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TRC Blog

August 11 , 2011

The Crystal Ball

The Crystal Ball

By Steve Hefner | President | Connected Acquisitions. We see the explosive volatility of the stock market these days. Up one day by several hundred points, down the next by over 500 points. Politics can drive the stock market. Global events can drive it. Even extreme weather can alter the stock market. But just what drives the retail market? How does a retailer decide to expand or contract? Why does an owner decide it is time to sell his shopping center? What are the forces of nature/economics that can cause core properties (ones with superior locations/demographics, national credit tenants and no appreciable turnover or vacancy) to now trade back to 2006 pricing levels (meaning – sub 6 caps)? The answer is not easy. It involves several variables. One is the flight to quality. As the stock market becomes more volatile, many investment funds and companies move to rock solid returns (treasuries, gold, real estate), even though returns are not necessarily stellar (compared to the S&P). At least, the returns on real estate are enough to pay the company dividend. Another one is capital availability. As the lenders decide to open up their coffers, more properties trade because buyers have options on rate, LTVs, impounds and other terms. In the last month, we’ve seen conduit lending (what little there is), pull back strongly. The life companies and regional banks answer with better terms, thus capital is somewhat plentiful now, but could turn either way quickly. Another answer is loan maturities. In the highly charged times from 2005-2008, there were more commercial real estate transactions in that period than any other time in history. With transactions, there are loans to make. Almost all of the loans on those acquisitions from 2005-2008 were either on 5-year or 10-year terms. That means commercial loans are maturing now thru 2018 for properties of which ALL of them were valued more when bought than they are today. Those are opportunities for us on the acquisitions team at The Retail Connection. Another answer to driving up the real estate market is job growth. Job growth means more disposable income, thus retailers see sales volumes increase. That spurs the entire economic engine for the country. This is probably the most critical variable to ensure a rising retail market. So what does my crystal ball say? It says to trust the traditional real estate cycle. Throughout history, we have seen periods of peaks and valleys. There is no reason to believe those don’t continue. Today, we are in the valley and I have my hiking boots on, because I have my sights set on that peak. We may hitch a ride with some of the variables I just mentioned, but the unknown is just how long it takes us to make the trek to the top. However long it takes, I’m betting that the path will still be a little rocky.
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Tip top stuff. I'll epxcet more now.
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