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HAVE INTEREST RATES FOUND BOTTOM?

The Federal Reserve Board surprised almost no one when it chose to leave the fed funds rate at 1.25 percent after its March 18 meeting. But how long can we expect interest rates to remain this low? In mid-March the Mortgage Bankers Association of America reported that a record number of homeowners had refinanced their mortgages, locking in low rates. Should retail real estate companies consider doing the same?

SCT asked a few industry leaders where they expect interest rates to go, when, and what retail developers should do about it.

Dan Sullivan, managing director of real estate capital debt markets, Wachovia Securities, Charlotte, N.C. — It is very likely that the Fed will cut short-term rates in the near term, and long-term rates, including five- and 10-year Treasuries, will remain where they are. We’ve got a war to finance, and there is going to be a big supply of Treasuries in the marketplace, because there is always a flight to quality. The net effect will be that long-term rates will stay where they are for the next six to 12 months.

Over the last few years, companies have kept a prudent mix of floating- and fixed-rate debt. With Treasuries at historic low rates, as well as spreads being at their tightest point in five years … I think [retail developers] absolutely should lock in rates. I find it hard to believe that long-term rates can get any lower. There is always the uncertainty of a protracted conflict, or other world events could cause rates to spike.

David Beckerman, managing director, Metrovation Capital, Bellevue, Wash. — We tend to follow the one-month LIBOR, and we think it will get back up to the 5 or 6 percent level in four years.

There are people with a fair amount of floating-rate debt on their portfolios, but there is a cost to locking in: a loss of flexibility. What you find in retail is that tenants change over time, and space needs to evolve. If you own a shopping center over 10 years, you are not going to have the same type of tenants, necessarily. Bed Bath & Beyond used to have 10,000-square-foot stores; now they have 40,000-square-foot stores. You have to be nimble enough to follow what the tenants’ space needs are. As a result, the lender has to give the landlord enough flexibility to satisfy the needs of the tenant. Another thing is, when you might have tenants with bankruptcies, does it necessarily make sense to make the debt service coverage worse in the short term, just for the peace of mind in the long term? If you suddenly lose a major tenant, you could hang on with a mom-and-pop store if you have a low enough debt service.

What has saved a lot of office building owners [from delinquencies] is that they have floating-rate debt that is so cheap, they can handle a 40 percent vacancy rate in the market.

John Kriz, managing director of real estate finance, Moody’s Investors Service, New York City — “I know rates will rise, and it’s when you least expect it.

We think it’s prudent to avoid having a substantial amount of floating-rate debt in a company’s capital structure. What prudent firms do to avoid being vulnerable to a significant shift in interest rates is they build a series of maturity layers. This layering provides flexibility. First, you end up not having that much debt coming due at a particular time, and as you layer in the maturities, you end up avoiding being completely right or wrong on guessing about interest rates. So you end up insulating yourself.

 

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	INVESTMENT VOLUME
	RETAIL VOLUME
	2002 proved to be a record year for retail transactions, according to the Investment Trends Quarterly. The fourth quarter represented the greatest total volume since CCIM began collecting the data in 1995. While neighborhood and community centers accounted for most of the activity, the quarter marked a comeback for some large traditional centers. *Represents New Plan Excel’s purchase of neighborhood and community centers from Equity Investment for $407 million and its sale of a portfolio of factory outlet centers to Chelsea Property Group for $193 million, as well as Acadia Realty’s sale of a group of shopping centers to Armstrong Capital for $17 million.
	Source: CCIM

 

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