ILLINOIS - At the beginning of 2008 I was sending emails showing that there was twice as much commercial real estate on the market vs. a year earlier and that it was increasing at a rate of 15 percent more properties each month. At that time, the way real estate was trending, I estimated the downward cycle would be a few years. Today, based on the impact of the capital markets, it is likely to be 4 to 7 years just to recover to today's values. Here's why:

Sellers who did not sell in 2007 thought their properties were more valuable than what the market would pay. Let's say they said they would sell for $10 million and it didn't sell. The real value of the property was $9 million but they were holding out believing in the "greater fool theory." Today, that same property is worth 15 percent to 30 percent less. In many cases, that's equal to or less than the debt they owe. In the last four months the feds have asked lenders to re-appraise every property in their portfolio. The borrower's property is now valued at today's value and we are hearing of borrowers handing their retail centers back to their lenders in this scenario.

Our belief is the lenders, who are not in the real estate business, will discount the notes and dump the real estate as quickly as possible. New investors will be buying these discounted notes for 60 percent -70 percent of what all the other competition owns their properties for. This investor can now charge a lower rent, and will fill his property with tenants from other buildings, thus driving the other properties NOI's downward. Historically, this cycle takes 4 to 7 years to stabilize. In the meantime, values of all buildings will fall another 15 percent to 30 percent.


Perceived Value (2007) $10,000,000
The investor who was waiting for the "greater fool"

Real Value (2007)$ 9,000,000
The value an educated investor would have paid when at the peak of the commercial real estate market

Current Value (end of 2008)$7,500,000 (-16.7%)
15-30% Loss of value due to Financial Markets & increased cost and risks (personal guarantees) of borrowing *

Expected Value (end of 2009) $6,375,000 (-15%)
10%-30% Loss of value due to reduced NOI (Tenant defaults and space size reductions)

Expected Value (2010-2011) $5,500,000(-14%)
10%-30% Loss of value due to new competition from new investors who bought defaulted buildings from Lenders and who will now under-bid for Tenants

Expected Value (2012-2015)$7,500,000(36%)
15%-40% Increase in value as defaulted properties reach stable occupancy and are sold

*Real Capital Analytics reports on 12/08/2008 that Chicago area cap rates, on a comparative basis, have risen 18%

As Jack Cohen, CEO of Cohen Financial has said "Asset value on properties today is probably the debt (at best), not the real estate, and, whether or not people default or try to save the deal will be a by-product of how much equity is at risk and whether or not people feel they want to protect it."

So what do you do? I would start by analyzing your current situation closely. Get an estimate of today's market value for your properties. Be realistic and conservative! If you bought your property 2-3 years ago, in most cases, it is worth less today. Look at your rent roll and tenant receivables, tenant renewals will not be 100 percent, and some of your stores won't make it through this recession. Plan for it, as painful as it might be!

Manage your NOI, paying more attention to your expenses. Act as if you will be absorbing all common area maintenance expenses, because you may be paying more than you think in the future. Negotiate the price for every supply and service contract you have. You probably have tenants who are giving notice that they are having trouble paying the full rent and are looking for concessions. If you can compromise, do it. Give them time to get back on their feet. These are the tenants that can leave your center for the lower rent center in a couple of years. Today you have to manage your expenses because it will help your tenants survive, which in turn, keeps you in the game as well.

If you have equity, move slowly. Buying opportunities will increase. Private equity investment groups (and some public equity groups) are buying with cash. They know where the value should be, where they are buyers, and it isn't at 2007 prices, or 2005 or 2006 for that matter. Most believe, as we do, prices will fall further.

However, we have yet to see many properties change hands, from the borrower to the lender. When it begins to happen, it will take more than three years to recover to today's values. An analogy we like to make is comparing commercial real estate to the current stock market crash. We are suggesting you sell when the Dow Jones is at 10,000 (now), or risk it going to 7,600 (2009-2010). Selling now gives you cash at a more favorable capital gains rate than the future will hold, and better buying opportunities are coming soon.

What's Hot, What's Not: Buyers will continue to flock to quality properties, with quality tenancy, with those cap rates slowly increasing. Distressed centers are also in demand, when they are priced appropriately, i.e. higher cap on actual NOI (no more master leasing). Triple net properties below a 7 cap, with flat income are not selling because there are so few exchange buyers. Also, any triple net property with less than 7 years left on the lease will be a difficult sell. That is, unless it is priced accordingly.

Bottom Line: Sell today or prepare to hold through this cycle. If you think the scenario summarized above is accurate and you do not have an interest in waiting for the next cycle which may be 4 to 7 years from now, we should talk about the real current value of your properties today.

Dan Martin and the Martin Retail Team is the top retail investment brokerage team in the National Retail Group for Sperry Van Ness with over $220 million in direct sales in 2008. The office has recently been named to lead the Sperry Van Ness National Self Storage team in the Midwest markets.

For more information you can reach Dan at: This e-mail address is being protected from spambots. You need JavaScript enabled to view it
Web: www.svn.com

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ARIZONA - Circuit City, KB Toys, Mervyn's, Steve and Barry's, Whitehall Jewelers, Linens 'n Things, Showcase Home Entertainment. How many more will join the growing list of bankrupt and shuttered chain stores before the end of the economic crisis?

The International Council of shopping centers predicted in December that, by the end of 2008, 148,000 stores would close nationally. The New York-based retail trade group expects an additional 73,000 store closings in the first half of 2009.

Retailers face three main challenges in the tough economy: Increasing shopper frugality, tighter lending standards from banks and tougher bankruptcy laws. Experts say that some stores that might have emerged from bankruptcy a few years ago will close permanently under regulations that make it harder for stores in financial trouble to get loans.

Also, some retailers - including Sears Holdings Corp., Talbots Inc. and Ann Taylor Stores Corp. - have said they may close a number of underperforming stores in the new year. Other chains have said they will postpone expansion until the economy improves.

But retail is "not all doom and gloom," said leasing expert Kim Choukalas, vice president for leasing at Westcor, the Valley's biggest shopping center company.

Experts - including Choukalas; marketing Professor Stephen Hoch at the University of Pennsylvania's Wharton School; and retail analyst Mary Brett Whitfield, senior vice president at TNS Retail Forward in Columbus, Ohio - have identified keys to retailing success in 2009.

"It's an ever-evolving world out there," Choukalas said.

Here are some trends to watch:

• Marketing to teens and young adults. Stores such as Buckle, Forever 21 and Aeropostale are coveted by many shopping-center developers. Forever 21 is expected to fill a number of vacant Mervyn's stores. And even J.C. Penney has jumped on the trend and says it is no longer your grandmother's store - but your teen daughter's.

• Luxury within limits. Coach's success shows that shoppers still want quality in the down economy but are unwilling to go into deep debt for it. Handbags at Coach range in price from less than $100 for a canvas wristlet to $300-plus for a large leather bag.

• Family-friendly. PetSmart, BestBuy and GameStop don't have much in common at first glance. But experts expect all of them to do well in the new year for one reason: They sell products that families can use while cocooning at home with kids - or pets.

• Deeper discounting. It's no surprise at least one report shows Wal-Mart Stores Inc. made more money during the holidays than its competitors combined. Even the wealthy want deals on groceries, basic apparel and electronics these days. Look for competitors such as Target to try to beat some prices at Walmart Supercenters.

• Uniqueness and interactivity. Stores that can come up with new and different products and formats will be winners. Think Apple, a store that is more focused on educating and entertaining customers with its product than making instant sales. Or Sephora, which allows customers to experiment with cosmetics in the store, or take home free samples to try.

In bankruptcy or gone

Amid a deepening recession, a number of big-name brands filed for bankruptcy protection or went out of business in 2008. Here's a list of some of the biggest:

Retailers

• Circuit City Stores Inc., the nation's second-biggest electronics retailer, is closing more than 150 stores and laying off thousands of employees as it keeps operating and attempts to restructure under Chapter 11 bankruptcy protection.

• Mervyn's LLC filed for Chapter 11 bankruptcy protection in July and began liquidation sales at its remaining stores to wind down its business.

• Linens 'n Things filed for bankruptcy protection in May. It announced liquidation sales at its stores in October after failing to find a buyer that wanted to operate the firm.

• Steve and Barry's filed for Chapter 11 bankruptcy protection in July, then later abandoned plans to keep stores open and said it would liquidate.

• KB Toys filed for bankruptcy protection two weeks before Christmas and has begun to liquidate its stores and plans to shutter operations. It is the second time KB Toys filed for bankruptcy protection; the first was in January 2004.

• The Bombay Co. declared bankruptcy in September 2007 and shuttered the last of its stores in January 2008.

• Sharper Image Corp. filed for bankruptcy protection in February and closed all its stores in the past year.

• Woolworths Group PLC in the United Kingdom failed to find a buyer in December and put its nearly century-old business into administration. It is closing its 800-store business in stages, set to end this month.

Banks or investment firms

• Bear Stearns Cos. was bought by JPMorgan Chase and Co. in March in a deal orchestrated by the government after a sharp decline in shares and a collapse in confidence in the company.

• Lehman Brothers Holdings Inc. declared bankruptcy in September, the largest-ever case in the United States, less than a week after reporting a $4 billion loss.

Airlines

• ATA Airlines filed for bankruptcy April 2 and ceased operations the next day.

• Aloha Airlines shut down its passenger service in March, shortly after filing for bankruptcy.

• Skybus Airlines, a low-cost carrier, filed for bankruptcy protection in April, less than a year after it began.

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NORTH CAROLINA -CB Richard Ellis Inc. has laid off an undisclosed number of employees as part of a national restructuring plan. The layoffs include John Blumer, managing director of its Baltimore office, a company official said.

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OREGON - With vacancy rates for Bend’s commercial office space at 13.5 percent — more than double the empty space available early last year and a number that is expected to rise — landlords are offering incentives that range from rent reduction to tenant improvements to handing out cash.

The latest incentive for businesses looking to expand is geared toward helping companies overcome the financial hurdles resulting from the credit crunch; namely, the lack of financing available upfront for overhead costs such as new office computers and other equipment, and tenant improvements, said Brian Fratzke, principal broker for Fratzke Commercial Real Estate in Bend.

“A lot of landlords will take the first tenant with a pulse and a pocketbook,” he said. “But when this thing turns around, they’re going to say, ‘Darn, I’ve just devalued my building.’”

Instead of lowering lease rates, which devalues the building over time, one of Fratzke’s clients, owner of the 2,800-square-foot RedBend Office Building near the Redmond Airport, will give the tenant the first six months of rent free, up to $27,000, Fratzke said.

This is equal to giving a free month’s rent at move-in and one every 12 months thereafter, which is a common incentive, Fratzke said...

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NEW YORK, (GlobeNewswire via COMTEX) - Buyers and sellers of commercial real estate remain on the sidelines, putting commercial real estate investments on hold in the short term despite an optimistic long-term investment outlook, according to the third quarter 2008 PricewaterhouseCoopers Korpacz Real Estate Investor Survey(r), released today.

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NEW YORK - On the leasing side, a similar trend is playing out. The commercial real-estate market is showing signs of "negative absorption," says Marisa Manley, president of Commercial Tenant Real Estate Representation, a New York City-based broker that advises corporate tenants. That means that more space is becoming available than is being leased or bought. As a result, the law of supply and demand is helping to cut rental rates and creating incentives for building owners to offer tenants additional concessions.

But that doesn't always translate into lower rents. Indeed, landlords are tightening up lease structures, and there's an escalation in the number of clauses finding their way into contracts. In fact, come renewal time, landlords will be working to extract as much as they can from tenants in terms of passing along rising operating costs. Meanwhile, CFOs and corporate real estate managers will be looking for their opportunity to lock-in better long, and short-term deals...

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ARIZONA - With the economy slowing down and consumers buttoning up, commercial real estate heads for a slump. Ryan Gaston may never break ground on the 227-acre Crosstown Commons outdoor mall in Corpus Christi, Texas, that he's nurtured for the past year.

Why? One by one, big brand retailers, which Gaston won't name but had formerly committed to the project, have opted for the layaway plan instead. They want to see if slowing retail sales will recover over the coming months before they commit to expanding.

"Because of the economic slowdown, our anchors decided to hold on their commitments until their sales improve," says Gaston, a development partner with Hawkins Companies of Boise, Idaho. He says he sees construction on the project pushed back at least until 2009. It was supposed to start in July.

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