Thought Leadership

State of the Industry Q1 2012: Interview Dr. Peter Linneman

Trademark |February 9, 2012

Written by: Terry Montesi, CEO & Tommy Miller, President of Trademark

Recently, our President Tommy Miller and I had an opportunity to interview Dr. Peter Linneman, the renowned real estate economist and publisher of The Linneman Letter. We asked him for his assessment of the retail and retail real estate business in the U.S. In the interview, we discussed malls, online sales, retailer credit, and retail and mixed‐use investments.

Terry: Peter, in the mall, lifestyle or mixed‐use business, where do you think the opportunity is in retail investments today?

Peter: Let’s start middle/tertiary markets. First of all, as an investor, malls are impossible if they are good malls in good markets. You’re signing into a mid‐single digit guaranteed return almost… at today’s pricing.

Terry: You mean from an acquisition return standpoint?

Peter: Yes. If your cost of capital is 4% on the debt with a maturity of 6‐7 years, …as a blend, and your cost of equity is 7‐8% total return, 50/50 debt. You can do it, but you’re going in for a 6% IRR unlevered and you get 8 on equity and 4 on the debt. If it’s a good mall – that’s the reality. That’s whether it’s a in a major market or a secondary market. But even in second tier market, classic GGP cities, if it’s the good mall in the city and it’s doing $450/foot, the pricing is still that way. It’s because what these malls have really become are locations and not stores.

This means it’s a bulletproof mall. You could lose tenants, dropping your sales from $650 to $575. You’ll replace them with a better tenant, bringing up the value. Those great malls, irrespective of where they are, are difficult to buy (unless you have institutional money i.e. a REIT, CalPer, etc)…

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