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SECOND FIDDLE NO MORE

Investors in hot pursuit of secondary-market malls

What could anyone say about secondary-market malls a year and a half ago? Their department store anchors were feeling competitive pressure from discount retailers, while other retail formats, such as lifestyle centers and downtown projects, were getting all the attention.

But market forces were setting the stage for what is today a healthy demand for ‘B’ malls. Analysts and mall companies alike say they are witnessing a surge in demand for these centers, thanks to low short-term interest rates, positive retail trends and consumers’ tendency to hunker down and stay closer to home after the terrorist attacks of last September.

“Investors have become more optimistic,” said Richard W. Latella, managing director of the retail industry group at Cushman & Wakefield, New York City.

Richard W. Latella

“Consumer spending did not take the same hit in the recent downturn [as in previous years]. They are not as afraid of retail, and so pricing has improved on these properties.”

Industry insiders generally define secondary malls as those in markets with less affluent populations of 250,000 to 1 million featuring such lower-brow anchors as J.C. Penney, Sears or even big-box discount stores.

Since early 2001 secondary properties have been catching the eyes of institutional investors and opportunity funds, sending cap rates down by about 50 basis points, said Jay Habermann, a REIT analyst at Credit Suisse First Boston, New York City. The rates are hovering at about 9.82.

“Retailers have gotten themselves into a good position,” Habermann said. “Bankruptcies and store closings are running below year-ago levels in 2001. Occupancy levels have held up, and there is renewed demand for the product.”

REITs are buying more and creating competition for the properties, said Mark E. Pasquerilla, chairman, president and CEO of Crown American Realty Trust, Johnstown, Pa., which owns enclosed malls primarily in secondary markets in the Northeast. In June Pasquerilla outlined plans to aggressively buy single-asset malls. Companies like Crown American have held up well since Sept. 11, 2001, he said, because they cater to shoppers who are skittish about venturing into big cities and exposing themselves to terrorism.

Mark E. Pasquerilla

More important, corporate-level buying has catapulted the properties to their present popularity, said Pasquerilla.

A company such as General Growth, Properties, Chicago, which in July closed on its $1.1 billion purchase of JP Realty, needs massive amounts of acquisitions to boost its earnings per share, he noted, and “one little mall somewhere will not do it for them.”

Officials at General Growth, which began in Des Moines, Iowa, and has specialized in secondary-market mall development, say the company was doing what it has always done. “General Growth has liked those malls forever,” said General Growth CFO Bernard Freibaum. “We’ve always felt that the opportunity [to improve a mall] gives you the reason to raise the capital.”

The trend’s only downside is that though the market is expected to maintain its buying momentum, cap rates may already be stabilizing, Latella said, and consumers might become more tentative about spending.

 

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