This Strolling the Agora column is from the January 11th, 2010 Issue of SHOPPING CENTER DIGEST
For a year now, as vacancy rates have climbed to record levels and the true value of shopping centers has plummeted, several prominent landlords and numerous investors have been preparing to grab properties at bargain prices from financially-strapped owners. A number of projects, mostly strips and distressed, have changed hands due to foreclosures, and a number of others where both parties were not pressured and walked away satisfied with the deal.
But there have been, as yet, few large acquisitions, aside from Simon Property Group's recent $2.2 billion buy of The Lighthouse Group's Prime Outlets. The controlling word here is large.
Though lenders have given breathing room to such debt-heavy operators as General Growth and Centro Properties, many in the industry anticipate these landlords soon will be selling quality and trophy assets to retire billions of dollars in debt to stave off liquidation.
The big question is when will the dam break and start a flood of mergers and acquisitions of large and prime properties.
Substantial, But Minor, Movement
There already has been substantial movement as minor investors and medium-sized landlords have announced additions to their portfolios: RioCan and Cedar Properties partnering to acquire two Pennsylvania strip centers; Equity Investment picking up two strips in the Cleveland, OH, market; Pacific Retail Capital beating off other buyers to re-acquire for $15 million the West Oaks Mall in Houston it sold four years ago for $102 million; Dizengoff buying its second Florida center; Colonial selling off Winter Haven in Florida; Inland picking up Grafton Commons in Wisconsin; Equity One acquiring Westbury Plaza on Long Island and then an adjoining site for expansion; minor centers and single-tenant properties in 1031 exchanges in California. And the list goes on.
Also, there is no end yet to established companies establishing divisions, or forming REITs to acquire properties; the latest is Excel Trust which just filed an IPO and hopes to raise $300 million to acquire retail properties.
And here we get to the controlling word large, near the top of this column. It's an interesting commentary on today's attitudes that $25 or $30 million is no longer considered a large acquisition.
Part of this is due to the massive amount of money raised in 2009 by publicly traded REITs. They raised nearly $35 billion–$28.3 billion by another estimate–by selling unsecured debt and common equity and used most of it to pay off older debt that was to mature in 2009; according to one observer, that debt was reduced to about $2 billion in September [not counting GGP, whose $10.3 billion debt was extended].
He continued: “This puts several heavy-hitters in a great position to acquire,” and pointed to Simon “who has raised about $7 billion which could be used to opportunistically acquire properties domestically and globally.”
In Canada, some analysts say over $1 billion has been raised by REITs in the last year to improve their balance sheets and prepare for future acquisitions. Said Kim Reddington of AMP Capital Brookfield: “We think the next 18 months will be a very fruitful time… They [REITs] are one of the few investors in the world that have capital.”
According to Hessam Nadji of Marcus & Millichap Real Estate Investment Services, foreign investors are expected to buy some $2.5 billion of US real estate this year.
To Dan Fasulo of Real Capital Analytics, offshore buyers have never acquired more than 10% of annual real estate sales. “There's no foreign invasion. There's just enough capital to touch off a meaningful recovery.”
Ed Sonshine of Canada's RioCan is enthusiastic, and especially positive about future expansion through more aggressive acquisitions. However, he sees most of the “steals” are in the US, so his company will be focusing much of its efforts south and is “feeling its way” through its partnership with Cedar Properties (See Above).
So, back to the question as to when the dam will break and major sales take place?
According to one VP of acquisitions, “The dam will not break until there is more pressure for sellers… or until they are in a position where they 'have to' sell. With ability to often extend/re-work debt terms, sellers are 'hoping' to ride out this storm; but last time I checked, 'hope' isn't a strategy.”
Says Peter D. Morris of Greenstead Group, “The dam will not break but there will be cracks… more stringent underwriting wukk result in a cautious flow of money back into shopping centers as early as 2011 (not 2010). There are still too many 'bad locations' [which] will need to be repositioned or abandoned. Top flight properties may become available and that is where we will see strong action, but I think B and C property will be hard to move for years.”
Leo McKittrick of Drake Barber Realty ties sales to the unemployment rate and when it changes direction. “The big unknown is how much of a change in direction? My opinion is a .25 to .50 reduction in the unemployment will trigger the buying. Why will this trigger a buying spree? All companies will know that the worst has passed.”
An Abundance Of Capital
Another echoed a common refrain over the last few months regarding some sellers waiting for cap rates to drop and those with the cash waiting for sellers to get real regarding their perceived value of property. These are usually the smaller operators.
“Institutional owners have raised such an abundance of capital… [they're not an active seller] unless they want to leave a market in its entirety. However, we have seen a large number of assets for sale from Centro, DDR, Inland, etc., but unfortunately, they have not actually executed sales due to property values being far below their basis.”
A number of those experienced in acquisitions and mergers note that there are many “lookers” examining large portfolios. “If they see signs that larger retailers are returning to an expansion mode, there is an incentive to make the deal before occupancy rates begin to rise across the board. This is an indication that values will go up and buyers may want to move before that begins.”
Another echoed that assessment. “Look for it to begin in early or late spring, with the first major sales triggering a rush of buyers to put their money where their mouth is.”
Further information on Shopping
Center Digest, our weekly Eflash, Expanding Retailers,
and the annual Directory of Major Malls may
be obtained from our website, www.shoppingcenters.com.
Strolling the Agora was a twice-monthly column discussing trends, issues of importance, and commentary on the leasing/development aspects of the shopping center/retail chain industry in the US and Canada. Called Strolling the Agora, it was a part of Shopping Center Digest, a newsletter founded in 1973 published until September 2010. The column provided expert insight into various retail focused topics. It was primarily authored by Murray Shor, Editor & Publisher as well as industry and veteran retail experts. A smattering of archived columns are presented here for your reading “pleasure”. It's an interesting “look back” at what were current hot topics at the time with regard to shopping center/retail industry focus, development and leasing expansions and processes, retail mix, opinions and more.
About Murray Shor:
Reporting and writing on the shopping center/retail industry since the late ’60s. Began as editor at Chain Store Age, founded Shopping Center World (now Retail Traffic), Shopping Center Digest “The Locations Newsletter” in 1973, and the Directory of Major Malls in 1979. Each issue of Shopping Center Digest contained a column called Strolling the Agora which provides commentary on trends, activity, issues of concern to development and leasing in the shopping center/retail industry.