Biding their time
Sep 1, 2008 12:00 PM, By Elaine Misonzhnik
It's becoming apparent that for retail real estate investors, 2008 has been the year to wait and see.
But the issue isn't that investors don't have money to spend. It's quite the opposite in fact. In the first half of this year, private equity firms, pension funds, insurance companies and public and private REITs amassed tens of billions of dollars for investment in commercial real estate in the United States. But with their laser-like focus on top-quality assets in the best locations and high long-term yields, they haven't had the opportunity to deploy much of that capital, industry sources say. And they might not begin buying in earnest until midyear 2009.
Take Greenwich, Conn.-based shopping center REIT Urstadt Biddle Properties Inc. It's not one of the largest players in the REIT universe, commanding a portfolio of just 3.7 million square feet. But it's always been a solid performer. For the second quarter of 2008, ended April 30, Urstadt Biddle reported FFO per common share of $0.28 and FFO per class-A common share of $0.30. Its core portfolio occupancy stood at 92.4 percent.
The company has plenty of cash with which to grow. Urstadt Biddle has set aside between $75 million and $100 million in equity for new purchases this year (capital that can be extended through prudent use of debt). We're definitely aggressively out there pounding the pavement, says Joanna Rotonde, acquisitions manager with the firm. However, the firm has spent only a quarter of that money with two closed deals and a third under contract, according to James Aries, senior vice president and director of acquisitions for the firm.
What's it waiting for? According to president and COO Willing Biddle, the firm has been actively searching for new assets, but the issue is that cap rates still haven't risen to where they need to be for acquisitions to make sense. If cap rates continue to rise and buyers are willing to adjust their expectations and we are able to sell stock at appropriate prices, then we would allocate more capital to shopping center investments, Biddle says. Biddle adds, he expects cap rates to rise another 50 to 75 basis points across the board, with higher increases for class-B properties than class-A properties.
Similar calculations are being made in boardrooms across the country. Players have purchasing power, but they feel the conditions have not deteriorated enough to justify major buying sprees. In the first half of this year, U.S.-based opportunity and real estate funds raised $33 billion, according to Private Equity Intelligence Ltd., a London-based firm that tracks real estate private equity funds. Furthermore, opportunistic small cap investors held $54 billion for investment in the first quarter, with between $6 billion and $8 billion set aside for retail, estimates Stephannie Mower, executive vice president and managing director of national investment services with PM Realty Group, a Houston-based real estate services firm. However, the sales volume on retail property during the first six months of the year amounted to just $12.2 billion, according to New York City-based Real Capital Analytics. That figure represented a 62 percent drop from the first half of 2007. The biggest sales commitment to date has been Centro Properties Group's agreement to sell 29 centers totaling 5.1 million square feet from its Centro America Fund to an unnamed private real estate advisor for $714 million. But the deal, which is scheduled to close in early fall, is somewhat of an anomaly, since Centro faces enormous pressure to pay billions of dollars in debt it took on to fund large acquisition sprees in the heady days of 2007. Centro reported that it incurred a 10 percent discount to the portfolio's previous book value in the transaction.
Companies actively searching for buying opportunities include Credit Suisse, Goldman Sachs, Forsyth Partners, MSD Capital, Behringer Harvard and Washington RE Investment Fund, among many others, according to Mower. Even some public REITs Kimco Realty Corp., Urstadt Biddle, Cedar Shopping Centers, Acadia Realty Trust and Inland Real Estate Group of Cos., among others remain on the lookout for acquisition opportunities.
Right now, what all buyers have in common is they want to deploy their money more carefully than in years past, since lack of available credit means they have to put more of their own cash into each transaction, says Gerard V. Mason, executive managing director in the New York City office of Savills, a global real estate services provider.
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