The increase in investment sales so far this year hints at an end to the cold shoulder between buyers and sellers that lasted for most of 2008.
On Jan. 27, Sydney-based real estate investment trust Macquarie CountryWide Trust announced it agreed to sell equity and interest in 30 U.S. retail assets to Inland Real Estate Acquisitions for a total of $427 million. The properties were sold at a 12 percent discount to their original cost base of approximately $485 million. It’s the largest retail real estateannounced in 2009.
The assets previously belonged to two joint ventures between Macquarie CountryWide and Jacksonville, Fla.-based REIT Regency Centers, JV1 and MCW/MDP, which were dissolved on Jan. 21. Officials from Macquarie CountryWide could not respond to requests for comment in time for the publication of this article. A portion of the deal, involving seven unencumbered grocery-anchored shopping centers totaling 588,522 square feet, closed two weeks ago. The rest of the sale is expected to close in March, when due diligence and loan assumptions on the 23 remaining assets will be completed.
Inland officials would not disclose the cap rate on the initial transaction, valued at $71 million. According to Mark Cosenza, acquisitions director with Inland Real Estate Acquisitions, “right now, one of our main focuses is on grocery-anchored centers and the deal was a good deal for us, in that it had a return that was accretive for our investors.”
So far this month, the size of investment sales transactions has started to creep upward slightly. After several weeks where the largest deals seemed to be in the $10 million to $20 million range, the numbers have started getting bigger. A portion of the 1.7-million-square-foot Northland Center in Southfield, Mich. was purchased by the New York City-based Ashkenazy Acquisitions Corp. for $30 million. And Ormond Beach, Fla.-based Jaffe Corp. bought the 234,045-square-foot Ormond Towne Square for $20 million. The latter transaction took just 55 days to complete, from signing to closing, according to Michael Cleeman, senior managing director with New York City-based Cohen and Co., Inc., who brokered the sale.
To be sure, it’s nowhere near what the industry became accustomed to during the boom when nine or ten figure deals routinely closed. But it’s a start. The accelerated pace of closings,say, has to do with the increasing pressure on sellers to dispose of properties at any cost; a trend that’s likely to intensify over the next few months.
“The velocity pick-up is a combination of two things ...sellers are actually moving on price and closing that bid-ask gap a little bit,” says Gill M. Warner, senior director with Stan Johnson Company, a Tulsa, Okla.-based commercial real estate investment firm. “I think sellers understand where the market is.”
About one out of five sellers with a property on the market today is in a position where a sale must take place at any cost, Warner says. In the next two months, that ratio will likely go up to three out of every five sellers, he predicts.
The Macquarie deal, for example, will help refinance or restructure all of the company’s debt maturities for 2009, according to a statement from Macquarie CountryWide CEO Steven Sewell.
These transactions signal a thaw compared to November 2008, when fewer than 50 retail properties changed hands, with a total value of only $600 million, according to Real Capital Analytics (RCA), a New York City-based real estate information provider. The volume represented an 83 percent drop from November 2007, with offerings outpacing closings 5 to 1. In December, the volume picked up a bit, with 90 properties changing hands, with a total value of $900 million, according to preliminary data from RCA. And cap rates continue to inch upward from the 7.3 percent average recorded that month, spurring on a greater number of closings, brokers add.
Warner, whose firm recently negotiated the sale of three Tractor Supply-anchored properties in the Midwest totaling approximately 60,000 square feet, reflected that in July 2008, the seller would likely have been able to achieve a cap rate of 7.0 percent on the stores. This month, the transactions closed at a blended average cap rate of 7.7 percent.
Sellers facing 2009 debt maturities have become more flexible on pricing, says Cosenza. At the start of 2008, effective cap rates for retail properties ranged between 7.0 percent and 8.0 percent, he says. This January, however, they started to approach levels not seen since the late 1990s.
In 1997, Cushman & Wakefield released a survey that found cap rates for neighborhood and community centers averaged 9.3 percent; power centers 9.7 percent; regional malls 8.3 percent and single-tenant properties 9.0 percent.
In some cases today, retail properties can be acquired for cap rates above 10 percent, according to Emmet Austin, chief investment officer with Stonemar Properties, LLC, a New York City-based real estate investment and management firm.
“These are sellers that need money now and they have realized what the market is dictating now,” Cosenza says. “I think those forces are accelerating.”