Via AdventuresInCapitalism.com,
Malls are bearing the brunt of changes in retail, but they’re only the canary in the coal mine.
Let’s start with a simple premise; commercial real estate (CRE) will change more in the next decade than it has in the past hundred years. Anyone who thinks they can fully foresee how it will evolve is lying to you. The only certainty is that highly leveraged real estate investors and lenders will be obliterated as current models evolve faster than anticipated.
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In the past, retail was retail, warehouse was warehouse and office was office—the same for all other CRE classes. There was some cross-over, but the main commercial real estate components stayed segmented for the most part. Now, with big box stores, the lowest hanging fruit for online shopping to knock off, going to dodo-land, there will be hundreds of millions of feet of well-located space suddenly becoming available. People act as if there are enough Ulta Beauty and Dick’s Sporting Goods to go around. However, you cannot fill all of this space with the few big box retail concepts still expanding—especially as many stalwarts are themselves shrinking.
As a result, a huge game of musical chairs is about to take place. Why pay $20/ft for mid-rise office space, if you can now move into an abandoned Sports Authority for $5/ft. Sure, it doesn’t come with windows, but employees like open plan space and there’s plenty of parking. Besides, with the rental savings, you can offer your staff an in-house fitness facility and cafeteria for free. Does your mega-church need a larger space? There’s probably a former Sears or Kmart that perfectly accommodates you at $3/ft. Have an assisted living facility with an expiring lease? Why not move it to an abandoned JC Penney—the geriatrics will feel right at home, as they’re the only ones still shopping there.
Go onto any real estate website and you will find out that huge plan space is nearly free. No one knows what the hell to do with it and the waves of bankruptcy in big box are just starting. As online evolves, these waves will engulf other segments of retail as well.
Type Macy’s into Loopnet.com and look at how many millions of feet of old Macy’s are available for under $10/ft to purchase. Retail’s problems are about to become everyone’s problems in CRE. When the old Macy’s rents for $2/ft, what happens to everyone else’s rents? EXACTLY!!! What happens if a CRE owner is leveraged at 60% (currently considered conservative) and leasing at $15/ft when the old HHGregg across the street is offered for rent at $3/ft? An office owner can lower his rents a few dollars, but at the new price deck, he cannot cover his interest cost, much less his other operating expenses. What happens to a suddenly emptying mid-rise office building? It has higher operating expenses than the box store due to full-time security and cleaning—maybe it’s a zero—in that future market rents no longer cover the operating expenses of the asset, much less offer a return on investment. I know, crazy—that’s how musical chairs works when demand contracts and the supply stays the same.
What happens to the guys who lent against these assets? Kaplooey!!!
America currently has more feet of retail space per capita than any other country. For that matter, America has more feet of office and other CRE types per capita as well. A decade of low interest rates has made this problem substantially worse. Think of the two malls that I spoke about in the last piece—they weren’t done in by the internet, they were done in by a tripling of retail space in a cities that are barely growing. These cities simply ran out of shoppers for all of this space. Now the mall is empty—heck the strip retail is only partly filled in. The next step is that rents will drop—dramatically. The owners of each asset, the mall and the strip center will go bust. Neither has a cap structure that is designed for dramatically lower rents. Neither has an org structure designed for carving up this space for the sorts of eclectic tenants that will eventually absorb it over the next few decades.
CRE has had it so good for the past 35 years, that most owners have never seen a down cycle. Sure, Dallas had too much supply in the early ‘90’s. Silicon Valley over-expanded in the early ‘00’s. It took a few years for it to be absorbed. Anyone who had capital during the bust made a fortune. This time may really be different. There’s too much supply. Short of blowing it up, it will be with us for years into the future. Without dramatic economic or population growth, some of it may NEVER be absorbed.
As an investor, this is all interesting to understand, but you don’t fully comprehend it until you have visited a few dozen of these facilities and seen how owners are trying to cope with the problem. In Miami, space is constricted. In Texas, there’s more CRE than I’ve ever seen. They keep putting it up—even if there isn’t demand currently. For three decades, they’ve always been able to fill it over time. For the first time ever, they can’t seem to fill it—in fact, demand is now declining. It is now obvious; there will be a whole lot of pain for CRE owners and lenders. Of course, someone’s pain can be someone’s gain.
To be continued…
It is possible to buy some things on the Internet that I can’t find in local stores anymore but the big problem is the growing nigger problems. The big declines will be wherever the nigger problems cannot be solved and thanks to Section 8 Housing, that is just about everywhere now.
Some years ago at the Houston Galleria I watched a small army of teenage jigaboos basically loot a major department store in broad daylight. They were literally running out of the store with armfuls of stolen merchandise.
Any place where there is a large concentration of jigaboos will have a dearth of retail businesses. That is because no retailer can survive the massive shoplifting losses inflicted by armies of jigaboos stealing whatever is not secured.
Vegas, it is blatantly racist to call niggers abusive words like jigaboo. How would you like it if they called you cracker or caulkie?
If you can’t call a Spade a Spade, what do you call them?
I’m still trying to find my White Priviledge that allows every rainbow-spectrum humanoid to say I have no right to exist and flourish in this world, but me and mine have to walk on eggshells when dealing with them.
I’m sorry-not-sorry about anybody’s feelings, but I’m about done dealing with individuals outside my “lily-white” color base.
Those within my tribe I treat as individuals.
Those without get treated as a group.
That is the way it works for the outsiders, so turnabout is not only fair play, but essential for the future of me and mine.
— “How would you like it if they called you cracker or caulkie?”
My favorite I’ve heard recently was from an Indian calling white people “cumskins”.
He went up in my esteem. I like that kind of equality.
They DO call me cracker, honkie, hillbilly, and so forth – and those are the INTELLECTUALS.
Most only know about fifty words, most of those are obscenities.
You are spot on concerning Texas. I live in Victoria, Texas and we have lots of empty stores in malls and a couple of completely empty malls. Those that are hanging on are doing so by a thread. Yet, they just keep on building new ones. I just don’t understand it, but I never understood why people in Antarctica don’t have to look up to see their feet either. thanks
— “Yet, they just keep on building new ones. I just don’t understand it”
All that interest free money the fed is pumping into the system has to be put somewhere. It’s eventually finding itself in ventures like commercial real estate. Most of the people down the chain from the fed, the loan originators, the construction firms, etc… are making out good on the situation. The people who hold the property are able to write off losses and swap it around in ways that keeps the music playing.
The people that lose are the ones trying to earnestly make a living owning commercial real estate, and savers who continue to watch their savings be worth less due to the inflation continuing at the fed’s loan window (and various other sources of manufactured money).
Razzle – You are spot on. Basically, the retail / apartment complex is the modern equivalent of the CDO / MBS for yield chasing. Here is how I have seen it work from the inside. A “fund manager” opens up a shop and tells his “clients” that he can return 7% on the clients money by investing in real estate backed investments. He then opens a management company. That management company then uses the funds money to purchase land / build apartments / retail establishments. They then charge the rent, and “manage” the property, charging the management fee of course. The fund manager makes money on managing the funds money, then the fund manager also makes money on the “management company” entity that is managing the property. The loser – the yield chasing investor. Of course, when you read the prospectus (who reads those pesky facts anyway) you see this, but people are so desperate for yield, they simply hand over their money. And what is even worse, they DEMAND that the fund manager put it to “work” in these ventures. It is comical that these people continue to pour money in to something that is going to just sit there, but like the cities in china that are all but empty, they all have more hope (and worthless fed money) than fact involved. The “fund” managers of course get their skim coming and going, and frankly don’t care which way the market goes, as they have made their skim already. Much like Real Whores, they will be happy to liquidate the assets for pennies on the dollar when the market goes the other way, or vacancies outstrip returns – for a fee of course.
The “asset” now is not ever intended to make any money, it literally is just there as part of the scam.
Humdo ,I gave you a thumbs up.Now please explain what you meant by ” I never understood why people in Antarctica don’t have to look up to see Their feet either ” You trying to a smart ass or are you really on to something ??