Saturday, March 20, 2010

Retail centers struggle

I spotlighted the Swedesford Plaza going into receivership last year but it looks like the defaults are spreading.

"When Wharton Realty Group bought Swedesford Plaza in June 2007 for $40.5 million, the shopping center was bustling with activity as conspicuous consumers shopped for flat-screen televisions, digital cameras and dinner out at restaurants.

Now, the 152,601-square-foot center off Swedesford Road in Berwyn is being foreclosed upon. Of the 60 commercial properties throughout the region that are delinquent or facing other loan issues, a third are retail centers such as Swedesford Plaza, according to recent data from Trepp, a New York research firm that tracks the commercial real estate and commercial mortgage-backed securities industry.

Of those centers with troubled loans, some have been foreclosed upon, taken over by the lender or have delinquent loans in special servicing. The situation shows how difficult the retail sector has become as consumers pull back spending, landlords struggle to fill vacancies, and shopping centers built during the commercial real estate boom cannibalize each other.

In the case of Swedesford Plaza, the property lost its biggest tenant — Circuit City in February 2009 when it liquidated. The retailer had occupied 65,312 square feet, and about a month after it liquidated, the $35.1 million loan on the property was shipped to a special servicer. The Circuit City space is still vacant. With the vacancy and other problems, the center’s appraisal amount was reduced in February by $14.4 million.

Vacancy issues have bedeviled retail centers during the recession, said director of investment sales at Fameco and co-chair of its distressed asset group. Retail bankruptcies, such as with Circuit City and Linens ’N Things, have hurt centers. Few retailers are stepping in to backfill the empty space.

“It’s the new math of real estate,” he said. “You have lower occupancy, less income coming in, lower rents, higher loan-to-value if you’re trying to refinance, higher interest rates, and that’s why properties have struggled.”

Swedesford Plaza isn’t alone. Joe Grasso has been working with a special servicer, since November 2008 to refinance a $32 million loan on the Pavilion at Lansdale. About four years ago, Grasso pumped $30 million of borrowed money into redeveloping the 140,000-square-foot center off South Broad Street in Lansdale. The loan is delinquent.

“Values when we were redeveloping it to now are two different worlds,” Grasso said. Some tenants have been slow to pay rents, the grocery store is struggling and some vacancies have popped up, he said. Despite the challenges, Grasso is confident the loan will be successfully renegotiated. “We will work it out,” he said.

So far, seven properties haven’t managed to work things out and have either been foreclosed or the lender has taken the property back, as in the case of Pottstown Plaza. The 161,727-square-foot center was taken over by its lender in January, according to Trepp data.

“They lost Giant to Upland Square, which is a 650,000-square-foot power center,” said Jonathan Rome. “You had an asset doing fine in its day and lost its anchor to a competing project across the way that is the pretty child on the block.”

Garden State Pavilion is another site that has floundered amid competition, according to Rome. The 257,353-square-foot center was constructed in 1999 before Market Place at Garden State Park was built just a stone’s throw away. The new center attracted one of the Pavilion’s anchors, Home Depot, as well as its customers. With a $26 million mortgage left unpaid and delinquent, the loan was foreclosed upon.

Once a property is foreclosed on, the special servicer will seek to try to fill vacancies and operate it as an owner would in hopes to eventually sell it, usually for significantly less than original loan value.

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