Shopping Centers Today -> October 2007
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WHAT WILL $10 MILLION BUY?

AN INFORMAL SURVEY REVEALS HOW MUCH RETAIL REAL ESTATE A FISTFUL OF DOLLARS CAN PURCHASE IN VARIOUS WORLD MARKETS

By Steve McLinden

Here’s the $10 million question: What types of retail properties could $10 million buy for an investor in each of six different markets around the globe? For the answer, we looked at one Midwestern and one coastal American market and four highly diverse international cities and came away with some surprising results — and in some cases a slender portfolio. (Apparently, a cool ten mil doesn’t go as far as it used to).

Armed with that $10 million in fictional cash and putting aside cap rates, yield bands and leverage for the moment, let’s take the tour. We’ll visit Columbus, Ohio, before crossing the big pond to Budapest, Hungary. Then it’s off to Shanghai, China, followed by the island of Java to visit Jakarta, Indonesia, before a return to the Americas to test the waters in Los Angeles and Mexico City. Passports, please — and keep those wallets at hand.

COLUMBUS

A GRAB BAG OF STORES AND NEIGHBORHOOD CENTERS FOR BUYERS SEEKING BARGAINS

Although Columbus is the Buckeye State’s largest city and its capital, it is still considered a ‘B’ market because it is No. 32 on a ranking of U.S. metro areas by size. And yet such upscale retail properties as Easton Town Center, known for its juxtaposition of influences and test stores, and the well-patronized Mall at Tuttle Crossing are anything but second-tier.

Not surprisingly, an investor flashing $10 million in cash can buy much more in Columbus than in the other U.S. city examined in this report. Sure, a Walgreens store in Los Angeles would command upwards of $1,000 a square foot. But in Columbus “we’d be looking at a price of $300 to $500 a square foot for the same asset,” said Bernard Haddigan, managing director of Marcus & Millichap Real Estate Investment Services. Typically, someone with $10 million in hand could buy a 75,000-square-foot neighborhood strip center in Columbus with mostly local tenants for about $12.50 per square foot, says Robert Click, senior managing director of the CB Richard Ellis Columbus office. Or that same buyer could get two to four stand-alone drugstore buildings for anywhere from about $2.5 million to $5 million. “But they’d get lower cap rates,” he said. “What you’re buying is the credit tenant.”

A $10 million stake could fetch an eclectic mix of properties. The 42,500-square-foot Big Lots Plaza, in Columbus, sold for $3.3 million in 2006 at about the same time a 1,600-square-foot Church’s Chicken building went for $406,000. Add to those the 7,100-square-foot Bob Sumerel Tire Co. building (it sold for $2.1 million) and the 17,800-square-foot Shoppes at Marysville ($5 million), which fronts a new Wal-Mart Supercenter, and the tab runs to about $10.8 million, according to Marcus & Millichap. “We continue to see speculation to the northwest of Columbus all the way to Marysville, plus there are several good redevelopment opportunities around,” said Click.

In the spring one California investor paid $1.6 million for a 20,000-square-foot building occupied by Family Dollar and the U.S. Postal Service while another bought the multitenant, 141,000-square-foot West Broad Plaza, near Westland Mall, for $8.4 million, according to Marcus & Millichap. Total tally: $10 million even.

BUDAPEST

U-SHAPED RETAIL PARKS AND STORE-RESIDENTIAL UNITS ARE BEST BUYS

Budapest, that East European city of 2 million dubbed the “Pearl of the Danube,” remains a jewel in the eyes of the retail investment community, with its wealth of new shopping centers and its fast-growing economy. The metro area already has about 6.7 million square feet (625,000 square meters) of retail on the ground, including 22 malls, and an additional 2.1 million square feet will be coming on line within three years, according to NAI Global.

For an investor with $10 million to plant, the best option may be one of the new centers called retail parks that are sprouting up just outside Budapest. These generally U-shaped parks measure about 107,640 square feet on average and typically contain four or five fashion stores, a shoe store and a children’s clothing store, as well as sporting goods, electronics and a few other kinds of retailers. But most do not include grocery stores, says Mark Klionsky, senior vice president of marketing at Princeton, N.J.-based NAI Global, because those are usually located near hypermarkets.

A quality “unit shop,” typically a three- or four-story, retail-residential unit on a busy street corner, could possibly be had for $10 million. “But the large majority of that trading activity is done by local investors off-market,” said Ferenc Furulyas, head of the capital markets group at Jones Lang LaSalle’s Budapest office.

By comparison, the development cost of a 355,000-square-foot, shopping-entertainment complex that opened near Budapest this year was approximately $27 million. “In most cases the developer himself is the investor too, without any intention to sell the project,” Klionsky said. These days Budapest retail properties and lease spaces are being snapped up quickly, particularly in the countryside, because recent infrastructural improvements there have spurred a population migration from Budapest. “For brands newly entering the market, it’s not easy to secure space in existing malls,” said Klionsky. “Most of the international brands have to wait until the opening of the new shopping malls.”

Starbucks, heretofore apprehensive about competing in Budapest’s indigenous café culture, will invest in the city after signing with AmRest, operator of Pizza Hut and KFC units in Central and Eastern Europe, to begin opening cafés in the city next year, according to Eston International, a Budapest-based commercial real estate services firm.

SHANGHAI

AVERAGE PRICE PER SQUARE METER: $10,000

Shanghai has long been hailed as “the Oriental Paris,” in part for the wealth of shopping areas known locally as Four Streets and Four Cities. These districts offer everything from everyday commodities to high-end designer goods. In addition to these streets, there are numerous modern shopping malls in Shanghai, including Plaza 66, part of the 66-floor office-retail tower of the same name in the Puxi District, and the recently completed Shanghai Bay Mall. Dozens of supermarket and hypermarket chains are doing brisk business locally, including Carrefour, Metro and RT-Mart.

The Shanghai metro area, home to about 19 million people, continues to be the target of intense real estate speculation by investors from around the globe. Thus, a retail investor seeking to plant $10 million in Shanghai may come up empty in many parts of town.

“With $10 million, there is not much you can buy, since the average price per square meter of prime retail space in the city center is $10,000,” said Lee Wee Liat, Jones Lang LaSalle’s Hong Kong-based head of research for Greater China. “So you can probably get a shop space of 1,000 square meters for that.”

At the Shanghai Bay Mall, in the Shanghai Pudong section, $10 million might get you about 1,100 square meters of space, says Klionsky. In established prime retail areas of Shanghai, there have been few for-sale properties for years now, he says. “If there were, the sales prices would probably be around $40,000 dollars per square meter.”

The numbers help explain the shortage: Year-over-year prime retail rental return in Shanghai last year was about 15.8 percent, according to Jones Lang LaSalle.

JAKARTA

BUY A PIECE OF AN IN-TOWN MALL, OR AN ENTIRE CENTER IN THE SUBURBS

Jakarta, Indonesia’s capital and largest city, is home to nearly 9 million but is part of a much larger megalopolis known as Jakarta-Bandung (population 24 million). Those numbers alone would seem to translate to abundant retail consumption and property investment. Most owner-occupiers of prime retail properties are not selling, however, even in the face of store closings and softening sales, say Jakarta market experts. In recent years runaway inflation has reined in the spending of residents in this vast market on the northwest coast of Java, which boasts 33 major shopping malls and dozens of other centers.

Despite recent efforts by the Indonesian government to control that inflation (it soared to over 17 percent last year), consumers remain cautious, according to a Jones Lang LaSalle report on Jakarta retail. Hence, retailers have been focusing on boosting sales at their profitable stores while closing the poor performers. Food-and-beverage sellers and entertainment-themed retailers have enjoyed some growth, but store closings like that of the Sogo Department store in Plaza Indonesia led to a first-quarter occupancy drop from 91.7 percent to 89.7 percent, says Jones Lang LaSalle.

In Jakarta, through so-called strata title ownership, investors typically buy portions of shopping malls, even entire floors, rather than buying a property outright. Retail centers in central Jakarta typically go for between $3,300 and $4,000 per square meter, and the city has a minimum size requirement of about 20,000 square meters, so our hypothetical $10 million investor could get only about 3,000 square meters in a prime location, Klionsky estimates.

Another option might be to buy a 5,000-to-6,000-square-meter property outside the city, where there are fewer size restrictions on retail centers, says Lucy Rumantir, chairman of Jones Lang LaSalle Indonesia. “However, there have been very few investment sales the last two years,” she said. A nonretail choice “could be a good-quality, three-star, 200-room hotel outside the central business district.” Eight retail projects totaling 450,000 square meters are slated to open within two years and should create even stiffer competition, says Jones Lang LaSalle. Still, optimism over the region’s potential has retailers Harvey Nichols, Kidzania and Seibu seeking additional sites in Jakarta-Bandung.

MEXICO CITY

TEAM UP WITH A LOCAL TO BUY A SUBURBAN CENTER

Mexico City, the world’s second-largest city (population 20 million), has shown significant improvement in fiscal transparency in recent years and is being targeted aggressively by foreign investors. In fact, an ING Real Estate report says Mexico has been upgraded from a high-credit-risk level to medium risk. This is significant for a country with investment-grade commercial real estate that ING Real Estate values at about $200 billion.

The owners of Mexico City retail real estate are primarily owner-occupiers or such specialized retail developers as the privately held, Mexico City-based Mexico Retail Properties, which plans to build some $600 million worth of retail projects in Mexico over the next four years. The company, which has 70 full-time employees in Mexico, is developing mostly open-air shopping centers at the rate of 10 per year, says John Burstein, managing director of Black Creek Group, which founded Mexico Retail Properties. Mexico Retail Properties’ Mexico City-area centers, which measure about 300,000 square feet and contain a Wal-Mart anchor and two or three junior anchors, are going up mostly in outlying areas, at a cost of somewhere between $20 million and $50 million each. “Whether you’re doing a $10 million deal or a $50 million deal there, it’s the same amount of work, and that’s why we gravitate to those transactions,” Burstein said.

Here our investor could probably acquire an 80,000-square-foot, second-tier shopping center with a 40,000-square-foot, locally based grocery anchor and some mainly local tenants, says Burstein. “We’re seeing a lot of new investors coming in who are really trying to learn how to operate in Mexico,” Burstein said. “The majority are practicing passive capital allocation and teaming up with somebody on the ground. In Mexico you need someone who has transparent practices relating to how the money flows and the relationships and the local networks and a good understanding of the entitlement process there.”

Much of the recent foreign investment in Mexico City retail has been in outlying areas. “It’s clear that living conditions in Mexico City have made many people move out of the city to seek less congestion,” said Frank Badillo, senior retail economist and director of global research at Columbus, Ohio-based TNS Retail Forward. “There’s a growing middle class there looking for a better life.”

LOS ANGELES

SAME OLD STORY: SURPLUS OF BUYERS

Los Angeles has far more buyers than qualifying investment properties, including those frantic, time-constrained 1031 exchange investors. As of July, retail occupancy in Los Angeles County stood at a heady 97.4 percent, up from 96.1 percent at the end of last year, according to a Grubb & Ellis report. With the local economy in good shape, Los Angeles County retailers are demanding more and more quality space and not always finding it, the report says.

Those factors inflate prices, says Marcus & Millichap’s Haddigan. “Anecdotally, I’d say $10 million in Los Angeles would buy you, on average, a 30,000-to-35,000-square-foot center, while in a city like Columbus, Ohio, it would buy you about a 140,000-square-foot center,” Haddigan said. “Quite a contrast.” Many Los Angeles-area buyers are buying or building retail properties with a belief that future profits will someday outweigh current costs, he says.

Just what will $10 million buy around Los Angeles these days? Some recent transactions chronicled by Marcus & Millichap tell the tale. In March a retail investor bought a 10,000-square-foot Shoe Pavillion building in North Hollywood for $3.5 million, and in May the 14,000-square-foot Vogue Plaza shopping center, in Thousand Oaks, sold for $6.22 million. These deals approach our $10 million mark.

In a six-week span from mid-May to late June, the 8,000-square-foot Beverly-Normandie open-air center, near East Hollywood, sold for $4.5 million; the 6,200-square-foot Leimert Plaza went for $3.9 million and the 6,800-square-foot Western Plaza changed hands for just under $1.15 million. Following three such deals our $10 million investor would still have nearly $500,000 left over.

Also over the past year, one investor bought the 9,670-square-foot Union Cattle Co., in Pasadena, for $5.4 million; a second bought the 8,300-square-foot Cucamonga Center, an open-air center in Rancho Cucamonga, for nearly $2.4 million. Throw in the 5,244-square-foot Los Angeles County Office of Education building, which actually went for $1.17 million, and the investment budget is still just shy of $9 million. (That leaves enough for a B-class gas station in Receda, perhaps.) All the buyers and sellers cited in this section were from California.

For the more fiscally adventurous, at press time $14 million would have snagged a Pacific Coast Highway mixed-use center featuring a restored 1933 courthouse, two restaurant tenants, an art gallery, seven small offices and shops, and beach and tennis rights at the La Costa Beach Club, according to a listing on Cityfeet.com.

It’s like we’ve said already: $10 million ain’t what it used to be.

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