The investment sales market for retail properties has turned a corner—at least when it comes to prime assets.

After more than a year of severely constrained activity, firms including Inland Real Estate Acquisitions Inc., Kimco Realty Corp. and Caruso Affiliated, among others, have been part of a flurry of large-scale acquisitions and joint venture agreements in the past few months. Industry insiders say the dearth of high quality retail assets on offer and a feeling that prices on top centers have bottomed is propelling the wave of activity.

“The general perception out there is that we turned the corner in the capital markets and with retail businesses as well,” says Christopher Angelone, executive vice president with real estate services firm CB Richard Ellis. “We’ve had a couple of quarters where retail properties appeared to stabilize and you didn’t have tenants asking for rent relief anymore. The psychology out there is that it is probably an opportune time to buy well-located, good quality retail properties.”

Last week, Caruso Capital Partners LLC, an affiliate of Caruso Affiliated, and TPG Capital, a global private investment firm, announced the formation of a $750 million joint venture that will invest in underperforming retail and mixed-use properties in mature markets throughout the Western United States. The partners are emboldened by the broader economic stability and think it is a good time to take on risk and mount an acquisition campaign, says Stephen Rader, president of the new venture, Caruso-TPG Capital Partners. The venture, which is already in negotiations to acquire several assets, plans to hold properties for five to seven years and will seek leveraged returns of 15 percent or greater.

Caruso-TPG Capital Partners will look at a wide range of retail assets—from grocery-anchored shopping centers to lifestyle centers. However, it will stay away from properties that need full-scale redevelopment, Rader says.

“We are going to be very disciplined. They are going to have to be in the kinds of locations we want them to be in terms of demographics and in terms of density,” he notes. “And at the same time, we want the property not to have any inherent design flaws that we feel might be too difficult to tackle. With an upturn in the economy that is a pretty simple strategy.”

In the first quarter of 2010, retail investment sales volume rose 40 percent year-over-year, to $3.1 billion, according to Real Capital Analytics (RCA), a New York City-based research firm. The firm says the increase is due to portfolio deals and partial interest acquisitions rather than one-off sales. Most of the transactions during the quarter also involved core assets—distressed property sales accounted for just 7 percent of the overall sales volume in the retail sector, RCA reports.

Investors are staying away from distressed sales in part because of lenders’ unwillingness to finance such transactions, says George Cushing, executive vice president with the retail investment sales group of real estate services firm Grubb & Ellis. In addition, many investors want to see whether banks will put a significant number of retail REO assets on the market, which might affect pricing. Currently, sellers of lesser quality centers remain unwilling to accept lowball bids.

In contrast, prices on class-A and the better class-B assets appear to have bottomed out last year, with cap rates beginning to move down from the 8 percent to 9 percent range into the 7 percent and 6 percent range. Cushing notes that when Grubb & Ellis brought a stable grocery- and drugstore-anchored shopping center in Houston area for sale in February of this year, the firm got 19 bids for the asset. Today, he thinks the number of bids would be even higher.

“People that got their bets in the fourth quarter of 2009 are already being rewarded with cap rate compression,” Cushing says.

Firms that have recently closed on portfolio acquisitions include Kimco Realty Corp., which bought five grocery-anchored shopping centers from PL Retail for $370 million through its joint venture with the Canada Pension Plan Investment Board, and Inland Real Estate Acquisitions, which closed on a $424 million portfolio of 16 grocery-anchored shopping centers from TIAA-CREF and Developers Diversified Realty in early March. The acquisition was on behalf of Inland American Real Estate Trust Inc.

Mark Cosenza, vice president of Inland Real Estate Acquisitions, says the increased level of activity in the marketplace has to do with intense competition for the few class-A assets that are available. The limited availability of prime product is helping close the bid/ask gap on those kinds of properties. Through much of last year, buyers’ and sellers’ inability to agree on prices was one of the primary reasons for low sales volume.

“Over the last year and a half, many funds have sat on the sidelines and now there is a pent-up demand to spend money,” Cosenza says. “The bid-ask has narrowed over the past couple of months because not only do these firms have to spend their capital now, but there is less high quality product coming to the open market. There are more people fighting for [fewer] high quality deals.”

—Elaine Misonzhnik