CCIM Feature

Think Globally, Sell Locally

Although experts agree that securitization has given commercial real estate stability — and perhaps freedom — from its cyclical nature, this new business environment offers its own challenges. No longer are local markets solely affected by local forces. While the closing of a town’s major employer or the addition of a highway interchange on the outskirts still has the most direct influence on a local market, now brokers also must keep an eye on the global economy as they work with clients to purchase or dispose of properties.

Fortunately, as Allen C. McDonald, CCIM, of Trammell Crow Co. in Nashville, Tenn., recently found out, the increased availability of technology offers brokers a way to cope with client requests and changing worldwide conditions simultaneously. When trying to "quietly" market a retail center during the commercial mortgage-backed securities fiasco late last summer, he turned to the Internet for his solution.

While complying with a client’s request for confidentiality, McDonald ran up against the downside of securitization — instant evaporation of retail lending sources. It was the first time that changes on Wall Street — brought about by foreign capital markets — have affected retail properties in local markets, according to the January 1999 issue of Shopping Center World.

Responsive to the new market realities, McDonald zeroed in on a 1031 exchange buyer for his transaction. It’s an option that might not have been available to him as recently as five years ago, when marketing property haves and wants over the Internet was in its infancy. Now just about every major commercial real estate firm has its own database of properties, as do associations and private organizations. For brokers who monitor Web listings, this new technological tool allows them to respond quickly to changing market conditions caused by events thousands of miles away.

Discreet Marketing
Of course, property marketing still starts at the local level, and in McDonald’s case, with an existing client. The seller was a partnership that had determined to sell the asset at the beginning of its formation, but, as McDonald notes, "The seller did not want rent rolls widely distributed and is very careful about who it does business with. The seller was very concerned about a controlled disposition process."

The property was the Owensboro (Ky.) Retail Center, a 156,000-sf community center in a small rural market. It was anchored by Toys "R" Us, Goody’s Family Clothing, T.J. Maxx, and OfficeMax. "A Target was also part of the center but owned its own pad," McDonald says.

Besides the seller’s desire for discretion, the marketing effort was compounded by other issues. One concerned a T.G.I. Friday’s free-standing building that was scheduled to be completed this June. "It made sense from the buyer and seller’s standpoint to include this building in the sale even though it had not even been started," McDonald says.

The second issue was the recent announcement by one tenant’s company, Factory Card Outlet, that it had suffered significant financial losses for 1998. "Factory Card Outlet indicated to us that the Owensboro store was a good performer for the company, but nevertheless, it was a caution flag for investors," he says.

Given the challenges already in place, McDonald didn’t really need the collapse of the ruble in Russia and the ensuing Asian economic crisis that shook up the CMBS market in late summer. "Cap rates for retail centers increased almost overnight when the capital markets turned upside down in the third and fourth quarters of 1998," he says. "With the CMBS markets virtually shut down, it was clear that conventional investors could not clear their return hurdles while achieving the desired return for the seller."

Prior to the CMBS collapse, McDonald had located a limited partnership interested in purchasing the center. "In fact, we had come to terms in the fall of 1998 for the sale of Owensboro but did not close due to dramatic changes in the capital markets.

"After that, it was clear that a 1031 buyer was the logical buyer for the asset," he says. "We had to close the gap between buyer and seller pricing expectations that resulted from the financing upheaval. This could most likely be accomplished by sourcing a 1031 exchange buyer and by getting the existing lender to refinance the project with minimal closing costs that would serve to increase the investor’s cash-on-cash yield."

Monitoring the Radar
A private pilot, McDonald likens his role under these conditions to that of an air traffic controller. "Given that I was not able to broadcast the Owensboro asset to the market, I had to constantly monitor both the Trammell Crow and the CCIM Internet messages for the appearance of a 1031 buyer on my radar screen. Unlike a real air controller, I was hoping for a collision course between the Owensboro center and a 1031 buyer."

But it couldn’t be just any 1031 buyer. "Some were just not a match in terms of size, location, and product type. So my process had to be very select and focused. The use of the Internet allowed this to happen."

The fact that the Internet exposed him to a wide array of 1031 buyer needs across the nation certainly shortened his search. Five years ago, he might not have had such success. "The probability of sourcing a match for this center five years ago would have been slim at best," he says. "At that time the only way to source this type of buyer was to network with real estate attorneys, CPAs, and other local brokers. The tools to network on a national basis just weren’t available."

After about a month, Joe Turner, CCIM, of AllSouth Corp. in Prattville, Ala., put out an e-mail that he was representing a 1031 client interested in retail properties. "I responded to Joe that Owensboro was available and that the existing lender would consider financing for his client," McDonald says.

Fortunately, lender refinancing was not a problem. "The lender liked the quality and the location of the asset. It felt comfortable recasting the loan in such a solid community like Owensboro," he says. "That was important to the deal because spreads had increased greatly with traditional lenders. But because the lender had already underwritten the asset and the market, it was able to recast the loan at a rate that made sense to both the borrower and the lender."

In addition, the seller agreed to escrow a negotiated amount of rent for the perceived credit risk introduced by Factory Card Outlet’s announcement. "The escrowed amount would be paid back to the sellers with each monthly rent collected from Factory Card Outlet by the buyers," he says. "The seller also escrowed an appropriate amount for the purpose of completing the pad for the T.G.I. Friday’s building, plus some contribution to hard-cost construction."

McDonald closed the $14.6 million transaction without ever speaking to the buyer or even meeting Turner. But that’s one of the many ways the Internet has changed the retail market. "Most retail property information is now delivered over the Internet directly to our customers and to CCIM brokers. This saves a vast amount of time and expense for all involved."

The sale of the Owensboro center closed in February. The CMBS markets have yet to recover fully and in the meantime, market experts are giving the retail sector tenuous ratings due to market saturation and other factors. However, McDonald piloted his way around these potential downdrafts by using technology to shorten a property’s turnaround time. It can make the difference between a deal that works and a deal mired in outside market conditions. "I use the Internet daily," McDonald says. "Most of our clients want their retail centers widely exposed to the greatest number of buyers in a short time frame. I view the Internet as a new tool we can pull out of our toolbox that will best serve our customers."

 

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