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INSTITUTIONAL INVESTORS BUYING MORE CENTERS

Institutions seeking to invest in retail real estate have for some time been pushed aside by private bidders, but it looks as if 2004 may be a better year for them.

This year institutional investors are on track to buy some $1.8 billion worth of retail real estate, up from about $1.3 billion last year, according to estimates by Real Capital Analytics, a New York City-based real estate research firm. That reflects their highest level of activity in the sector since 2002, when they bought nearly $1.9 billion worth of assets.

In 2001, right about the time well-capitalized private investors began flexing their strength, institutions bought roughly $1.5 billion of retail assets, versus $2.8 billion on the private side. This year the projections are that private buyers will spend a whopping $10.2 billion on retail properties, down from $11.9 billion last year, but up 24 percent from $8.2 billion in 2002.

If institutions do start laying up a greater share of retail assets, it will be because private investors, smelling a peak, are selling more of the properties than they are buying, says Dan Fasulo, a Real Capital associate.

The institutions, meanwhile, knowing they must be quicker on their feet, are speeding up their bidding and due-diligence processes, Fasulo adds. Procedures that used to take three to six months are now squeezed into as little as one month, allowing institutional investors to close more deals, sooner. In some cases, institutions are making all-cash offers.

NetFunding.com, an Internet-based commercial real estate brokerage with headquarters in Atlanta, is set to contribute to an institutional resurgence with a new closed-end equity vehicle called Fund One. (A closed-end fund is open only to a limited number of investors.)

The firm has lined up two life insurance companies as investors and hopes to attract more after the current investments are finalized.

Fund One will comprise three capital components: senior loans provided by commercial mortgage lenders, equity from institutions and equity from NetFunding.com’s corporate reserves and from individual investment partners. And the firm may launch a second, similar fund, depending on how well Fund One performs, says Allen O’Brien, a managing director at NetFunding.com.

Fund One will offer yields ranging between 115 and 130 basis points over 10-year Treasuries on the senior portion, enhanced with yields of roughly between 9 and 11 percent from the equity slice. That’s not extravagant, O’Brien acknowledges, but these yields result in higher prices for the sellers, which means more enticing offers for coveted neighborhood and community centers. More important, he says, the fund’s equity portions allow institutions to get attractive returns as compared to those from first-mortgage investments.

“The institutional investors are finding it difficult to meet their investment goals and yield requirements through senior mortgages alone,” said O’Brien.

NetFunding hopes to acquire at least 10 assets over the next 12 months, at a valuation of between $5 million and $15 million each, O’Brien says. At press time NetFunding was expecting to close on several anchored neighborhood centers in the Southeast by year-end, according to O’Brien.

The minimum maturity date for Fund One’s investments is 10 years, so it is especially good for institutional investors that want to hold properties for the long term, he says. That way, they get to lock up these investments over the period, collecting steady returns all the while.

“We look over the long haul, which allows us to be competitive,” said O’Brien. At the same time, he adds, the two insurance company Fund One investors are very patient.

Such sentiments point toward a continued revival of institutional investment in retail real estate.

“We think of it as the beginning of a long-term program,” said O’Brien, “and we think it is a powerful new weapon.”