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Benderson Real Estate Deal Raises Eyebrows

Benderson Development, as detailed in this Sunday’s Buffalo News, has bought back 11 shopping centers from Developers Diversified Realty Corp, the company they had sold those same shopping centers to in 2004.  This deal will return 3 million square feet to Benderson’s portfolio which already totals more than 25 million square feet.  8 of the shopping centers are in Western New York, with 7 in the suburbs and 1 in Buffalo (the Marshall’s plaza on Delaware Avenue which is home to Bagel Jay’s and others.)

The Benderson transaction is getting national press coverage as it highlights the tremendous decline in commercial real estate prices.  Of course, Benderson, one of Buffalo’s best-run companies, comes out of this transaction looking particularly shrewd as they were a seller in 2004 (pre-bubble peak) and are now buying back their former properties at a reported 30% discount to where they sold (post-bubble burst).  
The Retail Traffic Blog has some interesting analysis of this deal: 

This is fairly incredible. Speculation has been that values on retail properties would fall 40 percent peak to trough. But the peak on values wasn’t reached until 2007. The fact that Benderson is buying properties at a 30 percent discount to 2004 values is a bit of a shocker.

The deal in 2004 between the companies works out to $122.34 per square foot. That is right in line with data from Real Capital Analytics. According to the firm, the average price on closed strip center deals in the first quarter of 2004 was $121.80 per square foot. However, values on strip centers didn’t peak until the second quarter of 2007. Then, the average price on closed strip center deals was $180.69 per square foot. Similarly, the average cap rate on closed deals in the first quarter of 2004 was 8.3 percent vs. a low of 6.6 percent reached in the second quarter of 2007.

Per asset, the 2004 deal works out to about $21 million per property. If the $160 million to $175 million price range is correct, that puts the price per asset at between $14.5 million and $16 million. If you do the math, if the Benderson portfolio had traded at the peak of the market in 2007-at $180.69 per square foot-the total portfolio would have been worth $3.4 billion, or $30.8 million per asset. That means-potentially-that these assets traded about 50 percent lower than what they were potentially worth at the peak of the market.

There are a lot of things we don’t know about these assets. Are they healthy assets or do they need work? What do the current tenant rosters look like? Are the rents at market rates or lower? When do the leases come up for renewal? Did Developers Diversified sell these assets at a deeper discount than is truly reflective of market conditions out of a need to raise cash? Without this information it is hard to draw a full conclusion on what it means for the market. But the fact remains that this represents a massive drop in values from just more than two years ago. And the drop in value is larger than even the most pessimistic estimates have been for the peak-to-trough change in prices for retail real estate.

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