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Retail CRE-
What’s going on?
Where are the risks?
What are ST and LT implications?
I’ll let people who are adjacent specialists (investments, development, lending, etc.) add what they will and will try to stay in my lane (Leasing and AM)...
What’s going on?
Where are the risks?
What are ST and LT implications?
I’ll let people who are adjacent specialists (investments, development, lending, etc.) add what they will and will try to stay in my lane (Leasing and AM)...
So “Retail” is unique in that it is the most niche CRE group. NNN, Power, open air, enclosed, street, and on and on.
I’m going to be general for the sake of sanity, but there are MANY exceptions and outliers that won’t fall under my purview/expertise (I use that term liberally)
I’m going to be general for the sake of sanity, but there are MANY exceptions and outliers that won’t fall under my purview/expertise (I use that term liberally)
Unlike textbooks, which focus on asset classes within Retail CRE, I divide retail into two categories based on one metric (IMO, how it should be viewed)- leasing.
1) market rent, and 2) sales basis.
1) market rent, and 2) sales basis.
Market rent applies to what I would define as replicable assets. That is, “the corner of 5th and Arapohoe”. Or visible dirt off of “Highway X”. Replacement cost varies by market, as do prospective tenants, but it’s a system based primarily on comp sales and comp rents.
Sales basis are the outliers, and that’s where you will find most retail in the B to A+ category. These aren’t easily replaced due to not only replacement cost, but scarcity, proximity, demographics, and the inherent risks associated with lease-up heavily predicated on relos.
So with that preface, WTF is going on?!
Well within retail categories matter in good times, and matter a lot in bad.
Most hurt by current circumstance:
Fitness
F&B
Travel
Service (physical) like massage, grooming, etc.
Tertiary; tenants who feed off of traffic.
Well within retail categories matter in good times, and matter a lot in bad.
Most hurt by current circumstance:
Fitness
F&B
Travel
Service (physical) like massage, grooming, etc.
Tertiary; tenants who feed off of traffic.
Tenants that are performing (comparative) currently:
Athleisure
Furniture
Juniors (children’s)
Automotive
Grocery
Athleisure
Furniture
Juniors (children’s)
Automotive
Grocery
Of those that are “performing” I would put their comp sales at 75-120% vs FY19, comparing month to month fiscally (i.e. backing out regional closure periods due to pandemic).
...So, practically, what does this look like?
Retail LLs essentially have two choices-
1) work with the retailer
2) default, recapture, collect
Let’s look at Option 1 first
Retail LLs essentially have two choices-
1) work with the retailer
2) default, recapture, collect
Let’s look at Option 1 first
Option 1- Work With
What size are they in our portfolio? (Sf=CoT, Gross rent=NOI)
What does their balance sheet look like? Does our helping them make them survive or they dead man walking?
Is their brand viable? Can we lease off them?
Are they reasonable? (Most important)
What size are they in our portfolio? (Sf=CoT, Gross rent=NOI)
What does their balance sheet look like? Does our helping them make them survive or they dead man walking?
Is their brand viable? Can we lease off them?
Are they reasonable? (Most important)
Option 2- Default/Recapture
What signature do we have? Corp? Personal? LOC? Single purpose entity (aka nothing)?
Demand for backfill (space size, use repurpose, historical performance, etc)?
How friendly is state/muni to LL vs T?
What signature do we have? Corp? Personal? LOC? Single purpose entity (aka nothing)?
Demand for backfill (space size, use repurpose, historical performance, etc)?
How friendly is state/muni to LL vs T?
The line between these two options is increasingly blurred, but the underlying goal is simple- 1) keep best tenants (performance & image), 2) maintain occupancy, and 3) maintain loan covenants (e.g. DSCR).
In order to do that, what can be done?
In order to do that, what can be done?
You need to bifurcate Tenants into 2 groups based on financials (who wants help vs who needs help).
First, let’s look at who NEEDS help, taking into account that whatever deal is struck needs lender blessing.
First, let’s look at who NEEDS help, taking into account that whatever deal is struck needs lender blessing.
Ideally, rent is deferred. Very prevalent early covid, unrealistic now.
Realistically, rent is abated (between 50% and 100% of closure period) and abated period is tacked onto term (either month for month, or ideally 2 months term for 1 month abate)
Realistically, rent is abated (between 50% and 100% of closure period) and abated period is tacked onto term (either month for month, or ideally 2 months term for 1 month abate)
But what if Tenant is expiring? Then, regardless of entity implications, they have leverage.
Either discount baked into renewal, or, rent in Fall 2020 is substantially reduced to INDUCE renewal.
Either discount baked into renewal, or, rent in Fall 2020 is substantially reduced to INDUCE renewal.
Even if rent is reduced in Fall ‘20, the likelihood of renewal rent being 100% of current rent is slim to none, which means you’re backwards on NOI.
But do you want term or occupancy? Occupancy Cost or Occupancy %?
But do you want term or occupancy? Occupancy Cost or Occupancy %?
While that is floating in your mind, let’s look at who WANTS vs. needs help.
These r typically your best tenants. Their legal teams and budgets probably trump yours unless you’re $SPG.
They are desirable, powerful, and you can lease off them. And they’re threatening to close.
These r typically your best tenants. Their legal teams and budgets probably trump yours unless you’re $SPG.
They are desirable, powerful, and you can lease off them. And they’re threatening to close.
If you help them, then your budget to work with locals is essentially extinguished.
If you don’t, then their threats to close (or temporary action of closing for leverage) are extremely damaging.
They offer buyouts of their lease that are a joke relative to amt owed over term.
If you don’t, then their threats to close (or temporary action of closing for leverage) are extremely damaging.
They offer buyouts of their lease that are a joke relative to amt owed over term.
So you essentially have no choice but to say no, unless you are a small NNN owner in which case you are raked over the coals.
Or you give a small but meaningful concession (isn’t that what they were looking for all along?!)
Or you give a small but meaningful concession (isn’t that what they were looking for all along?!)
While all that is happening, and you’re getting close to what you hope is the end of the nightmare, the govt comes in and effectively shuts the whole thing down again. So what does that tell you?
Avoid investing in props that are predominantly the “bad” categories.
Be aware of your OCC psf vs OCC % and make your strategy accordingly.
Communicate w/ partners/LPs. Over-communicate if possible.
Know what pushes your lenders buttons. And don’t do that.
Be a good person.
Be aware of your OCC psf vs OCC % and make your strategy accordingly.
Communicate w/ partners/LPs. Over-communicate if possible.
Know what pushes your lenders buttons. And don’t do that.
Be a good person.
EMPHASIS on be a good person. I’ve been in some very bad situations with some really good people on the other side of the table. Would go to war for them.
Been on the other side of the table of real dirtbags in much better situations. Wouldn’t help in the apocalypse.
Been on the other side of the table of real dirtbags in much better situations. Wouldn’t help in the apocalypse.
