Time was the buyers who lined up for neighborhood shopping centers were high-net worth individuals or family trusts that found the investments well suited to their financial needs for long term income producing properties. But more and more, and particularly in California, institutional investors are eyeing these smaller centers, anxious both to find avenues for the large amounts of cash their funds are attracting and for investments with the promise of stable returns. “A big factor in the last five years has been the influx of institutional capital coming into Southern California,” said Kyle Matthews, a commercial real estate broker who specializes in retail investments at Marcus & Millichap in Encino. “We have been seeing a lot of these regional centers being bought out by REITs and institutional buyers.” In recent weeks, Grosvenor Investment Management US Inc. acquired the 154,000-square-foot Gateway Village community shopping center in Valencia for one of its funds. The acquisition, for an estimated $66.4 million, was driven in large part by the demographics and upside potential of the center, in a planned community providing significant barriers to entry by competitors while offering steady population growth to attract retail tenants. But the fund, which targets properties in the range of $50 million to $100 million, might have more easily found a larger, regional center in another state or community. In California, it was limited by its size range to community shopping centers. “In California, you get less for your money than you do in other parts of the country,” said Gary Lyon, managing director, acquisitions at Grosvenor Investment Management US Inc. “Typically those would be sold to high net worth individuals or trusts. Obviously with prices going up it all of a sudden falls into an institutional size range.” High-net worth individuals and trusts still make up a large segment of the likely buyers for smaller centers. But as prices have accelerated some of these centers have drawn the interest of much larger players. Like many investment funds, real estate-related funds are flush with capital that managers must deploy or risk returning to investors. There are but a few deals available at the billion-dollar level that characterizes large shopping center properties. So in their place, institutional investors are looking at making a number of smaller deals. “They have all this money they have to place, so they look at opportunities that are smaller for them, but there are more of them,” said Matthews. “So instead of placing all their eggs in one or two baskets, they’ve diversified into five or 10 neighborhood shopping centers.” Investment benefits Companies like Grosvenor are actively seeking properties in these medium price ranges so long as they offer some of the same investment benefits they get from larger properties. “For this client, even though we were willing to look across both coasts and fast-growing cities in the Sunbelt, at the end of the day we really believed that where we would invest their money would be Southern California or Southeastern Florida,” Lyon said. “It’s a function of strong population and job growth and the fact that, in both places, you are out of land. As long as you buy in an area with that combination, the story is only going to get better.” What the investors are betting on is the strength of the retail marketplace. As retail sales continue to accelerate, vacancies at these centers are tightening and, as vacancy levels decrease, owners can raise rents and increase the returns on their investments. Effect on others The increased attention by institutional investors has had some effect on the traditional buyers in the marketplace. For one thing, rising interest rates have made it more difficult for them to finance their investments with debt while institutional competitors typically come to the bargaining table with cash. But many private investors are transacting so-called 1031 exchange deals, where they must reinvest the proceeds of a sale within a specified time period in order to avoid onerous tax consequences. That makes them strong competitors against institutional investors who may not be willing to pay as much for a property. Some note that private investors still dominate the market for local shopping centers that may not have grocery anchors, the sweet spot for institutional money. “It’s probably 60 percent private investment versus 40 percent institutional investment,” said Donald MacLellan, managing director of Faris Lee Investments, which represented the seller of the Valencia Gateway. “If it’s not right down to the bull’s eye of a grocery anchored shopping center, then it’s probably 90 percent private and 10 percent institutional. If you’ve got a Ralphs or a Vons or an Albertsons anchor, then it’s probably 60 percent institutional.” Still, if prices and interest rates continue rising, others say that institutional investors are likely to increase their presence in the market. “They’re able to compete more favorably because the high net worth investor that would have historically purchased these has been impacted by falling yields and rising interest rates,” said Lyon.
Institutional Investors Get In On Smaller Retail Centers