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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: fatty who wrote (17267)	2/13/2004 11:18:06 AM
From: Elroy Jetson	Read Replies (1) \| Respond to of 306849

My Parents are developers who build shopping malls in Northern California. Based on this experience I would say the outlook is uniformly bad, certainly much tougher than it used to be. Once a project is leased up a decision is made to hold or sell. The few projects that were sold on completion were projects where you could anticipate problems down the road, or occasionally the project was worth more to an adjoining property owner. Many builders used to partner with insurance companies. They put up the money and you received a Developer's Fee and Management Fees - and sometimes an Equity Participation. The 1970's and 80's were great years. Ever since 1990 things have been rough for a number of reasons. 1.) Operating losses can be deducted by the developer but non-managing partners are limited to $25k per year. This makes private money tougher to raise. Or you can put on less leverage, which lowers the returns, and makes private money tougher to raise. 2.) REITs are not interested in purchasing retail projects which are too small to warrant a full-time manager on-site. 3.) Insurance companies, formerly the biggest investors in this field, are less interested now due to increased competition coming from REITs and Pension Funds. 4.) There has been more retail space created nationally (and in all major markets) than required, so rents have declined. This is due in large part to enormous amounts of money from REITS and Pension funds. Much of the Pension money comes from Germany through Lehndorff and other advisory firms, and recently through three large Australian firms. Some of the firms like Melbourne based Centro even specialize in smaller strip malls - stuff even smaller than my parents usually build. So there's no niche where they aren't. Increasing amounts of retail space, like the "Beverly Connection" are being converted to residential use because the mall is worth more torn down and built into Condos. Lease rates on property are very low relative to purchase price, due to low interest rates and the real estate bubble. As a consequence it's now better to Master Lease a property from a property owner, for say 99 years, and then build and lease a retail project. This lowers the capital needed dramatically and because of the low lease rates the returns for improving the property are much higher. Even developers of larger projects like Rick Caruso who built "The Grove" at Fairfax and Beverly have very uneven track records. While "The Grove" is wildly successful, his two previous malls went into receivership. One big difference is the land under "The Grove" is Master Leased from the Gilmore Trust. So I think this bears out what my Dad has realized. The more you get into the business the more you realize how few retail building owners there are. In the areas my Dad operates he knows all of the other owners and has lunch with each one periodically. It's a very small business and everyone is after a lot of the same tenants. It really helps to convince a successful business owner to expand to your town. You can create a tenant that way and not have to compete with every other owner in town. I'm curious what you had in mind.