Thawing from the Deep Freeze?

Editor’s note: For the last 20 years, Chain Store Age has featured its annual ranking of the country’s Fastest-Growing Acquirers based on retail square footage purchased during the previous calendar year.

In our 21st year, we have temporarily changed course. Because acquisition activity virtually came to a standstill in 2009, we are focusing instead on the few purchases that closed last year, but more importantly, on what lies ahead.

You know it’s a tough acquisitions market when a sector’s largest player, a significant portion of whose growth came through portfolio purchases, completes no deals in a year.

Simon Property Group, the largest public retail real estate company in the United States, acquired no property at all in 2009, the company confirmed to Chain Store Age. Though it announced plans to acquire Baltimore-based Prime Outlets for $2.3 billion and bid for General Growth Properties last year, the former deal will not close until later in the year. At press time, Chicago-based General Growth had announced a plan to emerge from bankruptcy as a standalone company, and was fighting the takeover bid.

With the capital markets still in a near-freeze, and retail properties hit hard by the Great Recession, major acquisitions came to a virtual halt in 2009. But the market was not completely dead: A number of well-capitalized companies took advantage of the lull to purchase individual projects. And 2010 may see an increase in activity, leading to more retailer confidence about expanding.

“Fortunately for us, most people sat on their hands in 2009,” said G. Joseph Cosenza, vice chairman of The Inland Real Estate Group Inc. and president of Inland Real Estate Acquisitions Inc., which spent $1.3 billion to acquire 10.2 million sq. ft. of retail space in 84 transactions.

Among its acquisitions were Dothan (Ala.) Pavilion, consisting of 327,555 sq. ft. of big-box and theater space, and Grafton (Wis.) Commons, with 238,816 sq. ft. The Dec. 11 purchase of the 82,292-sq.-ft. Merrimack (N.H.) Village was the first deal by Inland Diversified Real Estate Investment Trust, a non-listed REIT formed on Aug. 24.

Inland’s secret? Sellers tended to approach the company even before hitting the open market, looking for a sure closing, Cosenza said. Slightly more than 50% of last year’s deals began with a direct call from the seller to Inland. Other deals came through brokers who “weren’t able to get a listing, but could bring us to a seller,” Cosenza said, while still more came through major companies contacting Inland directly.

“Each one of these seemed to have a goal of selling a property quickly,” because of mortgages soon to mature or a need to shore up a cash position, Cosenza said.

Inland wasn’t alone in acquiring a significant amount of space despite the downturn. Also through multiple deals, Kimco Realty Corp. acquired 6.7 million sq. ft. of retail space, ranging in size from the 35,000-sq.-ft. Carmel Mountain in San Diego to the 872,000-sq.-ft. Oakwood Plaza in Hollywood, Fla. Tellingly, all deals took place in the second half of 2009, with all but a handful of the transactions closing in November.

Cincinnati and Salt Lake City-based Phillips Edison reported that it acquired 805,801 sq. ft. of retail space last year through its various funds, which are financed by private investors. These deals include the purchase of Bridgewater Falls in Fairfield Township, Ohio. At 635,000 sq. ft., this stands as the largest center in its portfolio and first lifestyle center acquired by the company, which primarily acquires neighborhood and community centers.

So deals for high-quality centers are getting done for those with access to cash, which should ease retailers’ fears that a landlord will neglect a property or even go bankrupt. However, it also means that tenants in struggling centers should not count on a white knight riding to the rescue via an acquisition.

Money is trickling back into the market, looking for something to buy, and some transactions have taken place, including Glimcher Realty Trust’s sale of 60% of Lloyd Center in Portland, Ore., and WestShore Plaza in Tampa to the Blackstone Group for $320 million. Even so, acquirers are cautious—Real Capital Analytics reported year-over-year sales of significant real estate properties declined 43% in January and 47% in February.

Kimco has stated it will continue to purchase vacant and occupied real estate owned by retailers. Inland, too, remains on the hunt, including acquiring a 16-center portfolio of neighborhood and community centers from a joint venture of TIAA-CREF and Developers Diversified.

“We will be buying the same kind of product. We have the advantage of a broad spectrum,” Cosenza noted.

But the company is finding more competition for deals, boding well for later in the year.

“More players have gotten off their chairs and are in the market,” Cosenza noted. Large public REITs have cautiously begun to raise money through secondary offerings, making funds available to purchase properties.

What they will buy is another question. Smaller one-off deals seem to be the order for the near future. Beachwood, Ohio-based Developers Diversified Realty, once a major bulk acquirer, has stated that it will no longer pursue large portfolio acquisitions, but will grow through “strategic transactions.”

That may not be easy in the short term. Kimco chairman and CEO Milton Cooper observed during his company’s fourth-quarter conference call that available capital exceeds the amount of quality real estate for sale. At least for now.

“We, like everybody else, are looking over our shoulders at the mountain of debt maturities and wondering whether that will trigger a lot more supply, but for the moment, we can definitely say that cap rates are going down, and if there is a good quality shopping center placed on the market, it had numerous, numerous bids,” Cooper said.

The biggest potential deal of all remains a question mark: General Growth Properties. At press time, Simon reportedly was weighing a higher bid than its $10 billion takeover offer. Other bidders also could jump into that fray.

While most observers say that a potential resolution of the General Growth situation is not affecting other sectors, it may be having a stabilizing effect on the mall market. During his company’s fourth-quarter conference call, Macerich chairman and CEO Arthur M. Coppola predicted growing interest in malls, now that it appears that General Growth will not liquidate and flood the market with dozens of centers. However, because of the scarcity of A malls, these investors will begin to look at the next tier down, B centers. Logically, this may benefit tenants in those properties as new owners invest further in the projects.

And don’t count out capital-laden Simon, whether it acquires all or part, or none, of General Growth, to continue growing by acquisition. With $4.3 billion in cash on hand and an additional $3.1 billion in liquidity, the company is prepared for the right opportunities, if the price is right.

“The opportunity to really steal something is probably not here right now,” David Simon, chairman and CEO, said in the company’s fourth-quarter conference call. “But there probably are going to be opportunities where we can buy something at a decent price and make money through our ability to run it a little bit better. But if the real estate gets too pricey, we’re going to keep our capital powder dry.”

So competition is increasing, prices are increasing, and cap rates are starting to drop again. Even so, Inland had closed 23 deals as of late March, with another $400 million to $500 million pending, because of its focus on smaller transactions, rather than buying extremely large portfolios that often will include a significant number of weak projects.

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