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RETAIL REITS MOVE TO CENTER STAGE IN NEW ENGLAND

The New England retail real estate market has undergone a radical transition in only two years, with REITs swinging from near-invisibility to being the most active buyers of community, neighborhood and power centers.

In 2001 REITs bought less than 1 percent of these properties, while the private sector accounted for 85 percent. The next year REIT neighborhood and community center purchases in the region climbed to 18 percent, while private-sector deals fell to 74 percent. By 2003 REIT deals had leapt to 73 percent, and private investments had shrunk to just 23 percent.

This transformation can be attributed to the steady rise in REIT stock prices of the past several years, says James Koury, senior vice president at Spaulding & Slye Colliers, a Boston-based real estate brokerage. Thus newly enriched, REITS have been able to pursue these properties much more aggressively than before.

“Now the REITs are winning the bids,” said Koury.

And this New England turnaround parallels REIT dominance in retail real estate deals nationwide. Three years ago REITs bought up 21.6 percent of all U.S. neighborhood, community and power centers. That rose to 35 percent in 2002, though it fell back to 20.6 in 2003.

But the REIT activity in New England has been nothing short of spectacular, given the region’s intensely competitive retail real estate market, what with saturation and low turnover restricting development, market professionals say.

That’s not to say that REITs weren’t trying to make these investments at all beforehand. On the contrary, in 2001 they were in fact active bidders on the properties, but they continually lost out to private investors able to borrow considerably more against a property.

Mall REITs have made some strides forward too, but activity in that sector has been slow relative to that on the neighborhood, community and power center side. In 2001 only one regional mall changed hands in New England — the 700,000-square-foot Swansea (Mass.) Mall — compared with four in both 2002 and 2003, according to Real Capital Analytics, a New York City–based real estate research firm. And four mall transactions have been completed so far this year as well.

The relatively small number of mall deals is mainly a function of the amount of product available, says John L. Bucksbaum, SCSM, CEO of General Growth Properties, noting that mall REITs usually dominate mall acquisitions anyway. Bucksbaum estimates that at least 80 percent of U.S. mall transactions over the past 10 years have been executed by publicly traded mall companies. Overall, 34 malls changed hands in 2001. That nearly quadrupled to 129 in 2002 before falling back slightly to 122 last year. So far this year there have been about 50 mall deals in the U.S., says Real Capital Analytics.

Whether REITs will stay dominant through 2004 is an open question, says Koury. But first-quarter REIT acquisition numbers indicate that for now they are standing their ground both in New England and nationwide. Sixty-two percent of all retail properties in the Northeast were acquired by REITs in the first quarter, versus 60 percent nationally, says Robert White Jr., president of Real Capital Analytics.