Quality Counts
Jul 1, 2007 12:00 PM, By Jennifer Popovec
Pricing in upside
Richard Latella, senior managing director and managing director of Los Angeles-based Cushman & Wakefield Inc., says the cap rate spread for different levels of quality is most obvious in the regional mall sector. He estimates that fortress malls would trade at a 4.75 percent cap rate (but none have traded in a while). Cap rates for class-B malls range from 6.25 percent to 7.25 percent, while cap rates for class-C malls range from 8.5 percent to 11 percent.
Latella has also noticed that cap rates for mall properties have softened. “I'd say they're up 25 to 50 basis points compared to 12 months ago,” he says, adding that they could inch up another 25 to 50 basis points over the next six months.
Regional malls, particularly fortress malls, continue to be one of the most sought after property types within retail. However, the small number of assets and the limited pool of buyers means that transaction volume is hardly robust. In 2006, for example, only $5.4 billion worth of malls traded hands, down 37 percent from 2005, according to Real Capital Analytics. On average, malls sold for $135 per square foot with a cap rate of 7.08 percent.
Mall transaction volume will end up much higher this year given the number of lower class portfolios that have either traded or are on the market. In May, Simon Property Group and Farallon Capital Management LLC acquired Mills Corp. for $1.6 billion.
And, in May, Babcock & Brown, an Australia-based investment firm, agreed to acquire Gregory Greenfield & Associates Ltd., an Atlanta-based owner and operator of regional malls. The deal included the purchase of eight malls totaling about 6 million square feet and the management responsibilities for six other properties that Gregory Greenfield managed for third-party investors. The purchase price was undisclosed, but industry experts estimate the portfolio traded at a cap rate in the 6 percent range.
Many of the class-B and class-C deals with value-added components are trading at cap rates that already factor in any upside. “Sellers have become more sophisticated and have recognized that there are so many opportunistic buyers out there that they've started to incorporate the value-added component into the price,” notes Michael Dee, head of Grubb & Ellis Co.'s retail division.
Latella points to the Pyramid Cos.' mall portfolio, which he thinks might trade at a cap rate below 6 percent. Similarly, Reza Etedali, CEO of Reza Investment Group Inc., says he has received offers for value-added mall opportunities with cap rates ranging from 5 percent to 8 percent.
“It's really a case of beauty being in the eye of the beholder,” explains Larry Krasner, a managing director in Jones Lang LaSalle's Los Angeles office. “Some investors are pricing opportunistic deals based on a combination of sustainable going-in yield and the stabilized yield of the future.” Just recently, he sold a regional mall in a secondary market where offers varied by as much as 300 basis points.
Grocers regain confidence
Grocery-anchored properties are also hot. Recent news about Wal-Mart's lackluster sales growth and pullback in new construction has given investors renewed confidence in grocers. “Overall, most market dominant grocers have found a way to compete with Wal-Mart,” Latella says.
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