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DEAL BAROMETER: WHO IS PAYING
HOW MUCH FOR WHAT (PDF)

Empty boxes, hot competition

The market for dark boxes has grown so crowded in the past five years that there is little profit left in it, sources say. More private equity firms are buying chains and then rationalizing their real estate. But more players mean tighter margins, says Daniel Hurwitz, chief investment officer of Developers Diversified Realty Corp. “The risk-reward profile had gotten much more narrow, especially for grocery stores, which take an enormous amount of capital to retrofit,” he said. The payday lies not in taking on whole portfolios of empty boxes, says Martin E. (Hap) Stein Jr., chairman and CEO of Regency Centers, but in redeveloping individual stores on a one-off basis.

Green investing

Investors are growing fond of projects that use energy-efficient design and are thought to control sprawl. “Many of our clients are looking for investments that offer competitive returns [and] that are also socially responsible,” said Scott Budde, managing director and head of TIAA-CREF’s Social & Community Investment Department. The teachers’ retirement fund formed the department last May after a survey of its participants found that over two-thirds wanted to see their personal social values reflected in their investments. Last month TIAA-CREF put $22 million into subsidiaries of ShoreBank Corp., one of the few U.S. banks that earmarks money for community redevelopment loans. Another institutional investor, CalPERS, which has a $5 billion real estate portfolio, announced plans to invest in companies that reduce energy usage by 20 percent.

Investors have few guidelines by which to measure the social and environmental profiles of retail real estate portfolios. One analysis of big-box retailing, by Domini Social Investments and Christian Bros. Investment Services, purports to identify social and environmental issues involved in store site selection. Boston College’s Institute of Responsible Investing is working on a system that will allow investors to evaluate the social and environmental profiles of public REIT portfolios.

BUYING RENTS?

One popular method sellers use to keep cap rates low these days is “buying rents,” said Dennis Gershenson, chairman, president and CEO of Ramco-Gershenson Properties Trust, at an investor conference. “If the tenant needs $20,000 in order to do this store,” he said, “the developer will say ‘Why don’t you take $30,000? But I want another $2 to $5 per foot in rent.’ They then sell that additional income.” The problem for the buyer, he said, is that those rent rates won’t roll over when the leases renew, because they aren’t in tune with the market.