The Greatest Risk To Retail Commercial Real Estate Is? Sovereign Debt! Macro Headwinds! Popping Bubbles! Busted Banks! No, It's

Reggie Middleton's picture

Here's the rub upfront for those who desire quick summaries:

  1. We had a massive CRE bubble which bust - See The Commercial Real Estate Crash Cometh, and I know who is leading the way.
  2. The CRE bubble bust, even as disguised and manipulated as it was, claimed some serious retail casualties. See GGP and the type of investigative analysis you will not get from your brokerage house.
  3. A public-private partnershp of misdirection allowed the popping bubble to be disguised. See The Conundrum of Commercial Real Estate Stocks: In a CRE "Near Depression", Why Are REIT Shares Still So High and Which Ones to Short?
  4. Even with the "kicking the can down the road mentality", fundamental and macro realities are bound to rear their heads. See The True Cause Of The 2008 Market Crash Looks Like Its About To Rear Its Ugly Head Again, With A Vengeance and then see Reggie Middleton ON CNBC's Fast Money Discussing Hopium in Real Estate 
  5. ... and will do so both in the US and abroad, see The "American Realist" Says: Past as Prologue - Re-blown Bubble to Pop Before the Previous Bubble Finishes Popping!!!!
  6. Those who truly believe that the more conservative EU nations will skate past this are sorely mistaken. See "Are The Ultra Conservative Dutch Immune To Pan-European Pandemic Contagion? Are You Safe During An Earthquake Because You Keep Your Shoes Tied Snugly?" Then see The First Major Real Estate Collapse In Europe? I've Found The EU Equivalent Of GGP, The Largest Real Estate Failure In US History
The fact of the matter is that there is a very fundamental, and sparsely recognized reason for retail real estate to take a tumble.
When discussing the proposed Dutch real estate short release to my subscribers a couple of weeks ago (see The Real Estate Recession/Depression is Here, Eurocalypse Style and The First Major Real Estate Collapse In Europe? I've Found The EU Equivalent Of GGP, The Largest Real Estate Failure In US History), I asked my analysts if there was evidence of increeased retail web activity affecting European mall sales. I know that was the fear in the Netherlands (see the last two videos at the bottom of the post here) and the reality in the states (see below). After all, doesn't pull in all of those hypergrowth billions of retail online dollars through physical malls. And if Amazon is making it, some mall store is losing it. Now, said mall store could open up its own website and potentialy successfully compete with Amazon (think, etc.) but exactly where does that leave the overbuilt, and probably over leveraged mall operator???
Exactly! Fu@ked! Professional subcribers can see the rapid growth of online retailing in Europe via this document -File Icon Online Retail Sales Penetration, as excerpted...

Online retail sales in Europe - Source: comScore Media Metrix

               In 2010, the online retail sales penetration increases noticeably among all major European nations, reaching an average 74.5% in Jan 2011 versus 66.0% in Jan 2010. This is a sharp increase. 

The UK recorded the highest Retail site penetration at 89.4% of the total online audience (up 6.3 points from last year). The Netherlands was ranked fifth with penetration of 80.2 percent (up 4.9%). The average minute per visitor for Europe was 52.4, close to 50.2 for Netherlands. For UK and France, this figure is above 80 minutes. This could imply that online spending would increase more sharply in the Netherland than in the UK, France and Germany. 

You see, during the bubble, a massive amount of retail space was built - much more than could possibly be effiiciently utilized. This is particularly true in the US, but also valid in Europe and even Asia as well (re: Ordos of empty cities fame). According to Howard Davidowitz, "We have 21 sq. ft. of retail selling space for every man, woman and child in this country." That's a tad bit much, eh? Do you know what makes it even worse? That selling space is becoming even less valuable, becuase more and more (and more) sales are being done online versus in a physical mall. I commented on Davidowitz's take, which is lockestep with mine this time last year: Davidowitz On Overt Optimism In The Retail Space And Mall REITs, Stuff Which We Have Detailed Often In The Past 

In December of 2009, I posted and article and accompanying research titled, "A Granular Look Into a $6 Billion REIT: Is This the Next GGP?" The following are excerpts from it:

The results of these activities have been congealed in our analysis of Macerich’s entire portfolio of properties (118+ properties), including wholly owned, joint ventures, new developments, unconsolidated and off balance sheet properties. Below is an excerpt of the full analysis that I am including in the updated Macerich forensic analysis. This sampling illustrates the damage done to equity upon the bursting of an credit binging bubble. Click any chart to enlarge (you may need to click the graphic again with your mouse to enlarge further).

Notice the loan to value ratios of the properties acquired between 2002 and 2007. What you see is the result of the CMBS bubble, with LTVs as high as 158%. At least 17 of the properties listed above with LTV’s above 100% should (and probably will, in due time) be totally written off, for they have significant negative equity. We are talking about wiping out properties with an acquisition cost of nearly $3 BILLION, and we are just getting started for this ia very small sampling of the property analysis. There are dozens of additional properties with LTVs considerably above the high watermark for feasible refinancing, thus implying significant equity infusions needed to rollover debt and/or highly punitive refinancing rates. Now, if you recall my congratulatory post on Goldman Sachs (please see Reggie Middleton Personally Contragulates Goldman, but Questions How Much More Can Be Pulled Off), the WSJ reported that the market will now willingingly refinance mall portfolio properties 50% LTV, considerably down from the 70% LTV level that was seen in the heyday of this Asset Securitization Crisis. Even if we were to assume that we are still in the midst of the credit bubble and REITs can still refi at 70LTV (both assumptions patently wrong), rents, net operating income and cap rates have moved so far to the adverse direction that MAC STILL would not be able to rollover the debt in roughly 37 properties (31% of the portfolio) whose LTVs are above the 70% mark – and that’s assuming the credit bubble returns and banks go all out on risk and CMBS trading. Rather wishful thinking, I believe we can all agree.

For those of you who didn't catch it in the table above, I'll blow it up for you...

Notice anything familiar??? There is a very strong chance that every single property on the list detailed in the forensic reports will be taken over by the lenders, that's a lot of properties. Subscribers should reference MAC Report Consolidated 051209 Retail MAC Report Consolidated 051209 Retail 2009-12-07 03:46:49 580.11 Kb , MAC Report Consolidated 051209 Professional MAC Report Consolidated 051209 Professional 2009-12-07 03:48:11 1.03 Mb, those who don't subscribe should download my  CRE 2010 Overview CRE 2010 Overview 2009-12-15 02:39:04 2.72 Mb. For those who want access, click here to subscribe!

So, why has Macerich and the entire REIT sector defied gravity despite the fact they are getting foreclosed upon faster than a no-doc, subprime, NINJA loan candidate who just lost his minimum wage job amongst all of these “Green Shoots”??? Well, I took the time to answer that in explicit detail... I urge all to read The Conundrum of Commercial Real Estate Stocks: In a CRE “Near Depression”, Why Are REIT Shares Still So High and Which Ones to Short?

More hard hitting BoomBustBlog commercial real estate commentary and research from Reggie Middleton:

Archived retail research and opininion from BoomBustBlog...

This is an example of exactly what we were talking about in our subscription documents regarding the ridiculous run up in consumer discretionary shares when taken in context of  the American consumer and the stress born from the Pan-European Sovereign Debt Crisis (click the link for our detailed analysis). You can find the earlier articles in this consumer mini-series as follows:

  1. What We’re Looking For To Go Splat! Part 1: macro arguments against the spike in retail stocks
  2. What We’re Looking For To Go Splat! Part 2: A list of 147 retail stocks with attributes that causes on to question their gain in prices, with a shortlist of companies who may very well go “splat”!
  3. Is the Consumer Really Back? Well, It Depends On If You Believe What the Government Tells You or Whether You’re An Indendent Thinker – The American Recovery and the North American Economic Outlook.


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kall's picture

Retailers should be more aware of these aspects than the actual customers. Frankly, if I had the chance to chose I would prefer starting and online business instead of a physical store one. Take the example of the Memphis classifieds guys, they really know how to run things there.

cranky-old-geezer's picture



The Greatest Risk To Retail Commercial Real Estate Is?



mkkby's picture

How many of us go to stores any more? I find the selection horrible.  I can never find what I'm looking for any more.  Even though they have a huge space, it's still only common items.  They filled the space by branching out into more categories.

geno-econ's picture

RE  in Florida may be on partial rebound with condos being purchased with drug money from South of the border. Such are the growyh prospects for America, but in any case does not help CRE . Why would anyone want to takeover  Winn Dixie ?

High Plains Drifter's picture

during all of this turmoil davidowitz has been a guiding light. he has not turned to the left or  the right. he has told me the truth. he ,....may go in peace...........

HardlyZero's picture

What happens when the laws change and allow "homeowners" to squat in their unpaid houses...and then that will spread into the rental markets through homes and then condos, and then rental apartments ?

All your neighbors might be squatters...soon.  This might be a new form of "debtor's prison"...a poor-government's way to control the situation.  If all the debtors were to upkeep their properties and not cause a ruckus or cause massive might work out for the debtors.  The owners will be very unhappy and in a very bad situation.

REITs might not be good going forward.

dolly madison's picture

Even as a landlord with much to lose, I think what happens in that case is good.  Everyone needs and deserves a place to live.  I'm thinking ownership of land is not such a good idea after all.  Ownership of stuff is fine, and ownership of the house on that land is fine, but everyone needs a place to live, and everyone should have a place to live.  A few should not be able to hoard up all the land.

SystemsGuy's picture

Ah, but who are the owners? The banks, mostly. How many developers were squeezed out of the market into bankruptcy? The banks are stuck - if they foreclose, they take a big chance that there will be no follow-on purchasers, and the houses in question become unliveable due to normally wear and tear and vandals. If they don't then all they can do is send the credit ratings of the current purchasers down a couple hundred points, but if those purchasers are being foreclosed upon chances are they've already dropped below the level where they could get a loan again anyway. The banks could always bulldoze, and I suspect that's what it will take, at which point the squatters will have lived in the house for five or six year at no real cost to themselves. However, until the banks are willing to do that (assuming that they actually own the title to the house, which at this stage is still a BIG if) then there will be a stalemate.

ebworthen's picture

Just look around your town; empty stores, "For Lease" everywhere, low traffic other than the UPS and FedEx trucks delivering online sales shipped for free with no state sales tax.

My community has empty strip malls built post 2008 that lay empty - who is paying the tab?  Was it written off?  Did the FED bail out the bank that provided the loan that is generating no revenue?


Boilermaker's picture

IYR, SPG, VNO, BXP, GGP....all on yet another RIP-YO-FACE off multi-week rally.

Again, it don't mean a thang if the Fed isn't going to let the REITS have any days without massive intervention to prop them up.  That's not going to stop anytime soon.

flacorps's picture

At the risk of making a mistake similar to the one made by those who suggested that the experience of unfolding a broadsheet newspaper could not be duplicated by using the internet, I will describe the pattern that unfolds in our own household with respect to stores and internet shopping.

90% of our shopping occurs in Target, and this has come primarily at the expense of Publix, our leading local supermarket chain.

When we use the internet to shop, it is for something specific in the way of a part for something around the house or a specific gift or book that we couldn't or didn't find at Target or at a specialty retailer like Stride Rite.

Yes, there is too much retail. No, the threat is not the internet.

kubrick007's picture

u r wrong, this is either due to your age or you may be living in a community that is slightly behind the times. i live in manhattan. the number of amazon boxes and deliveries daily is through the roof. i probably purchased 300-400 things on there this year. everything is cheaper there. even toilet paper. not to mention slowly i am seeing that older people are starting to use it (over 40).


as the economy worsens, people will realize that they can save money on amazon and other online sites with less hassle. also each year goes by will be another transition from the old folks who do things the old way to the new folks who are used to internet for everything. 


in 10 yrs, 99% of everything will be online purchase. the 1% will be either rich and don't care about savings or so poor that they don't have the internet or they mismanage their finances.

SystemsGuy's picture

Not 99% perhaps, but certainly north of 50%.

Stores are becoming showrooms - I've seen this behavior a lot lately, where people go to store x with their smartphone and scan barcodes or QRCodes of the items they're interested in, play with the items a bit, then leave. Later they go online and find the cheapest deal for the item, not necessarily the PoP.

I have to wonder what ten years time will bring for these malls. As a guess, 20-25% will be repurposed as community centers, alt-schools, satellite offices, or even low income housing. Another 10-15% or so will just be ghost malls, perhaps with one or two stores still in business on outward facing store-fronts, but with the malls otherwise empty and becoming squatter fodder. Another 10-15% will be torn down and allowed to go fallow. Most of these will be in the suburbs. That's a lot of CRE gone bad.

I watched one particular mall in Washington state slowly drift into ghost-mall status. New owner did eventually come in and make huge concessions on rent to lure in new tenants, but last I heard they were struggling again. Civic leaders don't like it, because it makes the downtown look blighted.

kubrick007's picture

don't forget amazon, zappos, etc are only inning 1 or 2 out of 9 in the conversion to online shopping. it is still very tough. for ex, right now to buy something online, i need to go to a computer and login my info. passwords will go way of the dodo bird at end of decade due to retinal/fingerprint security. also in next phase of embedded reality in phones it will become easy to simply point the camera at anything u want in real time and just say buy it and have it show up in less than 48 hrs. as americans are addicted consumers it will be hard to resist.


there will be certain times that people will want to try things on, but more and more that problem can go away easily also as the extra 2 day wait for turnaround will be better than the hr long wait in the stores to try things on. obviously urban centers will and continue to adapt quicker because shopping is much more difficult in these environments due to population density but ultimately retail will go away and direct sales will become the norm

Clycntct's picture

Trying to use the provided links?

Archived retail research and opininion from BoomBustBlog...

404 page  Is it my computer/whatever or is it only paid members?

If the later is this marketing?

 I try and follow but it's a pain.

ItsDanger's picture

The market value risk of commercial vs residential isnt the same dynamic.  Unwinding the bloated commercial sector would be quite different.  Result will be the same.

Georgesblog's picture

It seems that the Real Estate markets aren't happy if they're not living in a bubble. The story gets repeated, over and over. After a bubble pops, the talk is about how to re-inflate the bubble. Now, it seems to be about keeping the bubble inflated, while they patch the holes. I had a bicycle tube like that, once. It had 11 patches on it. It wasn't very reliable.

Shizzmoney's picture

First of all, awesome analysis as usual, Reggie.

Davidowitz (wow, whadda Jew!) has some good analysis here, but its nothing no one hasn't heard before - just stating the understated-in-MSM obvious.  Online retailers are gaining steam because it cuts down on costs which saves consumers money.  BUT this is a catch 22 because retail jobs, which are a last resort jobs for most people (along with food service), will become more scarce and scarce.  And since those jobs don't pay anything, people will have less to spend....which will drive them to cost cutting.  Unless of course, you are a top 20%er........then you are obviously shopping at Tiffanys (part of this too, I believe, is that if push came to shove, jewelry can be resold).

Plus, I disagree on his analysis on BJs Wholesale being "strong"; they owe my company (textile firm) a lot of money and are late on payments. 

In the end, the money crunch will only consolidate retailers even more, which in turn crushes the ability of one to start their own small business, which in turn crushes benefits+jobs (with good pay).

The money changers are winning.  But not for long; people WILL stop spending (or spending just on what they need, not what they want....and the consumer philosophy of what they need/want is shifting too) either out of lack of cash flow OR from protest.


geno-econ's picture

Whadda you doing in textiles ?? Other than BJ's which is probably Davidowitz's biggest client, your comments are much the same in expressing dim outlook for retailers and country. We have heard these sentiments before but  now with more conviction and consequent impact on CRE and rest of economy. Small textile and apparel importers were on the decline more than a decade ago after Walmart , Kmart and others began importing themselves or in some cases using importers as agents on small commissions When textile and apparel quotas were lifted there was no longer any role for importers to take "quota risk avoidance."   Going forward, this Global Economy and internet thing is not working for the broad well being of the nation, but we are rolling ahead at flank speed like a drunken Jew on credit

Jim in MN's picture


Lack of Fucking Cash for Final Demand, Darlings

ex VRWC's picture

Ooh can I go? Can I go? It's lack of tenants!

wkwillis's picture

The prospect is both better and worse. With the coming balance of payments collapse of the dollar, we will have less stuff to sell in the retail space we already have. On the other hand, light manufacturing (anything with components that weigh less than fifty pounds and doesn't require 10 kilovots, basically) can use a repurposed big box store.

tedstr's picture

HOw long till Fedex and UPS become takeover candidates by Amazon

tedstr's picture

Man you are the bomb.  Always great reading

RockyRacoon's picture

Yeah, but....    I used copy/paste to send this article to some friends in the CRE area.   My spell-checker went berserk.   So many simple typos is unforgivable when it comes to credibility.   Sheesh.   Great content but lousy package.

swani's picture

The Nuclear Option is just more can kicking while they figure out more can kicking. If there is politcial will, TPTB could continue to do this for a very, very long time, and one thing is for certain, the politcal will to destroy the future is there in droves.

Vampyroteuthis infernalis's picture

Good post Reggie. Those economic pundits just don't need to deal with macroeconomics these days until the house of cards collapses. They will then be sitting around, "What happened?!?" Pundits are educated idiots!

Badabing's picture

"Good post Reggie. Those economic pundits just don't need to deal with macroeconomics these days until the house of cards collapses. They will then be sitting around, "What happened?!?" Pundits are educated idiots"


If TPTB can hide the popping bubble of CRE like Reggie says, than the house of cards may have already fallen. We are looking at a shadow of the house of cards, and it looks to be standing, only to find that its an elaborate shadow puppet.

A recipe of false indicators,  denial, and hopeum keep the show going for the sheeple.


supermaxedout's picture

Hey Reggie,

whats your comment on this ?

Revisiting The "Nuclear Option": Will The Fed Buy European Bonds?

I Think this theme is overshadowing everything else. Your expert opinion may help us to see clearer what is happening.



Jumbotron's picture

Hey Reggie,

whats your comment on this ?

Revisiting The "Nuclear Option": Will The Fed Buy European Bonds?


The Fed will exercise ALL options in the end..........


WHY ????  Becasue the financial desert will bloom if it does......

eureka's picture

Who cares about small-malls in Fresno and Flagstaff.

Check General Growth and Station Casinos - national retail and regional gaming behemoths respectively - stories about corrupt judges who let the primary "stake-holders", i.e. the controlling founders, off the hook - AND - unbelievably let them keep nearly all their assets AND "socialize" their losses to their bond holders.

WOUW - what a fricking concept - imagine if that model were to be applied to US stocks, banks & T-bonds...

Corrupt judges, Bitchez - are the foundations of Reits.