Blackstone/DDR Acquisition Signals Appetite for Portfolio Deals in the Retail Sector

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.

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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.”

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