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POWER CENTER REVIVAL

Investors take new interest in a flagging format

Power centers are big, have little small-shop space to stabilize their rental income and have been hit by a string of store bankruptcies and closures in the past few years. So why are investors eyeing them more closely than ever before?

“We’re starting to hear a greater increase in demand for power centers,” said James Koury, senior vice president at Spaulding & Slye Colliers, a Boston-based real estate brokerage.

Buyers have come to see well-positioned power centers as valuable assets. A year ago, these centers were trading at an average cap rate of 10 or 11 percent; nowadays, investors are paying higher prices for the better power centers, driving cap rates down to between 9.5 percent and 10.5 percent, Koury said. At press time, for instance, Spaulding & Slye Colliers was negotiating the sale of a New England power center with a trading cap rate of 9.65 — about 50 basis points lower than it would have traded at a year ago, he said.

Even lenders are beginning to look more kindly upon power centers, at least the outstanding ones, said Allan O’Brien, managing director at NetFunding.com, a Web-based interchange for commercial real estate finance. One lender recently quoted a loan at 200 basis points over the 10-year U.S. Treasury bond with an aggressive 80 percent loan-to-value (LTV) ratio. More significant than the loan’s 7.10 percent rate was its LTV, noted O’Brien. A year ago lenders would not have considered financing power centers with LTVs of more than 75 percent.

“Power centers were like the third rail of retail,” said Koury.

The story is different this year, thanks largely to the convergence of real estate industry market forces. First, investors want to continue investing in retail properties, Koury noted, but after ravenously snatching up quality grocery-anchored neighborhood and community centers, they are finding that precious few are left for sale.

Meanwhile, the office real estate market is cooling off. Though office rents are generally increasing as rents roll over, vacancies have been on the rise for about 18 months now, said Gary Boston, an office REIT analyst at Salomon Smith Barney. Some office markets are seeing rental incomes remain flat or decrease as leases are rolled over.

The Pacific Northwest is one U.S. region where demand is outstripping supply for power centers and for retail property in general.

“Anything [except office space] that is listed trades quickly,” noted Jack Estes, a regional manager at the Portland, Ore., office of real estate investment brokerage Marcus & Millichap.

The reason for this, he explains, is that the real estate industry in the Portland market operates under restrictions for the amount of land that can be developed commercially (see story). In 2002 some 875,000 square feet of retail is to be developed, less than last year.

Putting a further squeeze on the supply of power centers for sale are low interest rates, said Steve Ruggiero, president of First American Properties, a Poulsbo, Wash.-based retail property brokerage.

“Given the last 12 to 18 months of low interest rates, if you were developing or holding a property, it did not make sense to put it on the marketplace,” said Ruggiero. Instead, developers and property owners refinanced the loans on their properties, saving on debt financing.

That pent-up supply makes for some attractive transactions for sellers willing to let go of their properties. In February 2002, for instance, Pan Pacific Retail Properties, Vista, Calif., bought the 358,000-square-foot Sunset Esplanade, a power center in the Portland suburb of Hillsboro for just under $29.5 million. Though the company bought the center at slightly less than its asking price, the cap rate was 9.5 percent, Estes said.

There are some caveats. Not just any power center will do, sources say. The most likely targets for buyers are properties that feature successful discounters, such as Target and Kohl’s, and such retailers as Best Buy. Further, investors are not rushing to stock up on power center properties — they are just taking them more seriously.

GILIBERTO-LEVY MONITOR

Source: S. Michael Giliberto & Co. and John B. Levy & Co.

The Giliberto-Levy Monitor analyzes the performance of commercial mortgage investments held by the life insurance industry. The index is based on retail returns beginning at a level of 100 in December 1977. For 1Q 2002 (preliminary), the retail sector generated income of 1.85 percent, the best performance of all property sectors.

CREDIT LOSSES ON COMMERCIAL MORTGAGES (March 31, 2001-March 31, 2002)

Source: S. Michael Giliberto & Co. and John B. Levy & Co.

For the 12 months ended March 31, 2002, retail commercial mortgages sustained book-value credit losses of 24 basis points, higher than any other group

 

REIT MARKET CAPITALIZATION

Source: National Association of Real Estate Investment Trusts

As of May 1, 2002, the REIT industry registered a total market capitalization of $170 billion. The retail sector, with a total market cap of $36.9 billion, accounted for 21.65% of the industry total.

 

SECURITIES OFFERINGS BY REITS

Source: National Association of Real Estate Investment Trusts

REITs issued slightly more than $5 billion in securities for 1Q 2002 and a projected $6 billion in debt and equity for 2Q 2002. The 2Q number represents securities issuance for the month of April, when the most recent data was available.

 

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