Retail REITs Are In For More Tough Times Ahead

| October 26, 2010 | 0 Comments

“I just want to pay for my daughter’s dental insurance…”

Scott, a commercial real estate agent, said this to me just the other night.  I had met Scott no more than a half hour earlier as I was mingling at a friend’s birthday party.

The gathering of 20 or so people was in a suite at the trendy W Hotel in Old Town Scottsdale.  The modern décor of the suite was decked out with over-the-top birthday decorations and a nice spread of food and beverages.

I stood on the balcony with my date and Scott chatting and sipping our cocktails.

It was the normal small talk, remarking on the incredible view and the beautiful Arizona weather.

Below, the Hotel pool area was swarmed with hundreds of people enjoying the beautiful Arizona night.  As we looked out, we could see the outline of the trendiest shopping and retail area in Arizona.  Beyond that was the silhouette of Camelback Mountain in the distance.

Eventually our conversation led to work.  Scott had a hand in leasing out many of the retail locations in the surrounding area.

I immediately perked up.

Scott clearly has an inside track on the retail commercial real estate market.

From our vantage point, we could see at least a half dozen retail developments that had been shut down.  After the Lehman Brother collapse, financing simply dried up.

This was just the tip of the iceberg.

I later found out some of the land for these developments had been purchased for more than $4 or $5 million an acre.  That was at the peak of the real estate boom… The bust had wiped out nearly every developer who had work in progress.  I guess it’s tough to make the numbers work when your land costs are astronomical.

Scott confessed the market was still lousy.  In fact, he was leaving the party early so he could catch a flight to LA.  He had hopes of closing a deal he had been working on for months.

He really needed a win.  He needed money to pay for his daughter’s dental insurance…

Here was a successful commercial real estate agent.  He had leased out much of the high end retail space in Arizona’s most expensive retail district.  Now he was praying a client would sign a lease so he could pay for his daughter’s dental insurance.

Clearly his business is going through a long dry spell.

Here’s what I found most interesting.  Many of the commercial real estate projects that had been shut down in 2008 were still sitting idle.

But now many of the projects were finally being sold to new developers. And that meant more work for Scott.

Here’s the problem.

All the new business Scott was looking at is a huge negative for the retail REIT industry.

According to the Wall Street Journal, “The retail vacancy rate hit 10.9% in the third quarter.”  For those of you who remember, in 1990, retail vacancy hit 11%!

All the mothballed projects are about to go back into development… That will add more retail space to an already overbuilt market.

I see a clear sign of higher vacancy rates and lower rents for commercial retail real estate in the near future.

Think about the implications.  Banks selling huge amounts of commercial real estate at fire sale prices will flood the market with new space.  It could be devastating to an already fragile commercial real estate market.

I just don’t see how this new retail space will be absorbed in this environment.  It spells lower occupancy rates and lower rents for retail REITs.

The way I look at, retail REITs have had a good run lately.  Many of them are at or near 52-week highs.  So if you’ve rode the retail REIT industry up over the last year, now is a good time to book some profits.  At least you’ll have money to pay for dental insurance…

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Category: Real Estate

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets on a daily basis. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

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