Retail will have ‘terrible’ 2009 – but be best buying opportunity for 30 years

The retail real estate sector will undergo a “terrible” year in 2009 as consumer spending drops dramatically and bankruptcies rise, according to Pacific Retail Capital Partners.

Steve Plenge, Pacific's managing principal, said the industry was about to undergo a seismic shift over the next 12 months, not least in larger shopping malls where some chain stores and anchor tenants will struggle to stay in business.

Speaking to PERE, Plenge said landlords were facing a perfect storm of events, including weakening fundamentals, declining sales and falling rents, that would push valuations down. That storm, he added, would present one of the best buying opportunities in three decades for private equity real estate firms with capital to deploy.

The former Somera Capital executive said 2009 would be “better than the 1980s and 1990s” in terms of investment opportunities, adding: “I have been doing this for 30 years and this is the best opportunity I have seen in my lifetime.”

Pacific Retail works as an operating partner for private equity real estate GPs, including Lubert-Adler Real Estate, which has invested $200 million with the retail firm.

Plenge, who set up Pacific Retail in January this year along with former Somera Capital employees Michael Miller and Marianne Gutierrez, said the firm targets value-added retail opportunities, particularly regional and super-regional shopping malls of at least 500,000-square-feet. Pacific had yet to make an investment, Plenge said, although it was now seeing prices change and more opportunities emerge.

Landlords who lost one or two of their anchor-tenants could face some of the most significant challenges, particularly from existing tenants who traditionally have the right to reduce their rent, and even walk away from leases, after the loss of anchor stores, Plenge said. As vacancy rates increase with rising store closures, landlords could also have to pay higher tenant improvement allowances, where the tenant is given an allowance for enhancements to the leased premises.

“All these events will see prices changes substantially. There will be a lot of opportunities for buying very well located retail properties, properties that have a reason to be and will be among the first to come back in the retail sector,” Plenge, who also worked for private retail investor Madison Marquette, said.