 |
 |
 |
 |
 |
 |
 |
 |
Shopping Centers Today -> July 2002
 PRINT THIS STORY: |
  CHANGE TEXT SIZE: |
TOP STRIPS FETCH TOP DOLLAR
Investors vie for neighborhood centers
By Dave Bodamer
 |
Wanted: Strip center in dominant market, with strong supermarket anchor. Infill location with high barrier to entry preferred.
Although the shopping center industry has seen its share of innovations — factory outlet centers, power centers, lifestyle centers — more buyers than ever are going back to the basic neighborhood center.
The players buying strip center assets range from some of the largest REITs, institutional investors and pension funds down to wealthy individuals looking for a retirement investment. Competition for this format during the past 18 months of economic uncertainty has been especially fierce, with buyers in the strip center market jostling over fewer buying opportunities.
“It is intensely competitive for good centers,” said Drew Alexander, president of Houston-based Weingarten Realty Investors. Properties that would have attracted 10 to 15 bids a few years ago are now drawing twice that attention, Alexander said. Weingarten has focused primarily on Florida and Texas, but buyers in other markets confirm that assessment.
“And the disadvantage in talking about this at all is that now even more people might get interested,” he quipped.
A number of factors are feeding the competition. Companies are holding on to strong strip center assets longer, and investors who had turned to technology firms in the 1990s are coming back to real estate.
All of which has sparked some lively bidding contests.
“It seems like in every market there’s always an individual who can step up and be as aggressive as they want,” said Jodie McLean, president and chief investment officer of Columbia, S.C.-based Edens & Avant, which has purchased about 150 centers in individual property and portfolio deals in recent years and owns more than 200 overall.
At the other end of the spectrum, large pension funds, such as Teachers Insurance and Annuity Association of America (TIAA), are also tough competitors.
“If Teachers decides it wants a center, you almost cannot compete against them,” said Todd J. Bassen, vice president of acquisitions for RREEF (Rosenberg Real Estate Equity Funds), which itself is hardly small fry. The San Francisco-based pension fund advisory firm, which recently merged with Deutsche Bank (giving the bank control of a total of more than $38.5 billion in real estate assets), is actively looking to invest $1 billion in strip centers this year.
The increased competition has, not surprisingly, led to tighter margins.
“Basically, you’re seeing lower returns to a buyer, higher to a seller right now,” Bassen said. “We’re seeing cap rate levels and returns that would have not have been there a year ago.”
Typically, acquisitions are occurring at cap rates of between 7 percent and 9 percent, industry officials say. It has become harder to get a double-digit cap rate on investments.
Kimco Realty Corp., New Hyde Park, N.Y., which is already the largest strip center owner in the country, has increased its pace of acquisitions in the past two years. Joint ventures with General Electric Capital Corp. and RioCan REIT formed in that time period have given it access to new sources of money for buying centers and, in the case of Canadian partner RioCan, exposure to a whole new market. Kimco, which owns centers directly and through its Kimco Income REIT that specializes in rehabbing distressed properties, will launch another fund this year to focus on the most-desirable assets.
“It will be a ‘best of the best’ fund,” explained Thomas Caputo, executive vice president of Kimco. “Added to our other funds, we feel that this will allow us to come at grocer-anchored centers from all sides.”
The prime selling point buyers emphasize for strong grocery-anchored centers is the stability of the asset class.
“If a recession hits, consumers cut off luxury spending,” said Chaim Katzman, CEO of North Miami Beach-based REIT Equity One. “But you’d have to go a real long way before people cut off buying food.”
No matter what the state of the economy, people go to strip centers an average of three times a week, every week.
“We’re catering to basic necessities of people: dry cleaning, banking, dentists, and so on,” Katzman said. Equity One has tripled in size in the past two years and now owns more than 75 centers in Florida and Texas. “We are the providers of the items and services that everybody needs.”
Weingarten’s Alexander concurs.
“This company, for example, has maintained an average 90 percent occupancy for the 16 years that we’ve been a REIT, and while a lot of that is due to the quality of locations or intensive leasing we do, it also is due to the basic nature of grocery-anchored centers,” he said. “They bring an intense amount of traffic, and they are very stable investments.”
Of course, it’s not enough to buy or build a strip center just anywhere. Location is intensely important, not only because a center must be in a spot with a critical mass of consumers, but also because, ideally, the site will be one that rival developers cannot get near.
“It’s been talked about forever, but I still think it’s true,” Alexander said. “Generally speaking, the right location will always stay strong.”
That said, buyers are a little picky about their anchors, preferring to go with dominant grocers in a given market.
Edens & Avant is one such buyer. Besides looking for markets with high populations, high incomes or at least a high-growth potential, it also has a strong preference for sticking with only the best grocers.
“It matters because of the risk of a [lesser anchor] leaving the market if it’s not the dominant player,” McLean said. “Then there’s no guarantee that the dominant player will replace it.”
Strip center owners are keenly aware of, but not particularly fazed by, Wal-Mart Stores’ growing prominence within the grocery sector. Most say that the threat can be tempered by exercising proper caution.
“Clearly everyone needs to be careful, because Wal-Mart already has a 10 percent market share, and they are just getting started,” Caputo said.
Wal-Mart, however, typically brings its Supercenter format only to secondary and tertiary markets. In larger and more densely populated areas, the retail giant simply cannot get the sites it needs to build its behemoths.
“By sticking in urban areas, in mature markets, it makes Wal-Mart’s job so much harder to find a location that would compete with our locations,” Katzman said. “Clearly there are situations where our centers have to compete with Wal-Marts, but we’re hearing from the best grocers that they are all gearing up, and while they regard Wal-Mart as a formidable foe, they are not about to pick up and leave town.”
There are other advantages to properties in urban areas, too. Centers in densely developed areas are particularly valuable even if they don’t have the best anchors, Alexander said.
“Infill locations are very important,” he said. “In locations with constraints on supply, there will be a significantly greater ability to do things with that center. It’s something that you have to look at. If you have something that is truly infill, then you have flexibility on other criteria.”
The grocery-anchored format is likely to remain hot for the foreseeable future, industry players say.
“Maybe we don’t look as glamorous as regional malls or lifestyle centers,” Katzman added, “but it is very consistent, stable and predictable, and it is reliable if you want something that will generate cash flow.”
 | Current Issue August 2008 |