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Shopping Centers Today -> July 2001
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FINANCE PANEL SEES POTENTIAL BUMPS IN ROAD
By Donna Mitchell
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| John B. Levy, left, and Kieran Quinn discuss financing for shopping centers. |
LAS
VEGAS — Although cooling off, the U.S. economy is still kicking,
thanks in part to unflagging consumer confidence. But retail real
estate developers heard some blunt warnings about the months ahead,
both in terms of the tenants that occupy their shopping centers
and their own financing opportunities.
Such
was the consensus at a panel discussion on financing and capital
needs in the current retail real estate market at ICSC’s Spring
Convention here. The panel was chaired by Kieran Quinn, president
and CEO of Atlanta-based Column Financial. "People have a good solid
view of the long-term growth of the economy," said John B. Levy,
president of Richmond, Va.-based John B. Levy & Co., an investment
banking firm. "They think they are going to be better off."
Levy added that the economy has shown a growth rate of between 1% and 2% in the last several quarters, modest in comparison with previous growth rates of 4%. "This is not a recession," he said. "What’s [propping] the economy up is the consumer."
That consumer confidence may be partially unrealistic, however, Levy added, explaining that consumers are continuing to bank on very rich long-term earnings growth as they spend, when actual earnings could easily end up lower than expected.
Consumers’ confidence has grown faster than their income, warned Jack Beebe, senior vice president and director of research for the Federal Reserve Bank of San Francisco.
Analysts expect to see some whittling down in the retail sector as far as performance and financing eligibility is concerned, according to John Kriz, managing director, real estate finance, Moody’s Investors Service. The New York City-based bond-rating agency has a negative outlook on the sector for several reasons, primarily because retail concepts overexpanded during economic boom times, and consumers are thought to be saturated with merchandise.
Discount retailers like Wal-Mart and Target will remain major retailing forces, because their logistics for management and expansion are better than the pack. Furthermore, they are beginning to extend their reach — Wal-Mart, for instance, is now the second-largest grocer in America.
Panelists agreed on several key issues concerning shopping centers of all configurations, from outlet centers to regional malls. Management must vary the tenant mix in order to keep pace with changing fashion trends, and thereby keep the shopping center ahead of the pack in its market. Centers need to make the trip compelling for consumers, especially in the face of rising gasoline prices.
As for financing prospects, Levy quipped that "real estate has always been the whipping boy. Banks tighten up in advance of the mistakes they know we’ll all make." But retail REITs seeking financing do have choices for raising money. One option is community banks. They know local real estate markets very well, and are likely to refer to that when considering whether to back a project. Also, Quinn said that retail property owners sometimes have unrealistic expectations of capitalization: Instead of selling their properties to raise money, many are refinancing loans.
"Stop shopping for that extra 500 basis points," he said. "Times have been good for the last seven years. You should have developed those relationships with the banks." Lastly, Levy reminded attendees to keep considering commercial mortgage-backed securities as funding sources, especially ones priced off swap spreads.
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