October 19th – Color Me Skeptical

One Big Thing

A Barclay’s analyst went on CNBC last week and made the claim that converting an underperforming mall to a distribution center or residential complex could reduce the value of the property anywhere from 60% to 90%. 

While I believe this would be the case if a top tier mall like Fashion Island, South Coast Plaza or The Grove were to be converted but these are all well-performing properties and it would never happen. I find this claim a lot harder to believe when dealing with actually-distressed malls whose values have already been gutted. If you have a mall that used to be anchored by Sears and JC Penney, it is worth nothing more than land value.

Yes, rents may be lower for distribution and residential uses but there is also demand for that product type, as opposed to a vacant mall that is sitting fallow.  Also, cap rates for distribution and residential are MUCH lower than for malls – especially B&C malls – which would help to offset NOI reductions from a valuation perspective. 

Redeveloping a mall site is expensive, complex and time consuming.  However, it is a far better strategy to maximize the value of an asset than letting that asset sit vacant, with little hope of it ever rebounding in it’s current form.  Watch the interview in the link.  I did a few times and can’t make any sense of the numbers that the Barclay’s analyst is referencing.  CNBC

What I’m Reading

Balancing Act: As mortgage rates have fallen, housing prices have soared, straining affordability.  My big takeaway from this is that the people who bought earlier in the year when rates dropped before prices moved have done very well as have those who refinanced.  Money

Running Tab: Renters who haven’t been able to pay all of their monthly rent and are protected under eviction moratoriums have racked up a whopping $34 billion of rent debt that will be difficult to ever pay back.  If a tenant is evicted from an apartment based on unpaid rent, the tenant still owes that money, meaning that it will be challenging for them to find another rental unit due to impaired credit.  Bisnow

Staying Power: 61% of employees currently working from home full or part time expect to continue doing so after a COVID vaccine is discovered.  NAHB

Rise of the Machines: As the rapid growth in e-commerce continues to redefine last-mile delivery, new building uses and logistics technologies are emerging to maximize efficiency. Commercial Property Executive

Know When to Hold ‘Em: Shortly after its founding, shipping giant Fed Ex was a struggling bootstrapped organization and had a $24k airplane fuel bill due with only $5,000 in the bank. Founder/CEO Fred Smith was on a trip trying to raise rescue capital from General Dynamics the Friday before the fuel bill was due and was unsuccessful. He was at the airport to fly home and, at the last minute, decided to fly to Las Vegas. Smith went on a heater at the black jack table with the company’s last $5,000, turning it into $27k, which was enough to pay the fuel bill and gave the company enough runway to raise more money from investors. Today Smith’s net worth is $5.4 billion.  Business Insider

Chart of the Day

diagram

SourceJones Lang Lasalle

WTF

How Did That Get There? A Brazilian senator  was caught hiding money in his underwear during a police investigation into the diversion of public funds for fighting the coronavirus, local media reported on Thursday. (h/t Steve Sims) MSN

Dead Tired: An elderly Indian man put in a see-through freezer box after his apparent death was pulled out alive — when he was spotted moving after 24 hours in his icy coffin.  Thanksgiving dinner is going to be awkward AF for that family this year.  NY Post

Basis Points – A candid look at the economy, real estate, and other things sometimes related.

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