Pain in store for shopping centers

From Reuters

For David Simon, chief executive of Simon Property Group, the largest U.S. owner of malls and shopping centers, retail property this year is all about distress.

The credit crisis has made the cost of new loans expensive or impossible for commercial real estate buyers and developers. That could leave some with short-term debt scrambling for loans to complete their projects or hold on to new ones.

"There's a lot of broken projects out there," Simon said during a recent conference call.

Soaring gasoline and food prices and the housing crisis have forced U.S. consumers to cut other spending and retailers to reel in expansion plans.

Those who own shopping centers are likely to feel a double punch: less demand for space and falling prices due to higher financing costs for buyers.

Large, well-capitalized shopping center owners could see great deals for new properties appear, as owners of new projects find it hard to lease space at a time when tenants are curbing expansion plans and the values of the centers are falling because of tighter lending.

"There's more lifestyle centers out there for sale than we've seen in the past," Simon said.

"I think the floodgates of that is just going to begin to open. . . . We're going to end up dealing with the construction lender."

Commercial real estate has seen vacancies rise slightly recently and loan default rates have generally been low. But the sector lags behind the general economy, and many investors and other experts believe the sector will see prices fall about 15% to 20% from their highs of last year.

"My view of the world is that the markets typically correct from most liquid to least liquid," said Spencer Haber, CEO of H2 Capital Partners, an alternative investment firm specializing in commercial real estate securities.

Those securities, such as commercial mortgage-backed bonds, first felt the pain because they're most liquid, meaning they can be bought and sold quickly. Loans follow, and finally properties themselves.

"The least liquid thing in the real estate capital markets is the actual property," Haber said.

The retail sector is expected to soften through 2009.

Real estate experts said they do not expect to see an overall fallout in retail real estate. But new construction and shopping centers that were either a part of a new residential development or were built to support one may not fare well. Properties in once-hot residential markets of Riverside and San Bernardino; southwest Florida; Phoenix; and Las Vegas are of particular concern.

"In some of those markets, what you saw were properties that were built to service a consumer base that never materialized," Haber said.

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