Category Archives: Real Estate

Illinois’ Lethal Combination: Rising Property Taxes & Stagnant Incomes

A lethal combination of rising property taxes and stagnant incomes has forced many Illinoisans to rethink their relationship with their state. More than 1.5 million net residents have already fled the state since 2000 – and you can’t blame others for thinking about joining them.

Property taxes have become punitive in Illinois. We’ve written about how these taxes have destroyed the equity in people’s homes across the state. Many families have done the math, and whether they’re in the struggling south suburbs of Chicago or the affluent North Shore, they’ve decided to leave Illinois behind.

The traditional method for measuring the burden of property taxes is to look at a household’s property tax bill and compare it to a home’s value. Under this method, Illinoisans pay the highest property taxes in the nation. At 2.7 percent, Illinoisans pay far more than residents in neighboring states – twice more than those in Missouri and three times more than residents in Indiana.

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That fact is outrageous on its own.

But to really understand the pain that these taxes inflict on Illinoisans, it’s important to compare property tax bills to household incomes. After all, those bills are paid straight from people’s earnings.

The unfortunate reality is that Illinois incomes have been stagnant for years – and falling when you consider the impact of inflation.

Between 2000 and 2017, Illinois median household incomes increased just 34 percent, far short of inflation. In contrast, household property tax bills are up 105 percent, according to Illinois Department of Revenue data.

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The net result: Property tax bills per household have grown three times faster than household incomes since 2000.

That means more of Illinoisans’ hard-earned incomes are going toward property taxes and less towards groceries, college tuition, and retirement savings. In 2017, 6.73 percent of household incomes went toward property taxes, up from 4.3 percent in 2000.

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That’s a 55 percent increase in the effective tax rate.

The detailed data is below:

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Property taxes, county by county

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Residents of Lake County pay the highest property taxes in Illinois when measured as a percentage of household incomes. In 2000, Lake County residents paid 6.5 percent of their household incomes toward property taxes. Today, residents pay 9.1 percent. That’s a 40 percent increase. The average Lake County property tax bill is now over $7,500 per household.

Meanwhile the residents of the other collar counties and Cook pay more than 7 percent of their incomes to property taxes, with average bills ranging from $4,500 to $6,200 a year.

Overall, the collar counties pay the highest taxes as a percent of income in the state. But it’s not just the Chicago suburbs that are taking a hit. Taxpayers statewide have seen their taxes rise.

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In fact, most of the counties that have had the biggest tax growth, in percentage terms, are found downstate. Hardin County residents, though they pay low rates, have seen them jump 97 percent since 2000. Residents in Pulaski County, have seen their rates go up by 78 percent.

Cook County comes next at 75 percent, but after that it’s all deep downstate again: Calhoun (70 percent), Greene (66 percent), Jersey (65 percent), and Pope County (62 percent).

Taxes too high

Any way you cut it, Illinoisans are being punished by property taxes.

That’s prompted some, including new Gov. J.B. Pritzker, to propose a reduction in property taxes by increasing income taxes.

But that would do Illinoisans no good. Illinoisans already pay the nation’s 6th-highest rates when you lump all state and local taxes together.

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Shifting them around won’t help when the total tax bill is too high to begin with. What Illinoisans need is tax cut, not a tax shift.

Source: ZeroHedge
By Ted Dabrowski and John Klingner via WirePoints.com

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Proposition 13 Is No Longer Off-Limits In California

https://s.hdnux.com/photos/75/11/15/16028529/7/gallery_xlarge.jpgGov. Jerry Brown, left, with Proposition 13 co-author Howard Jarvis at a news conference in July 1978, one month after California voters passed the measure. Photo: ROBBINS / AP

Proposition 13 Is Untouchable.

(San Francisco Chronicle) That’s been the thinking for 40 years in California. Politicians have feared for their careers if they dared suggest changes to the measure that capped property taxes, took a scythe to government spending and spawned anti-tax initiatives across the country.

However, that is beginning to change. With Republican influence in California on the wane and ascendant Democrats making tax fairness an issue, advocates are confident that the time is right to take a run at some legacies of the 1978 measure.

High on their list: making businesses pay more and ending a sweetheart deal for people who inherit homes and their low tax bills, then turn a profit by renting them out.

Legislative Democrats hold so many seats that they don’t have to worry about the GOP blocking such ideas from going before voters. Gov.-elect Gavin Newsom has said that “everything would be on the table,” including Prop. 13, as he formulates a plan to reform the state’s tax structure.

Perhaps most important, Prop. 13’s age is becoming an advantage to would-be reformers: California’s voting demography is changing. The generation of homeowners that grew up with Prop. 13 is well into retirement now, and some younger Californians blame flaws in the measure for everything from the under funding of public schools to growing wealth inequality.

“For Californians who grew up in the public education system that came after Prop. 13, their education was robbed from them. They didn’t get the same education their parents did,” said Catherine Bracy, executive director of TechEquity Collaborative, which is trying to rally the tech community to support changes to the state’s tax structure.

Bracy, 38, moved to the state six years ago from Chicago. “For newcomers (to California) like me, who were born after Prop. 13, we want to experience the California dream, too,” she said. “But we don’t have the opportunity to, because all the goodies have been locked up by the older generations.”

Prop. 13 was a remedy for a side-effect of one of California’s first housing bubbles — spiking property taxes. Moved by their own tax bills and horror stories of longtime homeowners being forced to sell because of skyrocketing assessments, voters overwhelmingly passed the measure. It rolled back assessments for homes and businesses to 1976 levels and capped annual tax increases at 2 percent.

Jon Coupal is president of Prop. 13’s fiercest defender — the Howard Jarvis Taxpayers Association, named after the initiative’s co-author. He agreed that “the number of homeowners who were around in 1978 is shrinking. And many younger people don’t remember the fear and anger about losing your home.”

But Coupal said that “notwithstanding the leftward movement of politics in California,” his organization’s internal polling shows support for Prop. 13 remains strong. And a survey in March by a nonpartisan group unaffiliated with Coupal’s organization, the Public Policy Institute of California, found that 65 percent of likely voters surveyed said Prop. 13 “turned out to be mostly a good thing for the state.”

Under Prop. 13, residential and commercial property alike is reassessed only when it is sold. But while homes often change hands every few years, many large businesses remain in the same ownership for a long time. Some businesses are paying property taxes based on assessments that haven’t changed in 40 years.

That’s one main target of people who want to tweak Prop. 13. The League of Women Voters of California says it has gathered enough signatures for a 2020 ballot measure that would create a so-called split roll system, under which businesses’ property would be reassessed every three years. Agricultural land and businesses with 50 or fewer employees would be exempt. Residential property would not be affected.

The change could raise $11 billion in tax revenue statewide, including $2.4 billion for Alameda, Contra Costa, Marin, San Francisco and San Mateo counties, according to a January study by the USC Program for Environmental and Regional Equity. The study found that 56 percent of all Bay Area commercial properties had not been reassessed for 20 years, and 22 percent had assessments dating back to the 1970s.

Could a split-roll measure pass? It might be close. Forty-six percent of likely voters surveyed by the Public Policy Institute of California in January said they supported the idea, while 43 percent were against it. Support was far higher among likely voters under 35 (57 percent) than with those over 55 (41 percent).

However, the split-roll concept has actually been growing less popular over the years, the institute said: Six years ago, 60 percent of likely voters backed it.

Helen Hutchison, president of the League of Women Voters of California, acknowledged that changing the law will be difficult because “Prop. 13 still has some kind of magical pull. But we think the time is right to do this.”

https://s.hdnux.com/photos/77/52/12/16687798/5/940x940.jpgState Sen. Jerry Hill has introduced a ballot initiative that would limit a tax break for heirs of residential property. Photo: Max Whittaker / Getty Images 2009

So does state Sen. Jerry Hill, D-San Mateo. He has introduced a ballot initiative that would tweak a different part of Prop. 13’s legacy.

Hill’s proposal, Senate Constitutional Amendment 3, takes aim at Proposition 58, which voters approved in 1986. The measure allowed parents to give their residential property to their heirs without triggering a tax reassessment. The intent of the measure was to insulate children from absorbing a huge spike in property taxes and help them stay in the family home. California is the only state to offer this tax break.

Hill proposed the change after learning that many heirs are using their inherited properties as second homes or renting them out for many times more than what they’re paying in Prop. 13-controlled property taxes.

The proposed ballot measure would require people who inherit property in this way to move into the home within a year if they wanted the property tax break. The change would apply to future heirs, not those who have already inherited homes.

Getting this measure on the ballot in 2020 requires Hill to corral a two-thirds majority from both houses of the Legislature. If it makes it to the ballot, it could be passed by a simple majority of voters.

Hill is mindful of the politics around property taxes.

We’re not touching Prop. 13. We’re touching Prop. 58,” Hill said. “The goal is to get people to pay their fair share.”

Coupal, head of the Howard Jarvis Taxpayers Association, doesn’t think Hill’s measure is the biggest threat to Californians concerned about taxes.

Source: by Joe Garofoli | San Francisco Chronicle

Chinese Firms Dumped $1 Billion Of US Real Estate Last Quarter

After being one of the most steadfast buyers of American real estate for years, large Chinese firms continued dumping high-profile US real estate in the third quarter, the Wall Street Journal reports, selling more than $1 billion of property as Beijing forced insurers, conglomerates, and other big investors into debt-reduction programs.

Chinese investors dumped $1.05 billion worth of prime US real estate in the third quarter while purchasing only $231 million of property, according to data firm Real Capital Analytics. This marks the second consecutive quarter where investors were net sellers of US commercial real estate, and the first time investors sold more US property than they bought since the 2008 crash.

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In the last decade, Chinese investors plowed tens of billions of dollars into US real estate, with a concentration in major metro areas like New York, Los Angeles, San Francisco, and Chicago. The Journal notes that Chinese buyers “never represented more than a fraction of the buying power in any U.S. market,” however they made headlines for paying massive premiums. 

Now, the party has unexpectedly ended.

Rising corporate debt levels and concerns over currency stability has forced the Chinese government to tighten capital outflows and clamp down on overseas acquisitions. 

As ZeroHedge discussed last month, total Chinese Credit Creation unexpectedly collapsed, resulting in shock waves of weakness across the domestic and global economy. Amid speculation that Beijing is engineering a “slow landing” through a significant slowdown in credit issuance, investors – hungry for liquidity – are unloading US properties at a rapid clip. In global markets, this will likely create a deflationary chill and lead to a further slowdown in 2019.

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Trade tensions between Beijing and the Trump administration have not helped the situation, as more Chinese firms sold properties amid worries the trade war could deepen in the coming quarters, and potentially lead to more aggressive blow back at Chinese investors. 

“This has to do more with a change in how capital is permitted to behave rather than Chinese investors saying ‘I don’t like the U.S.’,” said Jim Costello, senior vice president at Real Capital Analytics.

“Ping An Insurance Group Co. of China and partners in August sold a 13-story Boston office building for $450 million, the largest sale by a Chinese investor during the third quarter, Real Capital Analytics said. Its U.S. partner Tishman Speyer said it was the one that drove the decision to sell the building.

China’s retreat showed signs of continuing in the fourth quarter. Dalian Wanda Group sold a glitzy development site in Beverly Hills, Calif., last month for more than $420 million. The Chinese conglomerate purchased the eight-acre parcel in 2014 for $420 million and had planned to develop luxury condominiums and a boutique hotel on the site, but feuds with a local union and contractors stalled progress.

Anbang recently engaged Bank of America Corp. to help it sell a portfolio of luxury hotels that it acquired two years ago for $5.5 billion, though the Waldorf isn’t part of that sale, according to a person familiar with the matter,” said the Journal.

“Anbang is reviewing the company’s U.S. real estate portfolio after seeing price recovering in local property market due to strong recovery of the U.S. economy,” said Shen Gang, a spokesman for Anbang.

Still, some strategists believe that Chinese selling may slow in the months ahead.

“I do not think it will be a tidal wave of sales,” said Jerome Sanzo, managing director and head of U.S. Real Estate Finance for Industrial & Commercial Bank of China. “Some of them are not able to move forward for various reasons and will take gains now while waiting for future changes.”

In a highly leveraged economy such as China’s, growth is a lagged result of changes in the supply of credit. And with credit creation waning in China, it is less of a mystery why local corporations are rushing to “liquify” as fast as possible: the Chinese credit squeeze is well underway. Prepare for a global slowdown in 2019, one which has already hit the US housing market hard.

Source: ZeroHedge

US New Home Sales Fall 12% YoY In October, Down 9% MoM

Another Indicator Bites The Dust

The good news? US GDP rose 3.5% QoQ, even though Personal Consumption was lower than expected at 3.6% and lower than September’s growth.

The bad news? New home sales fell 8.9% MoM in October.

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New home sales declined 12% YoY, tied for the worst reading since 2011.

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Yes, as The Fed withdraws monetary stimulus, home building companies are taking the Nestea plunge.

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Another housing indicator bites the dust.

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Source: Confounded Interest

Desperate Home Builders Offering $100,000 Discounts, Free Vacations Amid Cooling Market

As US home sales begin to cool off, homebuilders have begun to panic – offering price cuts of more than $100,000 along with free upgrades such as media rooms, cabinets and blinds – reports Bloomberg

https://www.zerohedge.com/sites/default/files/inline-images/price%20reduced.jpg?itok=9-FrnmTFThat’s not all, real estate brokers are being enticed with free vacations such as trips to Lake Tahoe, Santa Barbara, Cabo San Lucas and even a dude ranch in Wyoming – all in the hopes that they will steer buyers towards houses in slowing markets.

This generosity flows from increasingly desperate home builders. Hot markets are cooling fast as interest rates rise. In the great housing slowdown of 2018, shoppers are reclaiming the upper hand, after years of soaring prices that placed most inventory out of reach for many families. “Everybody is hungry for the buyers,” Konara says. –Bloomberg

https://www.zerohedge.com/sites/default/files/inline-images/nhsl.png?itok=nSkT70icBuilders are definitely feeling the heat right now, as new home purchases dropped in September to the weakest pace since December 2016. Meanwhile, previously owned home sales dropped for a sixth straight month – the worst streak since 2014, according to Bloomberg. Investors in home building stocks are also feeling the pain, as the sector has lost more than a third of its value this year. 

There are pockets of robust housing activity still, however – as rising wages have put more homes in reach; starter homes are still in demand, while some smaller and more affordable markets – such has Grand Rapids, MI and Columbus, Ohio remain strong. Still, the overall trend does not look good.

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On top of interest rates, sellers in some regions face added challenges. President Trump’s tax overhaul places caps on tax deduction for mortgage interest and property taxes, hurting high-tax regions such as New York’s suburbs. In Manhattan, added supply is about to hit the market, with 4,000 new condo units to be listed for sale in 2019, almost twice as many as this year, according to brokerage Corcoran Sunshine Marketing Group. –Bloomberg

Another factor hindering home sales, according to Bloomberg, are restrictions on immigration which have made high-skilled workers in places like San Jose and Austion hesitant to buy, while a strengthening dollar has made US investment properties less appealing to wealthy buyers in South America, and Chinese buyers snapping up homes up and down the West Coast. 

In Seattle, where home prices have doubled since 2012, builders are offering cash for customers to “buy down” mortgage rates—that is, pay to get a lower interest rate. “Builders are calling us,” says Andy McDonough, senior vice president at HomeStreet Bank, which works with the companies on such promotions. “They weren’t doing this earlier because buyers were lining up.” –Bloomberg

The shifting real estate tide is perhaps most noticeable in previously sizzling markets – such as Fricso, Texas. Located 30 miles north of Dallas and full of newly constructed master planned communities, its population nearly doubled over the past decade to 177,000, while its jump of 8% last year made it the fastest-growing city in America. 

https://www.zerohedge.com/sites/default/files/inline-images/house%20being%20built.jpg?itok=9o9Fj67pAll is not well in Frisco, however, as home sales have all but ground to a screeching halt. 

On a recent weekday, Konara, the real estate broker, drives his Dodge minivan along Highway 380, a builder battleground, where national giants such as Lennar, Toll Brothers, and PulteGroup go head to head with Texas companies. He stops at sales offices, where balloons festoon posts in a vain effort to spur sales. He points to empty houses that he says were completed six months ago.

His own sales are half what they were in 2016. In many cases, he’s rebating to customers all but $1,000 of his commission on each home sale. He walks into an Indian restaurant for lunch and looks up at the television screen. A competitor, the “Maximum Cash Back Realtor,” says he’ll take only $750. “You know what that means,” Konara says. “I’ll have to do the same.” –Bloomberg

Konara received a call from Raj Patel, a 35-year-old pharmacist with two young children. Weeks away from finalizing a purchase of a $699,000 new home with “four bedrooms, a grand staircase, two patios, a balcony, a game room, a media room, and a three-car garage,” the buyer is paying $90,000 less than the advertised price – and still has reservations considering that a builder in the same community is selling a similar house with the same “bells and whistles” for $75,000 less than that

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Konara tells Patel “the market is getting soft,” to which the pharmacist replies “Hopefully the market doesn’t dip much more than this.” 

Nearby, Jennifer Johnson Clarke relaxes on a couch in the living room of a model home in Frisco. There’s a wet bar to her right, a 23-foot ceiling above and an indoor Juliet balcony. Not long ago, the $1.2 million house would have been a hot commodity. Clarke, director of sales for Shaddock Homes, a 50-year-old family-owned builder, will have to work harder to sell homes based on this model. –Bloomberg

“We have an oversupply. Too many lots came on the market in the last 12 to 16 months, and demand has fallen off a cliff,” says Clarke. “I’ve not offered incentives on any scale like I’ve offered this year.” 

Source: ZeroHedge

“Things Are Getting Worse”: Mall Owners Hand Over The Keys To Lenders Before They Even Default

For years, traditional malls around the United States have been in a state of partial or full collapse thanks to “the Amazon effect”: deteriorating conditions, bankrupt or cash-bleeding tenants, with some even transforming into homeless shelters as the retail industry “evolves”. 

In other words, as Bloomberg writes, “things are getting worse for malls across America.” So much worse, in fact, that their owners are simply walking away early from struggling properties, a trend that has sparked fears of material losses among mortgage bond investors.

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Investors in and lenders to malls across America are bracing for the fallout from the disappearance of the brick and mortar sub-sector of the industry. With the recent bankruptcy of retail giant Sears, mall operators are continuing to see accelerating defaults in the wake of numerous other retail bankruptcies from stores like Bon-Ton, Wet Seal and RadioShack, and many others, resulting in abrupt declines in rental and lease payments.

And amid the ongoing collapse in what was once a staple source of shopping and entertainment for “middle America”, many mall owners are simply turning over the keys to lenders even before their lease is over, according to Bloomberg. That puts the loan servicing companies in a position to either try to run the properties themselves or turn around and sell them. If they can’t make the debt payments, the new owners of the commercial mortgage backed securities in turn end up facing the consequences themselves.

While much of the noise surrounding the “big mall short” which dominated the 2017 airwaves has faded, the number of mall loans issued since the financial crisis that identified as “highest risk” has almost tripled to 29 this year. And the consequences are becoming painfully visible. The Washington Prime Group REIT last month simply gave up on two malls in Kansas where the loans had either defaulted or were close to default. This month, Pennsylvania REIT announced that it left a mall in Wilkes-Barre that also had a loan ready for default. The PA REIT is considering abandoning another mall in Wisconsin for the same reason.

Ben Easterlin, head of commercial lending at Atlanta-based Angel Oak Companies, told Bloomberg that many small town malls are no longer being included in CMBS packages. “It’s easier to value a mall in L.A. than it is in Sheboygan,” he said. “We talk about these malls all day long. We have not seen any of these malls in a CMBS lately and don’t expect to, frankly.

Meanwhile, even though the delinquency rate right in the commercial mortgage backed securities market is at post-crisis lows now, the pain will likely take a couple of years to show up due to maturities that won’t occur for several years.

Adding to the pain, stores leaving these malls often cause a waterfall effect because of co-tenancy clauses that are included in many small mall leases. These clauses mean that if there aren’t enough tenants in a mall at a given time, other tenants have the option to leave. So when a “major” anchor-store company – like Sears – closes a bunch of stores, it can triggers clauses releasing other stores from their contractual leases, further hitting the mall and its creditors.

Still, not all investors see this as Armageddon.

The Galleria at Pittsburgh Mills was seen as an investment opportunity by New York-based Namdar Realty Group and Mason Asset Management, who bought the property for $11.35 million earlier this year after it was once valued at $190 million in 2006, before it was packaged into a commercial mortgage backed securities pool.

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Steve Plenge, managing principal of Pacific Retail, is another optimist who sees today’s climate as opportunistic. His firm has taken over at least two malls that have been returned to lenders after defaults. He told Bloomberg: “we think this sector, the servicing business, will get bigger for us. There will be more defaults, more foreclosures.”

We agree. In fact, at the beginning of October we noted that mall vacancies had hit 7 year highs. And, according to a WSJ report, the average rent for malls in the third-quarter fell 0.3% to $43.25 a square foot. This is down from $43.36 in the second quarter and is the first time this number has fallen sequentially since 2011, according to research firm Reis, Inc.

At the same time, vacancy rates are on the ascent, rising to 9.1% in the third quarter from 8.6% in the second quarter, and the highest they’ve been since the third quarter of 2011, when these rates hit 9.4%. 

Barbara Denham, senior economist with Reis, told the Journal: “The retail sector is still correcting”. And, as long as ever more people continue to migrate to online retailers (or buying less stuff in general), it will be for years.

Source: ZeroHedge

“It’s Surreal. We’re In The Matrix” – Calgary’s Newest Mall Is A Ghost Town

Yet another shopping mall project looks to have fallen victim to “the Amazon effect”, serving as evidence that brick and mortar retail, in the conventional sense, is doomed.

The latest victim is the New Horizon Mall in Calgary. The construction of the “multicultural mega-mall” is nearly complete, but tepid interest forced its developer to push back its planned grand opening to next year. The mall was initially set to open in October of this year.  Only 9 of the 517 spaces in the mall have opened for business since May, when owners were first allowed to take possession according to a new report by Global News.

“It’s surreal. It’s not normal – we’re in the Matrix,” one shopper told Global News. 

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The developer, Eli Swirsky, president of The Torgan Group of Toronto, told Global News:

“I love the mall. I think the mall will be fine,” he said in an interview. “I wish it was faster, of course, but every time I go there I’m awed by its size and potential and I think we’ll get there.

Swirsky told Global News that he expects 20 stores will be open by the end of September, but he still wouldn’t commit to a final grand opening date. Instead, he said that it will likely happen when 80 to 100 stores have opened. That is seen to push back the grand opening well into spring of next year.

The optimistic outlook stands in the face of eerie reality of the project, which shows “For Lease” signs and empty glass spaces traditionally reserves for stores.

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Those who have already taken up shop in the mall, including Rami Tawil of Silk Road Importers, think that pushing the grand opening off until there are more tenants is a good idea: “I think now it’s better if we push it a couple of months because we need more stores here to open. We need the people coming to see more stores.”

The mall style is based on a similar mall that the developer opened in the Toronto area – about 20 years ago. The mall is different from traditional malls in the sense that it doesn’t exclusively lease to tenants. Rather, investors can purchase retail space and then have the option of leasing it to others or operating it themselves. The developer also holds large chunks of space in hopes of enticing anchor tenants. None of these have been announced yet.

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The few tenants of the mall are at varying stages of readiness. Some are still trying to figure out what type of product or service may be best to offer at the location. Others are trying to re-sell or lease their spaces, according to the mall’s general manager, Jason Babiuk.

The mall was a $200 million project that broke ground in June 2016. Some believe that the difficulty in filling the mall has to do with its condominium-like ownership model, which could attract the wrong type of investors to such a project.

Retail analyst Maureen Atkinson, a senior partner at J.C. Williams Group stated: “The challenge with the condo model is that the people who run the stores are typically not the people who own them. So they would have sold these to investors … who see it as an investment and they may have trouble finding somebody who wants to run a business.”

Earlier this week we learned that mall rents in the United States were plunging as vacancies were shooting toward record highs.  According to a WSJ report, the average rent for malls in the third-quarter fell 0.3% to $43.25 a square foot. This is down from $43.36 in the second quarter and is the first time this number has fallen sequentially since 2011, according to research firm Reis.

At the same time, vacancy rates are on the ascent, rising to 9.1% in the third quarter from 8.6% in the second quarter. 

Our take? Instead of trying to re-invent an industry that is already on its deathbed by opening a “multi-cultural” mall, maybe Canada should have, at very least, taken a page out of the United States’ once successful mall playbook: bankrupt retail brands and greasy Asian food court samples. 

Source: ZeroHedge