UNUSUAL PAIRINGS
Apr 1, 2008 12:00 PM, Elaine Misonzhnik
Just because it's difficult to borrow money doesn't mean development plans need to come to a halt. In fact, the credit crunch — and the resultant drop in available construction financing — has given rise to some new partnerships. Retail REITs, with mountains of cash at the ready, are increasingly joining forces with small local and regional developers to enable projects that otherwise might not move forward.
Last month Santa Monica, Calif.-based Macerich Co. announced a joint venture agreement with DMB Associates, Inc., a Scottsdale, Ariz.-based diversified real estate investment and development company, to build One Scottsdale, a 120-acre mixed-use project in Scottsdale. Macerich will head up the retail component of the project, while DMB will oversee the residential, office and hospitality portions.
Also, Chattanooga, Tenn.-based CBL & Associates Properties, Inc. broke ground on two large-scale shopping centers in Florida — Pavilion at Port Orange in Port Orange boasting 550,000 square feet and the 750,000-square-foot Hammock Landing in West Melbourne. Both open-air centers result from a partnership with the Benchmark Group, an Amherst, N.Y.-based privately held real estate developer.
REITs have been forming joint ventures for decades. What makes this recent round notable is how the ventures differ from previous marriages. In recent years, REITs primarily have joined with institutional investors, such as pension funds, largely for the purpose of making big acquisitions.
The latest round of joint ventures is different. The unions are developing projects, not acquiring them. And the partnerships are coming at a time when many firms are scaling back projects, delaying construction or scrapping plans to build altogether.
The new round of joint ventures also signal that there are still areas across the country that can sustain new construction, despite the economic slowdown. Moreover, they solve the financing conundrum many firms face by teaming developers that have assembled sites, but have no funding, with REITs that have deep pockets and see an opportunity to grow portfolios without shouldering all the development risk. The joint ventures dilute the potential hazards for both parties, which is beneficial given that projected development yields have dropped from the high teens at the peak of the cycle to the mid-single-digits in recent months.
On mixed-use projects like One Scottsdale, a developer, such as Macerich, can focus on the retail component while its partner takes on the more challenging residential piece, notes Rich Moore, an analyst with RBC Capital Markets. “They are adding a high-end housing component because it's right for the asset, but they don't have the responsibility to develop it themselves.”
“We have the ability to get them on the phone and get a quick honest answer,” says Geoff Smith, vice president of development with CBL. “We also have a relatively large and experienced leasing staff and can put a great deal of human resources into the project; smaller developers would have to outsource.”
As a result, there could be more joint venture development deals in the short term. According to Smith, CBL is already scouting several sites with the Benchmark Group and Moore has heard that Ramco-Gershenson is close to announcing its own joint venture project.
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