By and  on October 13, 2008

The financial crisis is disrupting the real estate industry.

Real estate investment trusts, which own and operate retail space, are especially vulnerable during economic downturns. Many face large debt loads and loans coming due as the availability of credit slows to barely a trickle.

The pool of retailers with the capacity to open new stores is dwindling. Some 20 chains have filed for bankruptcy protection this year, including Steve & Barry’s, Boscov’s, Goody’s and Mervyns. Others are downsizing or scaling back expansion in the face of declining sales.

The trend is having an impact on developers seeking financing for their projects. As retailers close units or pull out of new shopping centers, developers struggle to lease space, which in turn makes lenders even more wary. And with sales down, mall owners’ revenues are off because they often receive a percentage of sales in addition to rent.

The money pipeline has almost shut down as the aggressive development activity that fueled REITs’ performance on Wall Street before the economic upheaval is now perceived as too risky.

Robert O’Brien, executive vice president and chief financial officer of Forest City Ratner, described the challenges facing developers. “On the permanent loan side, we have seen the [commercial mortgage-backed securities] market disappear, taking more than $150 billion of capacity with it,” he said.

“In this environment, we are talking to three to five times the number of financial institutions for each transaction to ensure we can get it financed,” O’Brien said. “Even then, the ability of a loan officer to predict with confidence what his or her credit committee will approve is near an all-time low. Until confidence is restored and funding costs fall, we will continue to see a restricted supply and increased spreads for real estate loans.”

Mall giant General Growth Properties Inc., hampered by a debt burden of $27 billion that it amassed over years of acquisitions, has seen its stock hammered. On Friday, GGP closed at $4.82, up 92 cents, on the New York Stock Exchange, compared with its 52-week high of $57.84. GGP has delayed several major projects because of the weak consumer market.

The launch of Summerlin Centre near Las Vegas, a 107-acre mixed-use development with 1.6 million square feet of shops, restaurants, offices and homes, has been delayed for one year by GGP to ensure an opening with low vacancy rates. Summerlin, just south of the Red Rock Resort between Pavilion Center Drive and the Las Vegas Beltway, was to open next year with Crate & Barrel and Nordstrom as anchor tenants.

“Based on the times and everything going on, we thought [delaying the opening] would give us additional time to get it leased up fully,” said Robert Michaels, president and chief operating officer of GGP. “We had discussions with all the tenants, and everybody seemed to be of the same mind, that opening in 2010 was the right thing to do. Summerlin was leasing well, yet we were coming under a time crunch. If we were to open in October or November of 2009, we would open with 75 percent or 80 percent occupancy. It made sense not to rush. Right now we’re moving forward with a 2010 projection to open.”

Summerlin Centre isn’t the only GGP project that’s been put on hold. The opening of the Elk Grove Promenade Mall in Northern California, with 1 million square feet of retail space, was initially planned for the 2008 holiday season. GGP recently said it would delay the opening until late 2010. Elk Grove is to be anchored by Macy’s and Target.

Michaels said GGP’s financial difficulties did not play a major role in the decision. However, last month, GGP said it would consider mergers or the sale of some properties to regain its financial footing.

“We postponed Elk Grove in Sacramento for virtually the same reasons as Summerlin,” Michaels said. “The retail environment is soft and anytime you’ve got a project, you look at the retail environment and see what’s going on. These decisions are really based on how we view the projects and how we want them to open. We’re under construction on both of these projects. They’ll be finished. We think they’ll be fine. We just thought it was a prudent decision.”

Another mixed-use development planned for Las Vegas, Echelon Place, is not proceeding, either. The $4.8 billion project was halted by Boyd Gaming Corp., which had been spearheading construction.

“The current state of the credit markets have made it virtually impossible for two of the [Boyd’s] joint venture partners to obtain financing for their portion of the development,” said Keith Smith, chief executive officer of Boyd.

GGP had signed on to build and operate Echelon’s retail space. Morgan’s Hotel Group was bringing the Mondrian and Delano boutique hotels to the development. Together, GGP and Morgan’s were responsible for about $1.5 billion of the project’s overall cost, Smith said.

Echelon’s 300,000-square-foot retail promenade, slated to open in the third quarter of 2010, may bow 18 months later.

“Echelon is a totally different story,” Michaels said. “We were part of the retail component being developed by the Boyd Group. Boyd really stopped construction on the Echelon project. They thought the timing was probably wrong. We’re still interested in the project, but with that one, we just have to follow their lead.”

Before a single shovel had been put into the ground, Related Cos. sought to put off construction of The Grand, a $3 billion, 3.6 million-square-foot mixed-use development in downtown Los Angeles.

“A few months ago we asked for a delay [to start construction] until February 2009” to nail down commitments from retailers and “to give investors time to feel comfortable and get our financing,” said Webber Hudson, executive vice president of Related Urban Development.

The final decision on whether to grant the delay will be made by the Grand Avenue Committee, which acts under the direction of the Los Angeles Grand Avenue Authority with representatives from the city, county and state.

“The retail community is hoping for a 2010 opening,” Hudson said. “That could change for reasons beyond our control, such as changing market conditions. We need to be able to sign two or three critical [retail] deals that will give us credibility in the credit markets. Being able to say we’ve got square footage signed to certain retailers has helped us in Phoenix [at CityNorth].”

The Grand, at First and Olive Streets, consists of a 19-story residential tower designed by Frank Gehry and will combine 126 market rate condominiums and 98 units of affordable housing. Other elements include a 250,000-square-foot retail pavilion.

Although the first phase of Related’s $1.2 billion CityNorth project in Phoenix is opening as planned, the second phase has been delayed until 2010.

“We met with senior Nordstrom executives on a number of deals,” Hudson said. “They’re still committed to Phoenix, and Bloomingdale’s is still committed.”

Macy’s West is the third anchor of CityNorth. “I wouldn’t want to be opening another million square feet of retail in 2009,” Hudson said. “But 2010 is 24 long months away.”

Although Hudson is concerned about falling sales and weakening demand for products, “we’re taking solace in the way we design our projects,” he said. “We divided CityNorth into three distinct districts — lifestyle, bridge and luxury. We’re finding a lot more comfort in the contemporary and bridge world.

“The relevance of a luxury-only project is kind of absurd now,” he said. “People’s shopping habits are changing. They’ve become more streamlined. They’re going back to department stores. Specialty stores like Chico’s and Ann Taylor slowed their expansion programs. That impacted the lifestyle centers because they have a smaller basket of eggs to choose from. They’re not diversified like the regional malls.”

On the East Coast, construction in the New York metropolitan region is on hold in several key locations. Mohegan Sun, the resort and casino in Uncasville, Conn., planned to expand its four casinos, property infrastructure and parking, but has chosen to wait a year on the $734 million project.

Forest City Ratner’s ambitious Atlantic Yards complex, on a site at Flatbush and Atlantic Avenues in Brooklyn, has been downsized and delayed. The 18,000-seat Nets basketball arena and 16 residential skyscrapers in Brooklyn also was slowed by a string of legal challenges.

Recently, Bruce C. Ratner, chairman and ceo of Forest City Ratner Cos., announced another possible delay of six months, adding: “Atlantic Yards will be built and it will create thousands of needed jobs and affordable homes. This is all the more important as our city and country confront one of the most difficult downturns in history.”

Forest City is working on several large projects in the metropolitan area, including Ridge Hill in Yonkers, N.Y., with more than 1 million square feet of retail space, and East River Plaza, a 517,000-square-foot urban retail complex in East Harlem. The company said it has $2.3 billion of construction projects ready to go when the economy picks up.

“We are acutely aware of the economic and financial market conditions, and we know that the investing community has real concerns about real estate development and the use of leverage,” Charles Ratner, president and ceo of Forest City Ratner Enterprises, said in a conference call last month announcing the company’s second-quarter results.

“We understand these concerns, though we believe they can be managed….We are being very realistic about what is possible under current conditions. There is no question that we are taking a more cautious approach to managing our business and in our outlook.”

Even before the current financial crisis erupted, Glorypark, a $500 million lifestyle and retail project planned in Arlington, Tex., near the new Dallas Cowboys stadium, was delayed in May because of lack of financing and developers’ inability to get firm pre-leasing commitments from potential anchor tenants.

The Glorypark decision followed the announcement that developer Ross Perot Jr.’s Hillwood Development company had put a hold on construction of the 43-story Mandarin Oriental hotel and condominium tower in the Victory mixed-use neighborhood near downtown Dallas.

Mark Vitner, senior economist with Wachovia Corp., estimated that thousands of developments nationwide will not open as planned this year.

Terry W. McEwen, divisional vice president of Poag & McEwen Lifestyle Centers LLC, a Memphis developer, is postponing three projects. The biggest, Saddle Creek, a Memphis lifestyle center built in 1987, was to add 1.3 million square feet of office, residential and retail space at a cost of $250 million next year.

“A $250 million mixed-use project is impossible to finance today,” McEwen said. The expansion will be put off to 2010, or until the credit markets free up.

Three future Poag & McEwen projects in New Jersey have been delayed to 2010 or 2011 from 2009.

Stanbery Development, a Columbus, Ohio, company, will open phase one of the Promenade at Coconut Creek, in Broward County, Fla., a mixed-use project, in November, but has postponed the 400-unit residential component.

Ben Carter, a principle of Ben Carter Properties in Atlanta, has made changes to the plans for Streets of Buckhead, a $1.2 million mixed-use project in Atlanta. Phase one will open next year, but a $170 million hotel component has been shelved until 2012, and the 300,000-square-foot office development was scrapped altogether.

Building A Cheaper Box

Builders are feeling the squeeze, too.

“There’s definitely more price pressure,” said Les Hiscoe, vice president of Shawmut Design and Construction’s Retail Group. Retailers “want to know if they can build stores for less money.”

Shawmut “can do the air-conditioning slightly differently and preserve the front-of-house finishes with cheaper materials,” he said. “We can get the exact same look with stone from China as stone from Italy. Material prices are up, prices of raw goods are up and any petroleum derivatives and goods from China are up because China is starting to value goods as their economy explodes. Labor wages have not softened.

“We’re busy in Las Vegas, but gambling receipts are off by 15 percent. CityCenter is a major retail project with 20 to 30 luxury retailers, such as Louis Vuitton, Tiffany, Roberto Cavalli and Hermès. There’s real nervousness in Vegas…and luxury retail is getting [saturated].”

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