Interesting Times

Acquisition activity in the retail sector remained sluggish during the first quarter 2009, with only 128 transactions closing for a total volume of $1.8 billion, according to Real Capital Analytics. The average cap rate increased to 7.2 percent. To compare, in the first quarter 2008, 592 retail properties changed hands for a total volume of $7.2 billion at an average cap rate of 6.9 percent.

Last year, retail investment sales volume for properties $5 million and above totaled just over $20 billion, nearly 70 percent less than 2007, according to Real Capital Analytics. Many of the most active buyers in previous years have retreated. Few publicly traded REITs are buying (with the exception of Cedars Shopping Centers Inc.), and most private equity firms cannot overcome their fear about the future of retail. Moreover, they insist on buying at the very bottom of the market (whenever that may be).

“Private equity firms, especially opportunity funds, are not comfortable jumping in now because they don't think we've reached the bottom, and they're having trouble underwriting future NOI,” says Chris Angelone, executive vice president/partner of CBRE's capital markets group in Boston.

By and large, the buyers active today are private investors, such as Ormond Beach, Fla.-based Jaffe Corp. The firm, which boasts a shopping center portfolio of two million square feet, recently acquired the 250,000-square-foot Ormond Towne Square from Developers Diversified Realty Corp. after several years of being inactive. President Dick Jaffe thinks the time to buy is now and scoffs at the idea of waiting for the bottom of the market.

“If you sell at the top of the market or buy at the bottom of the market, you can only attribute it to luck,” Jaffe says. “I want to buy at a price where I feel confident, and the properties I'm buying now are being offered at great values.”

In addition to private buyers, non-traded REITs like Inland Real Estate Group and Cole Capital are taking advantage of their all-cash positions. Last year, Inland was the most active fundraiser of all unlisted REITs, raising $2.2 billion, according to Robert A. Stanger & Co., a Shrewsbury N.J.-based investment banking firm that specializes in non-traded REITs. It invested $886.3 million in retail properties in 2008, according to Joe Cosenza, president of Inland Real Estate Acquisitions Inc. and vice chairman of the Inland Real Estate Group Inc. So far this year, Inland has raised $209 million in its Inland American non-traded REIT.

Cosenza sees a market with little competition, better pricing, and higher cap rates. “If you don't have a long-term positive view on retail, then get the heck out of here,” he says. Cosenza adds that cap rates for quality real estate today are “extraordinary.” For example, Inland is acquiring properties at returns of 9 percent or more.