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RW Kline News
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SCOTTSDALE, AZ-Robert Kline is CEO and principal of RW Kline Cos., a local company that works with lenders through disposition process of commercial real estate assets. The company specializes in CMBS, commercial loan modifications, note sales and restructuring. GlobeSt.com chatted with Kline about retail issues as well as the loan sales market. The firm is also partnering with GlobeSt.com as a Thought Leader during the RECon show in Las Vegas later this month. Click here for more information.
GlobeSt.com: We hear a lot about big box issues. Can you clarify some of what's going on with big box-anchored centers?
Kline: Well, many of the centers have lost major retailers; Circuit City, Borders and other big box tenants. When that happens it creates a lot of stress because you have to work to back fill the space. Adding to the problem is that a lot of the smaller tenants in such retail centers anchored by big boxes have escape clauses. If the center's big box goes out, they can leave. We're seeing quite a lot of that; smaller tenants are either moving on or renegotiating their leases. We're at an all-time high for property owners coming to us for restructuring, for white-knight financing and the like. We have 23 centers we're repositioning, and every one of them either has an empty big box or a failed shell.
But we've seen some creativity when it comes to big box space – in one situation, we saw one owner put small boutique-type shops, hair salons, nail salons and small jewelry stores in a big box, like a mini-mall. We've even seen go-kart tracks go into some of them, but that can be somewhat noisy.
GlobeSt.com: Is the Internet having an impact on physical retail centers?
Kline: Yes, but we have to be careful to blame everything on the Internet. Certainly we're seeing that with electronic retailers and the Office Depots. People are looking more online to have stuff shipped to them, as it's more convenient. But some people still want the touch and feel experience. Even with Best Buy, when customers walk in to buy one thing, they rarely walk out just with that one thing.
Also, when it comes to apparel, yes, ladies fashion on the Internet with free shipping is appealing, but more people are going to come into a store to try on apparel, and will make impulse buys of more. So we're likely to see non-apparel goods being ordered through the Internet while others are physically going to the stores. But there is little doubt that retail is overbuilt and will have to be thinned out.
GlobeSt.com: Does this mean we're seeing more retail property owners trying to sell their assets?
Kline: That's a mixed bag. Right now, about 63% of retail property owners out there are trying to reposition their properties rather than selling them. What that's telling you is there's a push for them to save what they have; they've made it this far and they believe they can make it the rest of the way. But what doesn't get sold at loan sales is getting foreclosed, and owners are still making mistakes in waiting until the last minute to get help.
GlobeSt.com: What are some of the indicators that a retail owner might be in trouble or be waiting too long to do something?
Kline: The biggest thing we're seeing is that, as CMBS maturity defaults are kicking in and the CMBS is getting to a special servicer, he can set the market number at what is needed. So if you have three centers in a square mile and one of them is owned by a special servicer, that special servicer can pull tenants from down the street with lower rents which, in turn, can create a kind of uneasiness. That can cause problems for the other properties.
GlobeSt.com: You recently introduced your Loan Match program to help buyers get information about loans that are on the market. What do buyers need to be aware of when looking at loans?
Kline: They have to be sharp. We tell everyone know what you're buying, know the loan documents, know the collateral. We tell them to have careful tax parameters. Also, if you try to reset a loan – be careful on your basis and how you administrate the loan sale. The important part here, though, is that underlying collateral is huge; of equal importance is looking at the documents. Buying a loan isn't the same as buying an asset, but people make that mistake all the time.
GlobeSt.com: It's been pretty well established that the pace of loan sales in 2012 will continue high. What about 2013 and beyond?
Kline: We think the loan sale business will be strong for next 24 months. The interesting thing is that CMBS will have solid maturities between now and 2017; the CMBS loans will compete against other loans, depending on the basis and economic recovery. In general, a lot of loans are selling in the $.60-$.70 cent range (on the dollar); some core assets are even selling at par. In January, our loan pool averaged almost $.80 on the dollar, which was huge. I don't think that will happen every quarter.