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CRE Finance World Winter 2016
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Stephanie Petosa: There seems to be a changing of the guard
in terms of retailers. What are the major retailer themes as it
relates to your portfolio?
Farzana Mitchell:
The retail environment is dynamic. Looking
at our portfolio over time, the top-20 retailers have changed
dramatically and this I believe is no different for our peers in the
mall industry. Sears and JCPenney stores are in most major malls
and they are sorting themselves out. JCPenney seems to be on
a good track. We do see a transformation taking place in the
retail industry with replacement tenants for Sears and JCPenney
bringing new life to the malls. A significant development is the
movement of big box retailers such as Dick’s Sporting Goods, Ulta
Cosmetics, Ross, Hobby Lobby, TJ Maxx and value-oriented retailers
into vacated JCPenney and Sear’s stores.
Lisa Pendergast: The omni-channel strategies most retailers
have come to employ to reach consumers are now readily
apparent. What’s less apparent is what’s happening at the
property-owner level to facilitate blending e-commerce and
brick-and-mortar sales. What is it that landlords can do, have
done on that front?
Farzana Mitchell:
The technological revolution is making retailers
re-think how to best serve customers. Retail sales will thrive on
a combination of brick and mortar and mobile technology and
e-commerce; all blend to form a better synergy. Consumers enjoy
the shopping experience and still require the stimulation of the
touch and feel and ‘trying out’ before purchasing. We believe
brick and mortar is here to stay, but we must continue to offer
the experiences to our customers and we are doing so by adding
restaurants, theaters and family entertainment. As a landlord, we
provide the infrastructure for retailers to have better technology,
faster access to Wi-Fi, and the latest digital platform on which to
operate. Then it is up to the retailers to use the technology we
offer to capture their customer in an exciting manner.
Stephanie Petosa: On the retail front, CMBS investors often ask
about tenant sales and co-tenancy agreements; and yet sales
are often difficult to come by. What sort of leverage do you have
over tenants to gain access to sales data?
Farzana Mitchell:
We generally require our tenants to report sales,
and we publish those sales numbers on a trailing 12-month basis
in our quarterly investor reports. So it’s a requirement for our tenants.
Not only do we need sales data for reporting purposes, but just
as importantly, sales are a part of our calculation for percentage
rents. Of course, this doesn’t apply to certain anchor tenants that
are not required to provide sales data. While certain anchors don’t
report sales to us, we typically know how they are performing.
When a lender is performing their due diligence, we can secure
a lot of that data and provide it to them for underwriting purposes.
We have more scrutiny today because of underperforming anchors
such as JCPenney and Sears. The trend of evaluating performance
of the malls by sales per square foot is changing to gross sales
for all tenants. E-commerce is having a different impact as well.
We are unable to obtain e-commerce sales information that’s
generated from the stores. The lines are blurring for in-store sales
and e-commerce sales within the context of bricks and mortar and
this will require sorting out over time.
Stephanie Petosa: Loans on office assets usually comprise a
large percentage of CMBS collateral and make up the lion’s
share of insurance company balance sheets. So it is an important
sector of the market. Is there still upside in the office sector?
Mark Weiss:
We’re primarily in New York and have mainly Class-A
and some Class-B-plus properties. The leasing market is incredibly
strong. That’s having an impact on the financing market. CMBS
investors in particular love having New York City office exposure.
A number of bond buyers live in New York and so can go see the
properties backing their bonds. Many of our office properties are
newly renovated; many of the larger NYC office assets have seen
renovations. These projects sell very well and often have multiple
offers when made available for sale.
Lisa Pendergast: What are your thoughts on suburban office
markets? I’ve worked in Stamford for a number of years, and it’s
been decimated by vacancies, with RBS and UBS moving out
in large part. Seems to me there simply aren’t enough hedge
funds in Connecticut to backfill that type of vacancy. And, that’s
just one example. Suburban New Jersey and New York appear to
have their share of vacancy issues as well. Will these suburban
markets come back in this cycle?
Mark Weiss:
We bought a 1.8 million sf office portfolio in Stamford
from our friends at Blackstone on the EOP flip in 2007. I really
think it comes down to how the properties are managed. The
average vacancy rate in Class-A Stamford office is around 20%.
If you look at our 1.8 million sf, our occupancy rate is at 92%. So
we’re significantly outperforming the market, but we put a lot of money
into these properties too. We really are a part of the community.
If you’re just an outsider who comes in as part of XYZ and owns one
building in a suburban market that needs love and care, occupancy
simply won’t come back as fast. In terms of cap rates, I think it’s
much differentiated. Stamford cap rates have not quite returned
A Roundtable: Straight Talk from Industry Leading Borrowers
“Mobile and e-commerce are changing daily and the
retailers who are at the forefront are capturing the
consumer’s attention.”