Blackstone and DDR Corp.’s recent acquisition of the 46-property shopping center portfolio from the EPN Group signals institutional investors’ continued interest in class-A and B-plus portfolio deals.
Given the lack of attractive investment alternatives in today’s environment, credit tenant-anchored class-A shopping centers in core markets offer the best long-term returns for such buyers, says Edward B. Hanley, president of Hanley Investment Group, an Irvine, Calif.-based boutique retail investment advisory firm. Hanley estimates that there are at least 25 institutional investors with profiles similar to DDR and Blackstone looking to score portfolio deals in the retail sector right now. During the third quarter, cap rates for shopping centers were among the lowest in the commercial real estate universe, averaging 7.2 percent, according to a real estate investor survey published by PricewaterhouseCoopers.
The only property types with lower cap rates included apartment buildings and office buildings in Central Business Districts (CBD).
The hitch is that quality retail portfolio deals are getting increasingly difficult to find. Blackstone has been among the most active portfolio buyers last year, picking up Centro Properties Group’s 585-property U.S. shopping center portfolio in March and a 36-shopping center portfolio from Equity One Inc. in September. The firm will likely dispose of as many lower-quality assets as possible then either sell it at a premium or take the holdings public, says Gerry Mason, executive managing director with real estate services provider Savills.
Mason notes that a number of other fund managers, including Kohlberg Kravis Roberts, have turned their attention to retail acquisitions of late. “They all want to know when they can close their next real estate deal, and retail is near the top of the class, right behind multifamily,” he says.
Yet not too many other shopping center owners want to part with class-A product right now, according to Hanley.
Meanwhile, many of the portfolios that have been put on the market in 2011 featured a great disparity in asset quality, putting off potential buyers, says Jeff Dunne, vice chairman with CBRE. A number of those portfolios had to be broken up into smaller pieces in order to close sales.
“What typically happens with portfolios is they are a very mixed bag,” Dunne says. “But people who buy high-end retail don’t want low end and people who want less expensive assets don’t want to pay more. The portfolios that are more uniform will have more buyer interest and I don’t see a plethora of [these] that will come out this year. There will be some, but not an overwhelming amount.”
What’s out there
In November, the most recent month for which data is available, there were no portfolio transactions taking place in the retail sector, and only two sales were valued at more than $100 million, according to Real Capital Analytics (RCA), a New York City-based research firm. That was the situation in spite of the fact that average cap rates for retail assets fell 25 basis points from the beginning of 2011 to 7.5 percent and that class-A shopping centers now offer yields in the low 6 percent range.
“You’ve got aggressive acquirers like Blackstone who’ve got a lot of money to put out and they’d rather put it out in bulk,” says Richard Walter, president of Faris Lee Investments, an Irvine, Calif.-based retail real estate investment firm. “There is a lot of this type of entities out there who are looking at the market today and are saying, ‘I can probably grab some value,’ whereas in 2010 or early 2011, I couldn’t.’”
The high level of demand is compounded by the fact that there have been minimal new deliveries in the retail sector in the past few years, adds Hanley. At the same time, however, shopping center owners who don’t have to sell to resolve credit issues, like Centro did, are not so quick to dispose of prime assets in bulk if they have them. Instead, most of the deals taking place this year will be single-asset transactions, according to Walter.
“Selectively, there will be some deals [like Blackstone and DDR’s] this year, but they are finite,” he says.