More Investors Backing Malls, High-End Shopping Centers

As Retail Finally Enters Recovery, More Investors Backing Malls, High-End Shopping Centers

Quality Properties in Densely Urban Areas or Part of Mixed-Use Residential Projects Are Highly Sought as U.S. Retail Moves Deeper Into Recovery
By Randyl Drummer

A variety of factors, including rising rental rates, stronger tenant sales and a dwindling supply of quality well-located shopping center space, are causing U.S. and offshore investors to move back into the retail real estate sector, the last of the four major commercial property types to enter full recovery.

The recent acquisition by GIC, Singapore’s sovereign wealth fund, of a 40% joint-venture interest in four properties owned by regional mall owner The Macerich Co. is one recent example. The Santa Monica-based regional mall operator announced it will ultimately sell interests in a total of eight properties by January 2016 to raise $2.3 billion cash.

The first phase of the venture closed a few days ago, with GIC shelling out $1.5 billion for an interest in the 2 million-square foot Lakewood Center in Lakewood, CA, and the 1.1 million-square-foot Los Cerritos Center in Cerritos, CA, both in Los Angeles County; the 1.1 million-square-foot South Plains Mall in Lubbock, TX, and Washington Square, a 1.4 million-square-foot center in Portland.

Macerich expects to complete the other two ventures early next year, including a second transaction with GIC on Arrowhead Towne Center in Glendale, AZ., and forming a joint venture with Chicago-based Heitman on Deptford Mall in Deptford, NJ; FlatIron Crossing in Broomfield, CO and Twenty Ninth Street Center in Boulder, CO.

Just as U.S. retailers appear to be once again entering expansion mode, large mall operators are enjoying higher rents as leases expire in low-vacancy centers, giving landlords the leverage to negotiate rent bumps at renewal or reletting. Macerich reported leasing spreads of 17.5% at midyear. Taubman reported a 29% average increase at rent rollover, while Simon and General Growth Properties logged spreads of 18.4% and 10.4%, respectively, according to CoStar Portfolio Strategy.

Seeing those kinds of income streams, investors have flocked back into retail — focusing especially on higher quality malls. Based on preliminary third-quarter CoStar data, 2015 will likely end as a record year for retail investment volume, with strong gains in pricing over the course of 2015, according to the CoStar Commercial Repeat Sale Index (CCRSI).

"Malls held up fairly well during the recession," said CoStar Senior Real Estate Economist Ryan McCullough. "They are the darlings among investors today. Mall performance has hung tough, despite the talk about dead malls. Some are dead and dying, but malls as a sector are thriving."

Meanwhile, several mall sales ranked among the top investment sales transaction of the third quarter.

Topping that list is the sale of the 75,000-square-foot Lincoln Road Mall in Miami Beach by Fryd Properties and Michael Comras to Ponte Gadea USA, Inc. for $370 million — a whopping $4,964 per square foot. The asset traded at a rock-bottom 3.38% pro-forma cap rate — not uncommon among high-end urban centers today. Sub-4% cap rates are common in dense urban retail corridor of Los Angeles, San Francisco and New York City.

In Flushing, NY, The Shops at Skyview Center, a 690,000-square-foot center, was sold by ONEX Corp. to The Blackstone Group, LP for $382.4 million, or $554-per-square-foot. The trade area is very dense, with 108,000 potential shoppers within a mile and 813,000 within three miles.

In the ultra-tight San Francisco Bay Area, Breevast US, Inc. sold the 550,000-square-foot Shops at Tanforan in San Bruno, CA, to QIC US Management for $174.4 million, or $317 per square foot, a clear bet on rising San Francisco market rent growth.

A joint venture of Greenberg Gibbons Commercial Corp., Somera Capital & AEW Capital Management sold another high-end center, the 383,541-square-foot Towne Center at Laurel in Laurel, MD, for $132.8 million, or $346 per square foot, to UBS Realty Investors in anothersub-6% cap rate deal.

"Most of these sales reflect the attractiveness of mixed-use, high-end urban properties," McCullough said

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