carefully consult with our clients to find the best way to structure the transaction.”
“For example, we recently advised a hotel client who wanted to raise 85 percent debt but we felt like the only way for the deal to work was to lower the debt portion to 65 percent. We suggested a few tweaks to the development plan and they ended up redesigning the hotel and reducing costs by $10 million in the process allowing them to get closer to their objective. With a little thought and creativity hopefully we can add value to projects that might not otherwise get done.”
Jeff Wild, an attorney with Benesch in Cleveland, Ohio surmises that, “Everything will depend on the lenders in the second half of the year. Right now, lenders don’t know what they will approve at credit committee. It remains to be seen what will happen in the market place, but we will know more in the weeks following ICSC.”
Wild added that his firm “usually has a crush of legal work starting about 6 weeks after ICSC, and so they are able to gauge how the market is responding in the coming weeks.” He warns however that “next year could be worse” alluding to the question of whether there is more rough market ahead.
Ackman-Ziff’s Hellman agrees, “The real financing risk has not washed though the market yet. The most suspect loans will be up for refinancing this year.” He believes that the strength or weakness of the market may have a lot to do with built-in or eleventh-hour negotiated modification provisions so that fewer properties will be lost. “Many lenders may be willing to extend the loan at a ½ point increase because they don’t want the property.”
However, there is still plenty of appetite in the debt market for projects according to Rich Highfield, Principal at Bank of America in Charlotte, North Carolina. Highfield commented that, “For us, projects in the $3 - $20 million dollar range are very doable. The $3 million deal is perfect. Over $10 million is harder to get done, but the $3 million projects are easier to package, and they diversify risk, so it is easier to sell to the market. We have put together two packages of CMBS this year at $1 billion each and are looking for more.”
Of course without the need for financing, transactions are always a little smoother. “In this market sellers are anxious, and all cash buyers have a strong advantage,” says Brian Berman, Partner at Berman Enterprises in Rockville, Maryland. “As an all cash buyer we are aggressively looking for acquisitions,” he added.
So there is debt to be found, how about tenants? Often a “catch 22,” lenders want to see some tenants lined up, but you can’t put together a project without funding, so how are owners faring in terms of lease up?
Dovid Spector, Vice President of Leasing at National Realty and Development in Purchase, New York suggests that there are some niches experiencing growth. “Midmarket value product concepts are getting done because in this environment those guys are expanding.” Spector believes that the market is in fact slowing, but with the right tenants in the right location, National Realty and Development has seen projects lease up quickly.
Principal of Caldwell Development in West Conshohocken, Pennsylvania Peter Miller agrees, “Retailers still want to move to the new sub-markets being developed where their sales forecasts are strong.” There are some hurdles however. “With CAM costs rising and a slower leasing market, tenants are pressuring landlords to take tighter deals and more of the operating expense burden,” says Miller. Caldwell, which develops mostly grocery-anchored centers in Pennsylvania and New Jersey was, “Negotiating with a big box tenant who wanted a CAM cap of $1.25 a foot for 5 years with a 1 percent bump each year after the fifth year; that is not a deal we are willing to do,” he added.
But according to Spector, “Not a lot of small shop deals are getting done; capital has frozen up, and franchise deals have completely halted.” So if the big box tenant is exerting more pressure and small tenants are no where to be found, what’s an owner to do?
In cities like Atlanta, Jeff Notrica, President of Inman Park Properties believes those hot new sub-markets are popping up in existing developed areas. Across the country the developers, retailers, and investors are all looking for the same thing – “the best.” Notrica believes that, “People will still pay top dollar for the best. Just like in the single-family market, $2 million houses, well-placed, will sell; the same holds true for commercial deals; you haven’t seen cap rates on Starbucks go up.”
“But you can’t say it’s the best trying to appeal to buyers and not deliver on that promise.” Notrica’s group buys in town Atlanta properties and has found the market much tighter than in the past few years as more and more developers are moving back into the city in an attempt to appeal to the in-town submarket with top dollar product.
Jim O’Donnell, a Partner with RCG Ventures in Atlanta agrees. RCG, which is in the process of spending down their first fund searches for properties in the $3 - $15 million dollar range or portfolios of $100 million. “We have seen cap rates for B & C properties tick up 150-200 basis points to about an 8 or 8 ½ cap rate.” Similarly though, “cap rates are not up as much yet for A properties.” O’Donnell’s group bought 15 properties last year and is hoping for 10 transactions this year before launching their second fund valued at $250 million. “The capital is available for the right transaction,” he added.
Cary Beale, a leasing representative with DDR, suggests that deals are in fact harder to come by. “I have a full schedule of meetings at the show and am confident that leases for some of our A-plus projects will get signed, but other projects will be a little tougher to lease. DDR’s size and strength in the market place definitely works to our advantage though.”
The poker rooms of Vegas are famous for their shrewd players holding their cards close to the vest and their emotions even closer. This begs the question as to whether this year’s RECon was particularly well placed. Spirits were high, but when asked about the often euphoric projections shared by some, Steven Socoloff, CEO of Socoloff Enterprises in Cleveland, Ohio noted “I think what we are seeing at ICSC is a little deceptive; people have their game faces on.” But as can be heard around every trade show booth, “It’s Vegas, Baby.”
Of course, each year there is the wonder of Vegas and RECon both growing bigger than ever expected, so whether you had to bring your game face or not, this year’s show was not to be missed. According to Mira Bergen, President of A Store is Born, a retail start up consultancy in Atlanta, “this is the biggest ICSC yet… new stores and concepts are everywhere.”
So RECon 2008 brought its share of deals and opinions. However, game face or not, new concepts or not, the difference of opinions bodes well for everyone. No one is going “all-in” at the table and everyone is watching the stakes, but money is still changing hands. And so the market goes.