Archives for October 2020

In the coming years, hundreds of America’s roughly 1,100 malls are expected to shut, as retail, restaurant and movie theater closures pile up, and more people favor shopping on the internet over heading to the store.
Property owners are going to be tasked with giving dead malls a new life. But the future prospects — fulfillment centers, apartment complexes, schools or medical offices — could mean massive writeoffs in property values, according to a new Barclays report.

Turning a shuttered mall into an e-commerce warehouse or a residential complex could reduce the value of the property anywhere from 60% to 90%, Ryan Preclaw, a research analyst at Barclays, told CNBC’s “Worldwide Exchange” Thursday morning.
While the land that malls sit on may offer better recovery values if it is used for a mixed-use development, he said, historically that has only happened for about 15% of former malls.
The turmoil hitting the retail industry, which has been accelerated by the coronavirus pandemic, creates a ripple effect for malls. When an anchor tenant like a department store closes, shopper traffic at the mall tends to drop by about 10%, Preclaw explained, setting off a “tipping point” for the property, as other retailers in the mall look to leave.
When mall vacancy levels reach 20%, he said, the mall is at risk of tipping into default. Barclays is forecasting there will be about 10,000 retail store closures in 2020.

Barclays’ commercial mortgage-backed securities, or CMBS, team said about 30% of the CMBS mall loans they track are already in delinquency or default. The firm predicts 15% to 17% of U.S. malls will need to be redeveloped into other uses longer term.

A separate report from Morgan Stanley released earlier this week said about 50% of all mall-based, specialty retailers’ leases are coming up for renewal in the next three to four years, as tenants are increasingly finding themselves in a position of power over their landlords. A wave of companies may be looking to either close up shop or renegotiate their leases for cheaper rent terms, putting additional pressure on mall owners like Simon Property Group and Macerich.
Accelerated by the Covid-19 crisis, e-commerce has also proliferated, giving way to store closures as companies no longer need so much real estate to attract customers. Or they simply can’t afford it, with their profits under pressure by shipping and fulfillment costs.
This year, about 44% of mall-based retailers’ sales are expected to come from the web, according to Morgan Stanley, up from 26% a year ago. It expects that percentage to stabilize at about 34% in 2021, after the initial e-commerce surge during the pandemic subsides.
“The good news for malls is that they should emerge much stronger post rationalization, but the bad news is every mall REIT needs to rationalize a portion of their portfolio,” Morgan Stanley said.
The Tennessee-headquartered mall real estate investment trust CBL & Associates is expected to file for bankruptcy protection by early next month, highlighting the stresses the industry has faced, including tenants not paying rent. Meantime, Brookfield Properties is cutting 20% of its retail arm, as it looks to trim its mall portfolio and leasing activity has dried up.
“In the U.S., we expect Covid-19 to be the final catalyst for the long-anticipated clean out of excess capacity retail capacity,” Barclays’ Preclaw said.
Source:”Turning a dead mall into a warehouse will slash its value as much as 90%, Barclays predicts“

If in-person schooling proves safe, winter vacations won’t carry as great a perceived risk, says Hilton Worldwide’s Dino Michael.
(Bloomberg)—Dino Michael took on one of the most coveted jobs in travel, that of global head of luxury brands for Hilton Worldwide, in November 2019. Four months into his tenure, the industry collapsed around him.
That means that for most of the time he’s been in charge of Hilton’s crown jewels—Waldorf Astoria, Conrad, and the collection of independent properties known as LXR—he’s been focused on difficult, long-distance troubleshooting, rather than glamorous long-distance travel.
For someone who started the year dreaming big about the renovation and reopening of New York’s iconic Waldorf flagship and expansion plans around the world, the Covid-19 pandemic may have come as an especially big shock. But speaking with Bloomberg Pursuits from London, Michael is steadfastly optimistic.
“The one thing that has stood out to me over the last few months is—given how big an enterprise we are—how nimble we’ve been able to be,” he says, pointing to the quick rollouts of flexible cancellation policies and strict cleaning measures that the company committed to under the CleanStay initiative it announced in late April.
Even with the company’s second-quarter earnings reports that show overall revenue per available room dropping by 81% year-over-year, with the luxury segment taking a disproportionate hit when compared with extended stay and limited service brands, Michael is bullish. His two highest-end properties in New York, the Waldorf and the Conrad, have clung to life while such mid-priced behemoths as the Hilton Times Square surrendered to fate.
“Right now,  service looks a little different. It’s more hands-off, we understand that. But service is even more important right now … and with winter coming, there’s real opportunity.”

On New York’s Waldorf Astoria

The Waldorf’s long-awaited reopening was supposed to take place in 2021. As with many an ambitious renovation, that’s been pushed back—most likely until 2022, Michael says. Roughly two-thirds of its 1,400 rooms are being converted into luxury condos designed by Jean-Louis Denoit; the sales office for Waldorf Towers opened in February, with 75 units listed, just before the pandemic arrested all development in Manhattan.
But the spaces travelers know and love will be “restored” more than “renovated,” Michael says, of an effort to return to their original postwar grandeur.
“We’re taking out every single window frame, peeling back every piece of wallpaper,” he begins, describing a project that’s estimated to cost $1 billion. “We’re doubling every room in size. I think we’ll have the largest entry-level room in the city—over 620 square feet.” He also mentions such historical refurbishes as converting the ornamental flower pots at the top of the Park Avenue entryway back to the large lighting fixtures that once spotlighted women’s dresses as they waltzed through the double doors. In the process, at least 80,000 decorative objects have been removed and put up for auction.
As for the oversized meeting and event spaces that have made the hotel a global bastion for fancy weddings and black-tie galas? Michael says “it’s too early to tell” how this will shake out, though he feels confident that the spaces will continue to see life for hybrid events that some attend in person and others check into virtually.

On the Future of Luxury Brands

When it comes to building and reviving the world’s grand dames, Michael says the pandemic isn’t even in view.
“These types of projects take five to eight years to complete,” he says. “That lets us look beyond Covid.” He adds that the current realities may permanently alter some behavior —such as opting to wear a mask when we have sniffles, to reduce the odds of spreading illness—but says hotel development happens on a long enough lead to render pandemic-specific design plans unnecessary.
Even in the shorter term, Michael says his brands are making more tweaks to service than to spaces.
“Our three brands have always taught ‘emotional intuitive service,’ which is all about reading the cues,” he explains. “If you’re still nervous about traveling, and you’re sanitizing your hands the second you get out of the car, we’ll offer to help—but from a distance, rather than heading straight for your luggage. It’s even more important now to look at these human cues, to look at the behavior adjustments we have to make.”
Conrad, he adds, might be his best-positioned brand right now. Even though its native crowd of business travelers has been grounded, the brand’s signature high-tech infrastructure—fast Wi-Fi, well stocked desks, teleconferencing devices, good sound systems—caters well to those who’d rather “work from anywhere” than work from home. Such types are plentiful; hotels have found lifelines in “workation” packages and in renting rooms by the hour to boxed-in locals.
That’s no guarantee of business, though Such properties as the new Conrad Punta Mita on Mexico’s Pacific coast or the Conrad Maldives Rangali Island might be better positioned to win over travelers than the Conrad New York, a sky-high tower in Manhattan’s currently quiet financial district.
No matter, says Michael. “The leisure sector will come back before the corporate sector. That’s where luxury is well placed. People have had major trips cancelled and are itching to get out.”
Indeed, wealthy travelers have long been booking their holiday getaways, trusting that luxury hotels will offer better ratios of space per person and the highest standards in privacy.

On Travel’s Rebound at Large

“The last thing any government wants to do right now is go back to full lockdown,” said Michael, despite increased case counts that are leading officials in France and the United Kingdom to consider such mandates.
He adds that the rebound will depend on where you live. If safe, in-person schooling helps parents—a generally cautious demographic—feel comfortable that their kids will remain virus-free, despite spending their days in group settings, winter vacations may not carry as great a perceived risk.
“We will get to a point where people will travel but be more vigilant,” Michael concludes. “Frustration and pent-up desire related to spending so much time in the same four walls—that will override anything. Of that, I am optimistic.”
Source:”Winter Will Be the Start of Travel’s Turnaround, Says Hilton Exec“

A new U.S. commercial property survey by CBRE finds a wide disconnect on pricing expectations between buyers and sellers as a consequence of the COVID-19 pandemic that is weighing on commercial investment activity.
The CBRE survey found that 61% of buyers are looking for discounts from pre-pandemic prices and only 9% of sellers willing to offer such discounts. Among buyers looking for discounts, nearly three-quarters were for office or retail properties. For suburban office, 95% of investors were looking for discounts, with no sellers willing to reduce their price.
“Buyers and sellers remain apart on many asset types, especially value-add where the bid-ask spread remains wide. Uncertainty about how to underwrite net operating income will remain until the pandemic is under control,” said Chris Ludeman, Global President of Capital Markets for CBRE. “Despite disruption of segments of the commercial real estate industry, cap rates have remained relatively stable and in fact have gone down for the best industrial and multifamily assets. There is no shortage of equity capital, both foreign and domestic, targeting real estate and debt markets are increasingly accommodative.”
CBRE’s survey examined capitalization rates for stabilized properties (excluding hotels) and investment sentiment on market conditions revealed a number of key findings. Capitalization rates–usually called cap rates–measure a property’s value by dividing its annual income by its sale price. A lower cap rate indicates a higher value.
“With the market still cautious, most of the cap rate compression recorded is not a reflection of rising asset values; instead, assets are being underwritten with lower year-one income assumptions, resulting in lower cap rates,” said Richard Barkham, Global Chief Economist for CBRE. “Even so, values have been surprisingly resilient, given the nature of the economic shock so far. While liquidity and investor sentiment remain strong in many segments of the market, values will ultimately be pressured by the ongoing challenges from COVID-19. The relative cap rate stability so far, versus prior cycles, provides some reassurance in an otherwise difficult market.”
Investment Sentiment:

• One-third of survey respondents are underwriting with the same rental income assumptions as in Q1 2020, with the remaining two-thirds adopting more conservative assumptions. Half of those with unchanged underwriting assumptions are industrial-focused respondents.

• Investors are placing greater importance on tenant credit quality (cited by 85% of respondents), length of remaining lease term (64%) and building occupancy (64%) than they did prior to the pandemic.

• Roughly two-thirds of survey respondents believe that investment activity will recover to pre-pandemic levels within a year. Industrial investors are most bullish on the recovery, with nearly 90% expecting activity to return to pre-pandemic levels within a year, ahead of multifamily investors (84%).

Capitalization Rates:

• Cap rates for Class A properties as of August 2020 differed minimally from rates at the end of 2019. The largest share of markets reported flat cap rates (except for retail), while the rest reported increases or decreases of between 25 and 50 bps.

• CBD and suburban office had the most markets (each roughly one-third) reporting cap rate increases. Suburban multifamily had the most markets (33%) reporting cap rate decreases.
• A majority of survey respondents expect cap rates to remain unchanged through year-end 2020, as the cautious resumption of investment activity will continue to delay extensive price discovery

Source: “COVID-19 Driving Wider Price Disconnect Between Commercial Property Buyers and Sellers in U.S.“