Success in Challenging Times
We are past the halfway point of the year. Summer is coming to an end and Autumn is on the horizon.
What are we seeing and where is Centermark now?
Retail, our specialty, thrives on rooftops and jobs. Unfortunately the current state of affairs is not good. Unemployment remains high (9%). Consumer confidence continues to fall. Inflation is rising (when you factor in food, gasoline, and commodities). Home prices remain in a free-fall. To top all this off, there is potential for stagflation not seen since the 1970s.
When considering acquisitions, we have seen cap rates compress. Smart sellers are rushing to unload assets into an overly euphoric market place overly concerned with current yield and hopeful pro formas. Adding to the cap rate compression is the fact that very little new product has been introduced since the market crash of 2008.
Banks have ramped up their disposition efforts regarding non-performing loans and REOs. And while we have reviewed many opportunities, the bid/ask gap remains too wide.
New construction proves extremely challenging. Many banks continue to stay on the sidelines. And those that are active in the marketplace are structuring loans in an ultra-conservative manner related to loan-to-value and pre-leasing. Construction costs are up considerably just this year alone. Most retailers are still slow to expand. And those that are, require ‘best in class’ locations and demand considerable incentives (i.e. tenant allowances, free-rent, etc.). When combined, the risk premiums can be too low given the deal complexity.
For the reasons already stated, we have lost many of our competitors.
Despite the gloom and doom of the overall economy and the challenges highlighted, we believe this is a moment to cautiously invest in real assets that can be bought attractively, mostly through distressed situations where re-engineering of real estate is needed.
Following this strategy and reacting to the changing market conditions highlighted earlier, I am pleased to report that the pace of 2011 business has been brisk and Centermark is thriving:
–We sold one shopping center and have another sale pending. As the investment community aggressively seeks to feed their addiction to yield, we have elected to ‘sell into this excitement.’
–We also are looking to ‘buy from disappointment’. We have three new construction projects and one redevelopment project expected to close in the next six months totaling over 100,000 SF. All of these are ‘value add’ opportunities anchored by national, credit-tenant retailers. I credit these opportunities to our expertise in urban redevelopment, local market knowledge, and plain hard work.
–Our portfolio occupancy rose 10% year-to-date. Letters of intent are pending that would achieve 100% occupancy. Our ‘feet on the street’ self-management model allows us to maximize operational efficiencies and exceed our tenants’ needs. Our successes have brought us third-party management opportunities, which we are thankful for.
We believe the same cautious and risk-averse approach to investment that allowed us to survive the crisis of the ‘late zeroes’ will continue to serve us well in these uncertain times.