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, Amazon.com 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 Walmart.com, 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...
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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).
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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.