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News release

Chicago

Jones Lang LaSalle 2010 Spring State of the Retail Market Report

Traditional investors sidelined while special servicers determine best course of action for distressed assets


CHICAGO, May 23, 2010 — Despite lingering economic stress that continues to curb consumer spending and affect the retail sector, recent evidence within the investment sales community indicates the retail real estate market has hit bottom and is showing increasing signs of recovery in 2010. The number of significant retail bankruptcies that grew to 13 in 2009 has slowed in the new year and occupancy costs have dropped with market rents stabilizing at 25 to 50 percent below the peak in 2006. Retail cap rates have fallen slightly  (see Figure 1), and will continue to experience downward momentum in the next 18-36 months as credit markets thaw, retail sales improve, vacancy rates decline and rents slowly increase, according to Jones Lang LaSalle’s 2010 Mid-Year State of the Retail Market Report. 

During the past two years, retail property transaction volume has fallen more than 80 percent, with just 239 sales of multi-tenant shopping centers in excess of 80,000 square feet of leasing transactions completed in 2009.  A mere $7.2 billion in strip-center and $4.3 billion in mall and other (including urban retail, mixed-use properties, single tenant, etc.) investment sales were completed in 2009.  The 2009 sales figures represent a decline of 32 percent and 57 percent, respectively, compared with year-end 2008. 

“The lull of retail sector transactions in 2009 allowed both buyers and sellers the chance to regroup, survey the landscape, and prepare for future acquisition and disposition activity,” said Kris Cooper, Managing Director of Jones Lang LaSalle’s retail investment sales business.  “New retail buyers are entering the market now including private investors, REITs and financial institutions. They’re seeking core at 7.5 to 8.25 cap rates on well capitalized assets and non-core at 9 to 10 percent or higher. Some opportunistic buyers are relieving troubled owners with a quick close to take the asset off their books, but that’s in exchange for purchasing the asset at 10 to 12 percent or higher. Attractive core retail properties are actually generating better pricing due to the availability of cheaper debt and lack of core product.”

Currently, more than $700 billion in notes backed by retail properties are underwater, though a majority are still performing and current.  This could change as loan maturity dates begin to force the issue between 2014 and 2017. Special servicers are expected to gain greater prominence in the years to come as they determine the best course of action for distressed assets.

“The days of ‘extend and pretend’ are coming to a close as special servicers, banks and other lenders examine the financial ramifications of extending loans versus liquidating assets,” added Cooper.  “There will be opportunistic buys available this year, but don’t expect a tidal wave of product to hit the market—there will definitely be an orderly disposition of assets in 2010.”

One example of that could be the orderly way General Growth Properties (GGP) is handling its bankruptcy reorganization plan.  Following an unsolicited $10 billion takeover bid from the Simon Property Group, a federal judge has given GGP until mid-July to straighten things out while it prepares a recapitalization proposal in conjunction with other suitors/partners.  Simon and other potential bidders will be allowed to submit offers in the meantime.  Still, all of this maneuvering has the potential to significantly alter the retail investment sales landscape.  The stigma of selling assets at a discount has begun to wane and is now viewed as opportunistic, while data points from current sales help to confirm pricing and build consensus.  However, many within the industry view the activity surrounding the nation’s largest mall owner with cautious concern.

It will be very interesting to watch how the GGP bankruptcy plays out and which players come out on top.   No single corporation should be able to establish dominance in any sector of commercial real estate.  Should this happen it does not necessarily equate to achieving desired results for retailers and competitors,” said Greg Maloney, CEO and President of Jones Lang LaSalle Retail.  “One thing is for certain—investors once again see the potential for growth in retail investments and that’s a positive sign for everyone in the industry.”

Little has changed in the realm of investor interest as grocery-anchored centers continue to curry the greatest favor, while those centers with market-leading tenants holding strong credit come in at a close second.  Retail property cap rates now stand at a low of 7.5 percent for core grocery-anchored properties with attractive assumable debt to a high of 10 percent or more for malls. Also faring well are properties offering tenants with long-term leases and strong sales, those located in major metro markets and those that offer a single tenant with strong credit.  Lifestyle centers, power centers, malls in tertiary markets and permitted land remain out in the cold with only the most opportunistic of investors buying at 10-12 percent caps or higher, using incentives such as “quick close” and all cash to lower pricing. 
“The turnaround in the retail sector will rely heavily upon the return of consumer confidence—as consumers move from buying only what they need and return to buying what they want,” added Maloney. “Discounters and value orientated retailers will continue to garner the lion’s share of discretionary dollars, but the ‘latte effect’ no longer seems to weigh heavily on the minds of consumers who appear poised to open their wallets to retailers like Starbucks.  The second half of 2010 shows great promise with the potential of an increase in retail occupancy.”

After several dismal years, the spectre of increased confidence, stabilizing vacancy rates and rents, as well as a lack of new inventory should all spell brighter times to come for both sellers and buyers alike.  “While the institutional investors continue to sit out a spell, entrepreneurial buyers and foreign investors are moving now. Cash is still king and this is a great time to explore prospects ranging from toxic maturing notes to core investment opportunities,” said Margaret Caldwell, Managing Director of Retail Investment Sales.

About Jones Lang LaSalle Retail

As the leading retail service provider, Jones Lang LaSalle Retail manages the largest third-party retail portfolio in the country.  The firm's 84 million-square-foot retail portfolio consists of more than 300 regional malls, strip centers, power centers, lifestyle centers, ground-up development projects, mixed-use centers, transportation terminals and over 6,000 retail ATM's and bank branches across 49 states. Globally, Jones Lang LaSalle (NYSE: JLL) has a retail portfolio of 265 million square feet of property under management and leasing, including more than 9,500 retail locations on four continents. Jones Lang LaSalle is the only global real estate services firm with a team of dedicated, full-time experts who deliver comprehensive and globally integrated services in Energy and Sustainability under one umbrella. The firm offers leading-edge, industry-unique technology, training and tools in energy and sustainability to maximize the benefits for its clients and the greater community. For more information on Jones Lang LaSalle Retail, visit www.jllretail.com.

About Jones Lang LaSalle Capital Markets

Jones Lang LaSalle Capital Markets is a full-service global provider of capital solutions for real estate investors and occupiers. Our in-depth local market and global investor knowledge delivers the best-in-class solutions for our clients — whether a sale, financing, repositioning, advisory or recapitalization execution. In the last three years, Jones Lang LaSalle Capital Markets completed more than $143 billion transactions globally. Our Capital Markets team comprises approximately 1,500 specialists, operating in 180 major markets worldwide.
 
About Jones Lang LaSalle
Jones Lang LaSalle (NYSE:JLL) is a financial and professional services firm specializing in real estate. The firm offers integrated services delivered by expert teams worldwide to clients seeking increased value by owning, occupying or investing in real estate. With 2009 global revenue of $2.5 billion, Jones Lang LaSalle serves clients in 60 countries from 750 locations worldwide, including 180 corporate offices.  The firm is an industry leader in property and corporate facility management services, with a portfolio of approximately 1.6 billion square feet worldwide. LaSalle Investment Management, the company’s investment management business, is one of the world’s largest and most diverse in real estate with approximately $40 billion of assets under management. For further information, please visit our Web site, www.joneslanglasalle.com.