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Expert call highlights perils and opportunities for malls [Merrill Lynch] US Commercial Real Estate/ REIT Industry We held a conference call this week with Tom Dobrowski, Vice Chairman at Newmark Knight Frank (NWRK) who provided an overview of mall capital markets. Overall, the call highlighted that the mall sector remains challenged, but opportunities to create value do exist for those with significant capital to execute. High quality malls are being valued more appropriately in the debt markets than in the transactions market. As a result, most recent comps are in the B and C quality spectrum with cap rates ranging from 10- 20% Since 2000, there have been two major periods for active mall transaction activity. The first period was from 2002 to 2004 (with REITs the most active buyers) and the second period was from 2012 to 2017 (with private investors the most active buyers). Peak pricing was in 2007 when average cap rates were ~6-7%. However, average cap rates this year have been ~16-19%. One reason for the higher average cap rates today is that the higher quality, lower cap rate assets are not trading. In addition, the assets that are trading today are mostly distressed that lenders received in default. There are only a handful of buyers of these distressed assets and as noted before, they are trading at higher cap rates today. These B & C mall accumulators are agnostic to geography and asset quality. The lower basis and higher cap rates have allowed the new owners to extend rent concessions to retailers in order to help lower occupancy costs to keep the centers alive. That said, only 12 malls have formally closed in the last 24 months. Investors looking to buy higher quality malls are assuming that mall earnings streams decay over time. Therefore, A mall owners are not bringing assets to the market since its highly unlikely they will achieve their perceived full value. However, the debt markets are valuing A malls more appropriately than the equity markets. Thus, landlords that are looking to raise capital would be more inclined to re-finance their mall properties rather than pursue a joint venture or outright asset sale. We remain underweight Retail within REITs* and reiterate our only Buy in Malls on SPG given its platform, asset quality, and balance sheet strength. |
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Msg # | Subject | Author | Recs | Date Posted |
12698 | Re: Expert call highlights perils and opportunities for malls | Zver1 | 6 | 12/10/2019 11:03:02 AM |