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Shopping Centers Today -> October 2003
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WILL TIAA DEAL BUOY CANADA?
Fund, partners invest $356M
BY IAN RITTER
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TIAA-CREF’s decision to invest in Canada’s malls is a welcome vote of confidence for a struggling sector, industry observers say.
In August the $283 billion, New York City-based pension fund agreed to buy $356.4 million worth of Canadian shopping centers in partnership with RioCan, Canada’s largest real estate investment trust, and the Ontario Municipal Employees Retirement System, or OMERS. More investment will follow, fund officials say.
The move represents a boost to a market that has been conspicuously difficult for mall retail in recent years. According to ICSC research, for the 12 months ended in June, Canadian mall sales per square foot dropped 1.6 percent from the comparable period a year earlier. The number of new center openings fell from 66 in 2000 to 37 last year. Further, centers there have lost some major anchors. Eaton’s and Simpsons closed during the 1990s, as Canada went into recession.
Given TIAA-CREF’s profound impact on the U.S. shopping center industry — it has a $6 billion retail mortgage and equity portfolio — its presence up north could have a similarly positive influence on Canadian retail real estate, says Seymore Obront, chairman of Oberfeld Snowcap, a Toronto-based retail consulting firm that boasts more than 280 tenant clients.
“I think it’s quite wonderful,” he said. “It brings a new ballplayer into the field, and it creates competition.”
TIAA-CREF’s involvement with U.S. shopping centers goes back to 1948, when it financed the expansion of the country’s first shopping center, Country Club Plaza, Kansas City, Mo. Since then it has done deals with almost every major U.S. developer and played an influential role in such pioneering projects as Boston’s Fanueil Hall and Mall of America. Indeed, the fund was a majority founding partner in Mall of America, of which it owned 55 percent. (It later sold 22.5 percent of its shares to co-partner Simon Property Group, making Simon a majority owner.) TIAA-CREF now owns 11.5 million square feet of retail real estate in the United States and Western Europe.
The deal with OMERS and RioCan is the first of its kind for TIAA-CREF, which has $44 billion in real estate holdings in all sectors. (Kathleen M. Nelson, a TIAA-CREF managing director, is ICSC’s chairman.) Though the fund has never directly owned centers in Canada before, it has financed the development of office and retail space there.
Canada offers TIAA-CREF potential for growth beyond the partnership, says Mark Wood, a managing director at the fund.
“It’s an opportunity we don’t think is fully exploited,” he said. “We’re interested in growing our portfolio up there not only with RioCan, but generally in Canada.”
Obront speculates that TIAA-CREF could come to own four times the number of malls involved in the venture with OMERS and RioCan.
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| A one-time Teachers’ pet: Country Club Plaza, Kansas City, Mo. |
“It’s tougher to find business in the States,” he said. “They found a niche here where they can put a little seed money and watch it grow. It’s going to lead to other business besides that. It will give [TIAA-CREF] a good taste of the Canadian market.”
The deal involves the purchase and repositioning of about 25 underperforming Canadian centers, mainly malls, totaling some 7 million square feet. These will be converted into power centers with big-box tenants.
The entry into Canada makes sense, says Steven Roulac, CEO of Roulac Group, a San Rafael, Calif., pension consulting firm.
“The investors are better served having broader exposure — international as opposed to just domestic, he explained.”
Canada’s proximity to the United States and the similarities between the two country’s legal systems are additional considerations, says Roulac.
Gail Mifsud, a real estate analyst in the Toronto office of financial services firm Raymond James, calls the acquisition of underperforming centers a good strategy, given the fierce competition for high-quality Canadian centers.
“We’ve seen cap rates continue to decline, and it’s getting very expensive and competitive to buy assets,” Mifsud said. “The demand of real estate has been so great because you’ve had a flooding of people out of the equity market to income-yielding investments. Everybody is looking at where to invest, and the Canadian market is attractive to U.S. buyers.”
The average mall in the Toronto metropolitan area sells at an 8.38 percent capitalization rate, Mifsud says. (Cap rates measure the annual return on a property in relation to its sale price.)
Teaming with RioCan is smart too, she adds, because that company knows the market well.
“[TIAA-CREF is] in a better position to buy real estate if they team up with someone who knows what they’re doing,” she said. “This speaks to RioCan’s entrepreneurial management.”
RioCan owns 164 centers across Canada, mostly in Ontario, totaling 32 million square feet. The company is also involved in shopping center investments with another large U.S. landlord, New Hyde Park, N.Y.-based Kimco Realty Corp., the largest community center owner in the United States. That partnership has led to the purchase of 29 centers since the fall of 2001, and the two continue to add to their portfolio.
RioCan president and CEO Edward Sonshine said the venture with TIAA-CREF and OMERS will purchase enclosed centers measuring between 250,000 and 400,000 square feet. They will be retenanted with supermarkets and Winners (the Canadian apparel chain owned by U.S. retailer TJX Cos.) and other big-box stores averaging 70,000 square feet. RioCan will handle leasing of the new acquisitions.
The venture is a new business direction for RioCan, which has focused mainly on low-risk retail properties, but the company needs this step for growth, Sonshine says.
“Good-quality real estate is very attractive to a lot of people today,” Sonshine said. “We’re starting to look at other add-on business to maintain growth.”
But the venture will confine itself to Canada and isn’t likely to make investments in U.S. shopping centers.
“Our plans are to continue building on the dominance we have in Canada and stay home,” Sonshine said, adding that the U.S. market already has enough landlords.
OMERS owns 107 retail, industrial, office and residential properties in Canada, including stakes in 20 malls that total 13 million square feet.
For its part, the partnership with RioCan “is an excellent vehicle for fulfilling our mandate to fund pensions for our members,” said OMERS President and CEO Dale E. Richmond in a press release.
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