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Shopping Centers Today -> February 2002
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ECONOMY DOWN, JOINT VENTURES ON THE RISE
Neighborhood centers are better investments than bonds in uncertain times, some say
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| Norman M. Kranzdorf |
Market players are predicting an uptick in joint ventures between institutional investors and retail REITs with the purpose of investing in shopping centers.
The trend would be driven by the general sluggishness of the bond and equity markets. It used to be that whenever stocks sank into a morass or got too volatile, institutional investors could run to the safety of bond markets to try to earn decent returns. But lately, rewards have been meager there, too. To make matters worse, in November the National Bureau of Economic Research made it official: The U.S. economy slid into recession last March.
By contrast, the equity interests that come with real estate properties look good, and REITs are even more attractive as ownership partners. Investors have great confidence in well-managed and creditworthy companies, say market players.
“Most money managers are looking to allocate the same portion [of their investment programs] or more towards real estate,” said James Easler, a managing director at New York City-based TIAA-CREF and group leader of its mortgage and real estate division.
As a traditional means for retail developers to do business, joint ventures are nothing new. But market participants expect that so long as the U.S. economy remains in the doldrums, retail property developers and investors will be resorting to them more often. Most transactions will involve companies specializing in the industry’s favorite defensive asset: neighborhood centers.
Kramont Realty Trust, a Plymouth Meeting, Pa.-based developer of neighborhood shopping centers, is considering several of these arrangements, said Norman M. Kranzdorf, chairman of the company.
For one thing, he noted that yields on U.S. Treasuries and the London Interbank Offered Rate are drooping at about 5 percent and 4 percent, respectively, which makes for some underwhelming earnings.
“With those kinds of interest rates, you have to look for higher returns somewhere [else],” said Kranzdorf.
The equity markets are giving investors plenty of impetus to look elsewhere, simply because REITs are not issuing a lot of new stock, noted John Grisham, a spokesman for Acadia Realty Trust, a Long Island, N.Y., developer of mostly neighborhood and community shopping centers. Partnering with the companies opens up an alternate source of capital that allows investors to make additional investments in REITs.
In October Acadia Realty formed a joint venture with four of its key institutional investors that will acquire up to $300 million worth of retail real estate assets. Grisham noted that the venture represents more such deals to come.
“There still seems to be some reluctance to invest in REITs by buying stock,” said Craig Schmidt, a REIT analyst at New York City-based Merrill Lynch & Co. Investors are “more comfortable with a direct relationship, which lends itself to the joint venture.”
“Logically, it gives the institution a chance to spread its risk among different properties,” said Kranzdorf. “There is less risk of bankruptcies.”
Supermarket-anchored properties with multiple tenants are stable properties, with long-term leases that have rent increases built in, notes James Koury, a senior vice president at Boston-based Spaulding & Slye Colliers, a real estate services firm. Compared with declining rents in the office property sector, and in light of the recent recession diagnosis, that kind of stability is just what investors need.
But not all retail property owners anticipate more joint ventures. This is especially true of regional mall developers. From their perspective, joint venture activity is about the same as it has always been.
“I cannot say whether there is any new surge of interest,” said Bernard Freibaum, CFO of General Growth Properties, Chicago. “A few transactions out there seem to be in the limelight.”
Aside from specific acquisition opportunities, regional mall REITs do not seem to be actively pursuing joint venture capital.
“Many of the mall REITs have not acquired anything, so its unlikely there would be a need for joint venture capital from pension funds,” said Steven R. Brown, senior vice president and portfolio manager at Cohen & Steers, a mutual fund in New York City that focuses exclusively on REITs.
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