Biding their time
Sep 1, 2008 12:00 PM, By Elaine Misonzhnik
Class-A centers have been slow to come to the market, says Richard Walter, president of Faris Lee Investments, an Irvine, Calif.-based national retail brokerage firm. The owners who are putting properties up for sale right now are doing so primarily because they need to raise cash and not because they are in distress, so they are still holding on to their best centers, he notes. That has been the experience for Stonemar Properties, a New York City-based real estate investment firm, which planned to buy centers worth $150 billion this year, with a focus on class-A and class-B properties in secondary and tertiary markets. So far, Stonemar only spent half of that money because sellers have not been putting high-quality centers up for sale, says Jonathan Gould, CEO of Stonemar.
“We are going after first-quality properties, but it's just there is not that much that we see that we are even interested in pursuing right now,” Gould notes. DLC Management Corp. serves as another example of the frustration cash-flush investors face in the current environment. At the beginning of the year, DLC earmarked $250 million in equity for new acquisitions, with a focus that tends to be less narrow than that of many other opportunistic buyers. The firm goes after value-add assets in secondary markets as long as they promise to bring in high returns. As of mid-August, however, DLC had only closed on one transaction, a 133,000-square-foot Bigg's-anchored shopping center in Cincinnati that took just $10 million in equity to complete. “There is still a wide gap between our underwriting and sellers' expectations,” says Taub. “This year we would expect to see [fewer] deals to look at, but we have actually seen an increase. That said, we've only closed on one deal.”
There is general agreement in the market that cap rates do need to rise further to help move buyers from the sidelines and back onto the playing field. In the past 12 months, cap rates on grocery-anchored shopping centers have moved 40 basis points, to approximately 7 percent, according to Bach. But if the credit crisis does not abate, they will likely rise another 50 basis points to 100 basis points. That means until sellers are willing to accept cap rates of up to 8 percent on class-A assets, experienced real estate players will continue to wait.
According to Lynn, it's because “nobody wants to be a sucker” and start buying before the market has hit bottom. And the consensus among sales brokers is that we are not there.
So long value-add?
Besides appropriate valuation, opportunistic buyers want to avoid taking on properties that need any work at all. The so-called “value-add” play has almost vanished. With a few exceptions, including DLC and Urstadt Biddle, buyers want to focus on the best quality centers in core markets, says French.
For example, although Inland Real Estate Group of Cos., which year-to-date acquired shopping centers worth $576 million, is willing to look in densely populated secondary markets, it will not consider purchasing any asset that needs additional work. The firm wants top-notch properties, with strong tenants, preferably the kinds of centers consumers visit more than once a week.
“I am not looking for the centers where I have to completely redevelop them, put a new face on them, put in a new parking lot,” says Joe Cosenza, a vice chairman with the Inland Real Estate Group, an Oak Brook, Ill.-based REIT and president with Inland Real Estate Acquisitions, Inc. “I don't have time for that right now.”
If a property features a vacancy rate of more than 30 percent, investors don't want to risk putting a lot of equity into it, adds Walter. They want quality real estate.
Distressed debt signals
One factor every buyer is monitoring is the situation in debt markets. The idea is that some owners may have expiring debt that needs to be refinanced and with debt markets the way they are, borrowers are looking at much more expensive debt. As of the second quarter, however, commercial mortgage delinquencies totaled just 2.1 percent according to Foresight Analytics, an Oakland, Calif.-based provider of real estate market consulting services. (In contrast, the delinquency rate on residential mortgages was 6.4 percent through the end of the second quarter, according to the Mortgage Bankers Association.) As a result, few owners are being forced to sell.
Acceptable Use Policy blog comments powered by Disqus
