International investors showing big appetite for U.S. assets
International investors jumping into the U.S. retail real estate market fit into two categories: the big names that go after High Street opportunities in select cities and acquire pieces of so-called fortress malls; and those that take the riskier, high-cap shopping centers, often in secondary or tertiary locations. High Street or urban shopping locations comprise the most coveted item right now, observes Mark Gilbert, executive vice president of Retail Investments in the Cushman & Wakefield Capital Markets Group, Miami. The problem is that these are select locations, limited to the likes of a few streets in Boston, Chicago’s Michigan Avenue, Rodeo Drive in Los Angeles, Miami’s South Beach and New York City. The buyers have been predominantly institutional, plus a select group of REITs and private individuals, says Gilbert.
Cap rates are quite low — in the below-3 percent range in New York City, 4 percent in South Beach and 3 to 4 percent on Rodeo Drive — so investors expect a big upside in terms of future rents. As for those U.S. fortress ‘A’ malls, almost all the sales within the past 18 months have been partial-interest deals, says Gilbert. “It’s either been a marquee operator selling a partial interest to an insurance company or large adviser, or the reverse, with some operators buying out their partners,” said Gilbert. “There have been very few 100 percent sales in the fortress-mall space.”
Underneath the ‘A’ properties is a whole country full of shopping centers of one sort or another, and these have been the targets of a new group of international investors. “We are seeing a lot of Israeli investors, a bunch of new players we haven’t seen in the past, going after properties in secondary and tertiary markets,” said Margaret Caldwell, a managing director with the JLL Capital Markets Group. “We have also seen a few Russian investors.” This wave of investors has been targeting higher returns, Caldwell says. “They are buying into 10 percent–plus deals. And a lot of it is all-cash. These investors are willing to gamble.”
Canadian REITs have been among the busiest of these investors. Recent acquisitions for Toronto-based North American Development Group, by way of example, include The Prado shopping center, in Atlanta; Seminole Mall, in Tampa, Fla.; and Tarrant Parkway Commons, in Keller, Texas. On the other side of the table are the Asian investors, which have been less active than expected. “There’s been just a trickle of Asian investors,” said Caldwell. “They are not moving as aggressively as we would like them to be in the bidding process. They like to buy trophy properties, but trophy malls don’t change hands very often.”
The volume of international deals in the U.S. last year was “as good as the glory years of 2005 and 2006,” said Gilbert. “2013 should be as good, if not better.”