Wednesday, March 23, 2016

Can You Say Vacancy?

- Listening to Goldman Sachs, is like listening to your wife's divorce lawyer.

- Sebastian

The institutions and talking heads have plenty to talk about as the year's losses in the Dow and S & P have been recovered. Don't listen to their siren calls, dear reader. Last week, I gave you an insight into the consumer and this week, the locations where the consumer shops.
Two Pillars
of the US economy is under severe duress. Sadly, the beauty and convenience of our strip centers, regional shopping locations and malls are closing. Why, you ask? As I pointed out last week, sales and revenues at these locations have declined quarter after quarter. Whenever a solid earnings quarter filters into the equation, the media shills pound on it like a dog walking past a flea. It is in their interest that you stay in the market until they can get out. It is why they always claim there is light at the end of the tunnel. I rode my bicycle past all the cars stuck in traffic. Do you know what is waiting at that point of light, a traffic crash. You will sit holding some stock that doesn't know what you paid for it until the crash site is cleared and things start moving again.
Last week I mentioned many retail companies are closing stores because with declining sales, they are losing money with no upturn in sight. For new readers a quick refresher. The following is just a sample of store closings: Sears, Macy's, Men's Warehouse, Gameboy, WalMart, Dillard's and John Deere.
Now, we need to look at the effects of those store closings to commercial real estate. Looking at the list, you notice the big brand names among the group. Sears, Macy's, Dillard's and WalMart  are anchors in shopping locations. They are cash cows for the owners of the real estate. However, when things turn south, they become an albatross to the owners and an evil omen for the small businesses that make up the shopping location.
First and foremost, these retail giants are magnets that attract shoppers to a location. It is why the small businesses follow the herd. In this situation, two smaller companies on the list, Men's Warehouse and Gameboy are examples of this retail axiom. When the lease is due, there is no extension. Instead, the owner of the shopping center has a boarded up wall that graffiti artists attack which results in constant maintenance costs to keep clean. These graffiti artists do brighten up many locations around the country when commissioned or asked to design a mural, but by and large, they are a blight on most terrains and add a cloud of depression to the areas that they place their tag lines.
Back to the commercial landlord and the loss of the anchor... 
The owner not only losses his biggest asset, but now, fears his smaller retail clients will also seek a new place. There is a real fear that shoppers will find another, more appealing location. His vacancy clients will look at the center. They will want better terms as the large vacancy makes the shopping center appear to be a dangerous location. Why else would the anchor leave? In a booming economy, these same retail owners would have no trouble finding a new tenant. News flash: this is not a booming economy and if WalMart or Macy's can't make a go of it, good luck trying to convince or find a new anchor.
Second Pillar
In addition, the oil patch has laid off thousands of high paying jobs that will effect business park locations who have service industries that provide the oil patch. They too, are suffering. The latest casuality number of oil bankruptcies is 67. This is up from the 48 in January. This rising tide of bad loans will affect the financial industry with a flood of non-performing loans. By the way there are 150 more oil firms getting caught in traffic in the tunnel.
In fact, the early tally of commercial real estate loans that need to be rolled-over or reconstructed is approaching $43 billion. This pending trouble is reflected in the government report last week in the confidence level of small businesses. It is down. These people can see that their shopping centers are getting over-loaded with vacancies. As for the chances of the $43 b getting new financing, that too is in trouble because the new rules under the Dodd-Frank Act makes new lending more stringent.
Adding everything up, things aren't quite as positive going forward as the media would have you believe. Not good. By the way, all that easy money that the commercial developers needed and provided by the Fed is another example of their boom and bust policies which is why I say, End the Fed!