 |
 |
 |
 |
 |
 |
 |
 |
Shopping Centers Today -> July 2002
 PRINT THIS STORY: |
  CHANGE TEXT SIZE: |
PENSION FUNDS GETTING PICKIER ABOUT RETAIL
By James McCown
 |
| Equitable’s first mall, Shoppers World, as it looked in the ’50s. |
The past decade’s sea change in the world of retail property ownership by REITs has taken the spotlight off the deep-pocketed owners that came before: U.S. pension funds. Yet, not only are these low-key institutions still very active owners of property, they’re neck and neck with REITs as the largest owners of equity real estate in the United States.
But pension funds have a range of property types to choose from, and retail’s performance of late has forced them to be more selective. Returns have lagged those of other property types over the past half decade, according to indexes kept by the National Council of Real Estate Investment Fiduciaries (NCREIF).
Pension funds saw a 9.2 percent investment return on retail for the five-year period ended in May, according to NCREIF. That compares with 11.19 percent for hotels, 12.13 percent for apartments, 13.06 percent for industrial and 13.53 percent for offices.
“The mall business is a mature one,” observed Douglas Healy, a principal and managing partner at Atlanta-based Lend Lease Real Estate Investments. “Regional malls are big-money investments, and the market is shaking out.”
The late 1970s and early 1980s were the golden era for institutional shopping center investors, who threw their chips on a booming retail industry. These investments helped pension funds’ portfolios withstand the meltdown in the office market from overbuilding in the late 1980s.
As the 1990s dawned, the real estate industry’s mantra was “stay alive ’til ’95.” And indeed, by mid-decade the overall property markets had recovered. Pension funds heavily invested in retail, however, were in for a shock. At the end of 1995, that promised year of recovery, malls took big hits in valuation as the industry grappled with its own overbuilding problems and shifts in consumer habits and spending. Pension fund managers are now wary of retail, particularly regional malls.
Healy points to the sharp distinction that investors are making between “fortress” malls, such as King of Prussia, outside Philadelphia, and the “other malls,” those vulnerable to having their anchors or key stores defect to a competing center.
The $274 billion Teachers Insurance and Annuity Association College Retirement Equities Fund (TIAA-CREF) has the financial muscle to do direct retail property investing. The company was a partner in a large regional mall package acquisition in August 1999 when a $1.7 billion joint venture among TIAA, Simon Property Group, New York State Teachers Retirement System and J.P. Morgan acquired 14 regional malls throughout New England.
“Our bias is to focus on dominant regional malls doing $300-plus per square foot,” said Jim Easler, managing director of the mortgage and real estate division at TIAA-CREF. The overall property type’s five-year NCREIF performance number lags now, he said, but with the sharp downturn in the office market, “retail looks pretty good.”
Investors are also keen on bargains. There are many “opportunity funds,” Healy said, seeking to buy centers at deep discounts.
“There are some of the nonfortress malls that are survivable,” he said. Yet Healy also cautions against being “the second mall in a two-mall town,” citing Columbus, Ga., as an example. There Peachtree Mall, owned by the mammoth $170 billion California Public Employees’ Retirement System (CalPERS), with a $2.1 billion retail portfolio, lured Dillard’s out of the crosstown Columbus Square Mall. Columbus Square’s remaining anchor, Sears, also defected to a nearby power center, and the city tore down what was left.
Emerging Trends in Real Estate 2002, a research report by Lend Lease and PricewaterhouseCoopers, says that such malls as Columbus Square “litter the landscape.” Further, the report says, the stock market downturn left some funds with a proportion of real estate they find uncomfortably high.
REIT investments are an increasingly popular option for plans that are not big enough to assemble a critical mass of centers on their own.
“If you’ve only got $50 million to invest, you’re better off with a REIT,” said Ron Pastore, principal of AEW Capital Management in Boston, a real estate investment advising firm to institutional investors. But some large funds are finding that even sizable investments in REITs are not getting them any respect.
Many funds have trouble assembling the critical mass of retail investments necessary to provide diversification. Steven Roulac, CEO of the Roulac Group, a San Francisco pension consulting firm, counsels his clients to lessen risk with broad diversification both by location and property type. But that is easier said than done.
“The vast majority of pension funds can’t do nine-figure acquisitions,” he said, referring to the price tag of even a relatively limited number of geographically diverse regional mall acquisitions.
At least one retail developer, Santa Monica, Calif.-based Caruso Affiliated Holdings, is teaming up with Invesco Realty Advisors, a Dallas-based pension fund advisory firm, to form an investment fund targeting community centers in mature and growing markets. The venture has raised $100 million, mostly from U.S. pension funds, which it plans to leverage up to $300 million to acquire properties. But partnerships between pension funds and shopping mall owners and developers can be more problematic. Part of the problem is cultural, AEW’s Pastore notes. “Some of the mall REITs think pension funds are big, dumb money.” Pension funds, for their part, naively believe their partners will do everything in their mutual interest, he adds. “But once you get married, everything changes.”
 | Current Issue November 2008 |