Archives for July 2020

While many investors wait on the sidelines, now is the time to be aggressive in buying vintage multifamily. There’s going to be a significant shift towards these garden-style communities as they offer more opportunities for social distancing with open space, lower density, and outdoor access, as well as greater air circulation compared to high-rises with closed hallways and elevators.

What is a ‘garden-style’ apartment asset and why are they undervalued?

A ‘garden-style’ community is one that features exterior access, landscaped grounds, and common outdoor areas for tenants. The structures are generally limited to four stories and feature single-story units with several to a floor. These multifamily properties typically don’t have elevators, and each unit has an entrance off a breezeway or the exterior of the building.

Some of the best investment opportunities are vintage multifamily assets. Many class-B and class-C communities that were built decades ago represent perfect value-add potential. These assets typically have some deferred maintenance, need interior and exterior updates, and lack modern amenities—those which will yield much higher demand, more stable occupancy, and improved NOI.
Additionally, these communities are often close to both professional and manufacturing jobs, schools, retail, and other drivers of value. The rental rates for these apartments are also generally lower than for class-A urban properties, which is crucial given the high unemployment rates and uncertainty in the job markets.

What else about garden-style apartments makes them appealing?

Many young professionals, particularly millennials, are sticking with renting to avoid the risk of foreclosure in the uncertain economic future due to the pandemic.
Younger renters in burgeoning local economies, such as Austin, Texas, are well-diversified and looking for the greatest value in their living spaces. We’ve found success by finding apartment communities near large developments where we can provide a quality living experience and better value to our end users. By improving amenities and bringing interiors up to class-A standards, we’re able to create hip, appealing spaces at a lower price point, and that’s what truly fuels long-term value creation.

Why ‘garden-style’ makes sense post pandemic

Aside from economic considerations, garden-style makes sense from a health perspective. Recovery post-pandemic for landlords of all classes is contingent on meeting users’ needs and expectations with respect to best health practices. As many jobs move away from the central business district, as we see in Austin, with many tech firms developing in the suburbs, residents are finding high-quality, lower-priced living options that are close to work. This helps users avoid the necessity of public transportation—a health concern for many. And, for those that are now working remotely, it’s an opportunity to have a class-A office without the price tag and where they can still get some decent food delivered.
And since we’re all sensibly wary of elevators and indoor common areas, vintage multifamily eliminates these issues and provides an overall more pleasant living experience in a natural setting. Suburban communities in particular offer many class-B and -C properties with excellent natural views backing up to forest and/or creek.

Why vintage multifamily is attractive to landlords and investors

These properties are attractive to investors as many apartment complexes are located in or close to major cities with robust demand factors, including population, industry, and income growth. Class-B and -C apartments also fair well during recessions and have not experienced average occupancy levels below 91 percent in recent decades.
Consequently, these well-located suburban assets are viable for capital infusion from an expenditure standpoint to renovate the units, amenitize them, and bring the interiors up to the standards of class A finish-outs.
Additionally, they pose a much healthier and more affordable investment alternative from a net pricing standpoint. We’ve seen a tremendous decline in retail, hospitality, live entertainment, sports, and restaurants, and it is going to take time for the market to correct. We’re going to need innovation to reinvent the commercial real estate market.

Creating value

Due to these factors, multifamily is going to be the most valuable asset class over the next 10 years. We see resilience in apartments in general, and specifically in garden-style class-B and -C communities that don’t have the occupancy density of high rises and offer more open space and fresh air. Renovating and operating these assets creates enormous value for tenants and owners. Garden-style is the wave of the future.
Source: “Suburban Garden-Style Apartments Will Be the Future of the Multifamily Sector”

Not the first time around

This isn’t the first time that Simon, Brookfield and ABG teamed up to rescue retailers falling on hard times.  They purchased Forever 21 out of bankruptcy earlier this year in an $81 million deal. Also, GGP, which Brookfield later acquired, partnered with Simon and ABG to buy teen apparel retailer Aeropostale out of bankruptcy in 2016, saving hundreds of stores from closing.
Over the years, ABG acquired other retailers out of bankruptcy, including Barney’s New York, Juicy Couture and Nine West, while partners like Simon bring the real estate prowess.
It appears that the strategy used to acquire Aeropostale remains in Simon’s playbook. Company CEO David Simon told analysts on a post-earnings conference call last year that his company would consider other opportunities to invest in troubled retailers.
“We certainly have the ability to help beyond what you might do on the leases [and] become an investor in a distressed situation,” Simon said. We’re “certainly as good as the private equity guys, when it comes to retail investment. And so, I wouldn’t rule it out,” he said.
Simon added that the company would work together again with Authentic Brands Group on other distress situations, as long as the retailers’ involved had the requisite size and brand equity.
“These investments help [landlords] control the real estate and potentially look at other options to reorganize, restructure and do what they need to do to make the retailers that filed for bankruptcy come out [of bankruptcy],” says Ana Lai, senior director and analytical manager at S&P Global Ratings. “This pandemic has certainly brought a lot of pressure and disruption, but there are brands that people are looking at beyond the pandemic that are still viable.”
The closures of malls due to COVID-19 have exacerbated the problems of some retailers and led to increasing bankruptcies. While many of these embattled chains were already struggling, the crisis pushed some over the edge. Meanwhile, some malls have still not reopened, while surges in new COVID-19 cases around the U.S. have forced re-closings of others.
As a result, analysts anticipate that even healthy retailers could struggle under the pressure as the pandemic persists.

Buying distressed retailers at discounts

“The important thing to remember in this emerging trend is that there are likely multiple strategies in play that would vary depending upon the acquisition opportunity, and they all still ultimately have to do with whether landlords could purchase these brands at a low enough price out of bankruptcy for any of this to work,” says Garrick Brown, vice president of retail intelligence, Americas retail services, at real estate services firm Cushman & Wakefield.
In the case of some anchor tenants, it may have more to do with regaining control of the real estate than with the long-term viability of a brand, but there are likely shades of gray here, Brown notes.
That means “keeping the most vital stores alive, while closing the underperformers and paving the way for mixed-using and densifying malls,” he says.
This was already a trend pre-COVID, according to Brown, with roughly 400 U.S. malls in different stages of tearing down dead anchor spaces for hotel, office, multifamily and medical uses. “It’s a smart move, as it hedges the landlord’s bets and creates more density to benefit what is left,” Brown says.

Strongest landlords have wherewithal 

Landlords with strong liquidity—like REITS like Simon and Brookfield—have historically been the ones to acquire bankrupt tenants, says Thuy Nguyen, vice president and senior analyst for Moody’s Investor Services and lead analyst for Brookfield Property REIT Inc.
“You’re not going to see that strategy being executed by landlords like CBL or Washington Prime. They have liquidly challenges to begin with,” she notes.
Additionally, the “surviving retailers want to be in high-quality portfolios in high-quality locations, and those are the portfolios of landlords like Brookfield and Simon,” Nguyen adds.
In spite of the challenges brought on by the pandemic, Simon still has deep pockets, with around $8.5 billion of liquidity on its balance sheet, including roughly $3.5 billion of cash available. Simon also recently completed a bond transaction for $2 billion.
The strategy to acquire bankrupt retailers might be a good move for Simon, says Ranjini Venkatesan, Moody’s vice president and senior analyst with the REITs group and lead analyst for Simon.
“The way they view it is that while they have the cash, they also have a sound understanding of the retail market,” she notes. “They know how much business their retailers do at what assets, and their retailers may want to continue having stores as opposed to closing stores, so they’re going to pick and choose based on all of that data.”
Meanwhile, Brookfield has created a new fund and said it would invest as much as $5 billion to help distressed retailers.

Types of retailers targeted for rescue

Landlords like Simon and Brookfield are likely eyeing retailers with business models that continue to be viable, but perhaps those that are having liquidity challenges during the pandemic.
“To make it through this difficult time, landlords are making an investment in these businesses that will help the retailers, but on the other hand, will also benefit themselves in the long run rather than having the stores go dark and having to deal with the vacancies,” Nguyen says.
It’s an even bigger play when it comes to anchor tenants like J.C Penney, because its store closures could invoke co-tenancy clauses of other retailers, which could lead to even more mall vacancies. Smaller retailers depend on anchors to drive foot traffic.
The move to acquire J.C. Penney would also allow the landlords to control the valuable real estate. In the case of the department store, there has been some debate about Simon looking to redevelop some properties where J.C. Penney owns the space. Acquiring the chain might give Simon a little bit more flexibility, Venkatesan notes.
However, some might ask if it’s a risky strategy for these mall REITs to acquire struggling retailers and move away from their expertise in real estate.
Nguyen says no. “Being REITS, there’s a limit to how much they can invest in other types of business outside of real estate,” she says. “We expect the earnings contribution from their retail investments to be small overall, but retail does give a different flavor to their earnings.”
Lai says Simon and Brookfield’s investment in troubled retailers is an “interesting strategy, but it’s a very limited investment in our view, and they’re partnering with others in the investment.’
“We don’t expect that to increase their risk level significantly,” she notes.
It’s a strategic move in the sense that if they were to own these distressed retailers and be successful, they could better manage their real estate portfolios, Lai goes on to say.
“They would have more control as opposed to leaving it up to others, who may end up winning the bid for the bankrupt company, or liquidation, which would be even a worse scenario.”
On the other hand, “there must be a limit to how much landlords can support their mall tenants,” notes Sarah Wyeth, head of S&P Global Ratings’ retail and restaurants division.
Struggling chains will have to figure out how to operate in today’s challenging environment.
“Each chain has unique hurdles to overcome aside from the broader trend of declining mall traffic,” Wyeth notes. “In addition to a successful digital platform, I think a mall-based retailer has to offer an exceptionally relevant and exciting product and experience to motivate consumers to make that special trip.”
Source: “Why Buying Bankrupt Mall Retailers Makes Perfect Sense for Landlords”