Mortgage Observer

Death of Malls Exaggerated: REIT Leaders

Shopping malls–that much-maligned asset class—are actually no thorn in the side of real estate investment trusts, a group senior executives at top REITs said today. The group was assembled at the New York University Schack Institute’s annual REIT symposium, held today at the Pierre Hotel.

REITs are in fact seeing these assets perform well despite the many news reports to the contrary.

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Tysons Corner Center in McLean, Va.

“Reports on the demise of malls are greatly exaggerated,” said Joseph Coradino, CEO of PREIT LLC, a Philadelphia-based REIT that focuses on retail. He made the remarks at a panel called “Strategy at the Mid-Cycle,” this morning.

He was not alone in the sentiment.

“Spaces [in malls] above 10,000 square feet,” remain well-leased, according to Matthew Lustig, the head of real estate at investment management giant Lazard Ltd.  While smaller spaces in malls nationally sometimes remain vacant, the larger spaces and big box retailers are indeed faring well, he said.

In recent years, news reports said shopping centers as an asset class nationally were seriously on the wane. Losses on liquidated retail CMBS loans have historically been the highest of those for any real estate asset class, according to data from Trepp. The average loss severity for retail since 2010 was 60.6 percent, the data show, whereas the average for multifamily in the same period was 49.6 percent. (These figures do not include loans with losses of less than 2 percent).

Even mega REITs, such as Simon Property Group and General Growth Properties Inc., were letting their less desirable malls fall into special servicing last year, according to published reports.

The dire situation with regard to malls prompted DDR Corp.’s CEO Daniel Hurwitz, to declare “I don’t think we’re overbuilt, I think we’re under-demolished,” in an article in The Atlantic Monthly.

But Mr. Lustig said malls and larger retailers are not what’s causing problems for retail centers. “It’s the ‘mom and pop’ stores that are still soft,” he said.

Amid our slow economic recovery, consumers have shifted their focus to bargains—a boon to the so-called big box retailers that so inflame local community organizations.

“It will not be a problem to recycle those big boxes,” Mr. Lustig said, referring not to a cardboard box in need of repurpose, of course, but to the free-flow of capital invested in big box retailers like Kmart and Walmart. “Recycling” the capital refers to exiting an asset in order to redeploy funds in another investment.

The retail sector has also managed to clean up well compared to other assets, Joe Mc Bride of Trepp told Mortgage Observer. While the delinquency rate for loans backed by retail was nearly unchanged between 2011 and 2013, according to reports, such loans made a dramatic recovery this year, claiming the title of lowest delinquency rate of any asset class in March of this year: 5.7 percent, according to Trepp.

Still, there are residual concerns from the 2008-2009 market correction, executives on today’s panel said. The main concern was pressure from the investment community to simplify the entities REITs use to do business—often complex J.V. and partnerships with idiosyncratic subordinate and senior positions.

The market has “punished” complicated partnerships and joint ventures, said David Henry, CEO of Kimco Realty, a retail REIT that owns shopping centers. “The investment community would prefer us to be totally vertically integrated,” he said.

But Mr. Coradino said the state of the equity markets is such that joint ventures remain ideal for his firm, despite the fact that investors would prefer to do business with a more straightforward entity.

“We are looking to J.V.,” he said.

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