Jones Lang LaSalle's panel included developer/owner Greg Greenfield, CEO of Gregory Greenfield & Associates, Ltd., a regional mall investment advisory company and a subsidiary of Australian company Babcock and Brown, Senior Director of Acquisitions Simon Honeybone of Sarofim Realty Advisors, G. Joseph Cosenza, Vice Chairman of The Inland Group, Inc.  It was also comprised of a trio of Jones Lang LaSalle retail and retail investment sales experts including President and CEO of Jones Lang LaSalle Retail Greg Maloney, Managing Director of Retail Investment Sales Jim Koury and International Director of Investment Sales Dave Doupé.  Moderator Anna Langley, a Vice President with Jones Lang LaSalle's Retail Investment Sales Group, facilitated the discussion.

“The discussion centered on the similarities in the current market versus the unprecedented nature of the current capital markets.  According to the panelists, today’s recessionary economic cycle feels historically different than past downturns when the recession was coupled with rising interest rates and oversupply of product,” said Ms. Langley. “An estimated $150 to $200 billion of debt capital has vanished, posing challenges to every sector of the business as retailers and investors alike are taking a “wait-and-see” approach. However, there is still capital sitting on the sidelines trying to find a way to enter the market today.”

“You have a situation where prices are lower, cap rates are higher and interest rates are lower. Cash now has the same effect as air and water—without it, you’re dead in real estate,” says Mr. Cosenza.  “Today, if you can find financing nothing is longer than five years. It’s gone beyond that old phrase of “cash is king”—if you have it in your pocket, or in your bank account, it allows you to do some pretty incredible things right now that wouldn’t have been competitive before and to me, that’s the perfect storm.”

Greg Maloney concurred, “People who have cash will find opportunities and be able to capitalize on them.  I think the very smart owner/developer will look at these times as a great time to buy as there is still attractive pricing for buyers that have the equity.”

Most agreed that pricing has moderated in certain geographic areas but largely remains relatively strong, especially when viewed from a historical perspective.  “Even though property pricing has moderated from a year ago by 100-125 basis points, we’re still at very strong pricing,” said Mr. Koury.  “The analogy I like to give is we came off the historically high pricing of Mt. Everest, but we’re still at the 20-year high pricing of Mt. McKinley. We don’t see the 5.75% to 6.25% cap rates we were getting for the best retail 12 months ago, but we can still get a strong 6.8% to 7.25% return for the same properties today. Sellers have recognized prices are still strong and are willing to sell in the face of good returns and mounting concerns about where capital gains may go with a new administration.”

However, there is a clear delineation between pricing in outlying areas and urban areas. “Cap rates on really good high quality property have only moved 25-50 basis points.  It feels like the well-located, A-real estate hasn’t declined much.  However, on some of the outlying areas, there’s been a 100-200 basis point shift depending on the property.  That’s where demand has dried up,” says Mr. Honeybone.

Regional malls may reap the benefits of the changing dynamics.  “The current environment may ultimately benefit regional malls,” said Mr. Greenfield. “With the current credit crunch and housing crisis, new retail development should slow dramatically, further enhancing most mall’s monopolistic position.”

Joe Cosenza, “I would say that roughly 80 percent of the joint venture developments we were considering did not come to fruition either because the major or secondary anchor pulled back because the project was on the fringe. Unless the major is buying the pad at the same time we’re buying the ground, we will not close.”

While some tenants are adding stores—albeit at a much slower pace than before—others are shuttering more than a few doors. Mr. Maloney added that most retailers are pushing back expansions into 2009.  

“One of the effects of the widespread availability of capital the past few years is that retail chains that would have failed in the past have been propped up by venture capital and the leveraged buyout cycle,” says Mr. Greenfield.  “We’ve really had it unbelievably good these last couple of years. Our malls aren’t emptying out by any means, but it’s definitely going to be more challenging to maintain strong occupancy in this environment.”

Greg Maloney agreed but states a key difference for retailers in today’s cycle. “Retailer balance sheets are healthier than they’ve been going into past downturns and they are much more aware of managing their liquidity today. But, part of managing liquidity is not over-committing to inventory and if you have less stock to sell to begin with, you have lower income. You can easily get into a self-perpetuating cycle of weakness where no one want to be a hero and go out on a limb and overstock or step out on new fashions. This is a toxic stew, but if you’re a contrarian and you can see what’s going to bring us out of this, you get excited about being in a new environment.”

Still others, like Dave Doupé, are more pragmatic.  “The good news is that most of the major primary market fundamentals are still intact,” says Mr. Doupé.  “It seems that retailers that have issues and challenges are getting more press than they did, say nine months ago, but for those of us that have been in the retail business, this is not new, this is the nature of retailing.”

Joe Cosenza added, “And, all the classes of real estate have kept their relative value and there is not much of a difference between a grocery-anchored center versus a lifestyle center, unless that lifestyle center doesn’t have the right ingredients as that cap rate will be pretty high.”

Simon Honeybone agreed, but remains more concerned about the lifestyle sector. “With the consumer being stretched, some lifestyle centers are vulnerable unless they’re in best demographics, infield, high income, supply-constrained markets. We feel that some of those consumer discretionary purchases of some of those middle- to high-end retailers are going to be hit. We’re also especially concerned with structure of most lifestyle leases in the sense that a couple of dominoes fall and you could be left holding a pretty risky asset.”

As for the future, roundtable participants agreed that retail and retail investment sales sectors will not reach equilibrium for well over a year and the credit crunch could get worse before the end of the year.  Right now, according to both Messrs. Honeybone and Koury banks and insurance companies are running out of money, using up as much as two-thirds of their debt allocations in just the first four months of the year. 

“We’re starting to hear some pretty alarming news from some of the insurance companies that started off with allocations in the $ 6 to 7 billion range and now are actually being cut,” added Mr. Honeybone. “They’ve gone through a large amount of those allocations, but are cutting funding because why make a mortgage at 200 over when you can go buy the paper at an even better spread? There’s evidence in market that some allocations are being decreased to pursue alternative investments and that’s a bit frightening.”

“The question is ─ who is going to fill the void?” prompted Mr. Doupé.  “The traditional permanent lenders retreated when the CMBS players came into the market and they re-allocated capital to other investment areas. Now, they don’t have the capacity to fill the void. These market characteristics are something that we’ve never seen before and the CMBS players are not going to merely re-enter the market one morning in the fourth quarter. We won’t see the market resolve itself in the next six to 12 months.”

Joe Cosenza added, “Institutions will have to be shored by up government intervention, or it could be devastating for next year.”

But despite the looming challenges, there are opportunities on the distressed asset and capital structure side. “We just now are getting calls from mezzanine lenders and investors throughout the capital structure, who by virtue of the current environment now own a direct interest in a mall.  As market pricing starts to come into focus, there will be increased opportunities for savvy companies such as ours to work with lender/investors who aren’t equipped to manage such a direct mall investment,” said Mr. Greenfield. 

Mr. Cosenza agreed, “I still believe it is a fabulous year to purchase retail real estate. We’ve closed $7.9 billion in transactions in the first quarter of this year, compared to $3.5 billion in the first nine months of last year.”

“It’s going to be a great opportunity to invest, so long as you stick to your underwriting standards,” concluded Mr. Honeybone.

More than half the retail participants agreed that federal intervention will be necessary to put confidence back into the capital markets.