How One JV Is Making Retail Bets In An Uncertain Climate

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In late August, real estate asset manager CenterSquare Investment Management announced a new joint venture with Arch Street Capital Advisors with a particular focus on acquiring high-end retail service properties in the US Sun Belt. The company represents a bold move in retail at a time when most investors are turning away from the industry as it continues on a slow path to recovering from its lows in 2020.

The company has seed funding to acquire $ 150 million in assets backed by a financing facility from Barclays and quickly closed four properties in Orlando, Florida, Houston and Atlanta in three transactions distinct. But as the outlook for most brick-and-mortar retail businesses remains uncertain, CenterSquare and its new partners are specifically targeting “essential” service properties: malls made up of tenants who provide basic services to consumers, including many have remained open throughout the pandemic. These tenants include national and regional fast food chains, beauty salons, fitness centers, and medical and professional service providers. The joint venture plans to focus on non-anchored properties in its acquisitions.

“All four [of the already purchased] the properties are located on high traffic roads with excellent visibility within major suburban sub-markets of growing cities, ”said Robert Holuba, senior vice president of CenterSquare Investment Management. As consumers have quickly changed both the way they shop (moving to e-commerce) and what they buy (looking for services and experiences rather than goods), CenterSquare executives say the company focused on properties of essential services that are not as sensitive to external shocks. . The company is reportedly aiming to acquire properties in the price range of $ 7 million to $ 20 million.

The joint venture is also expected to benefit from its particular focus on high-end properties in the Sun Belt area, potentially undervalued assets in growing cities. Throughout the pandemic, these markets have experienced far less disruption and price uncertainty than the major subways, according to real estate data firm Real Capital Analytics (RCA).

Overall, the volume of sales of retail investments in 2021 remains low due to a few large transactions at the portfolio and entity level and a decline in shopping center investments. In the first half of 2021, retail investment sales totaled $ 24.1 billion, up 29% from the same period in 2020, but still 35% below the 2015-19 average, note the RCA researchers.

Regarding transactions specifically involving shopping malls, sales of investments in this sub-sector in the first half of 2021 totaled $ 12.2 billion, down 49% from the five-year average before. pandemic, according to data from RCA.

As CenterSquare’s Holuba puts it, most retail businesses “continue to be painted with the same negative brush,” leaving major opportunities for institutional investment in high performing service properties.

Among REITs, retail acquisitions continued to lag despite rising consumer spending in physical stores, according to data from CoStar Group. In August, these transactions totaled less than $ 900 million. Between 2010 and 2019, purchases of commercial properties by REITs averaged $ 5 billion per year. In 2020, the figure reached $ 3.7 billion, but $ 3.4 billion came from the closing of the pre-pandemic purchase of Taubman centers by Simon Property Group.

CenterSquare Strategy

The essential service properties present a major opening for investors like CenterSquare and its joint venture with Arch Street. Holuba says the company is targeting malls where tenants see the growth of current consumer trends rather than volatility, and resist pressures from the e-commerce boom. “The tenant mix consists mostly of domestic tenants who provide services, whose customers are required to visit the store to consume the service,” he notes.

The company reports that the company was able to secure the properties at “attractive capitalization rates” because of both negative investor views on the retail business as a whole and because CenterSquare bought the properties off-market, such as they did so with other similar investments. Overall, CenterSquare reports that its approach can generate returns in “high teens” by taking advantage of attractive purchase prices. Average cap rates on the sale of retail assets in the United States were 6.6% in the second quarter, according to RCA data, with cap rates on multi-tenant mall sales of 7.2 % on average.

By focusing on properties providing essential services, CenterSquare saw a very different picture of retail performance during the pandemic than investors who specialize in more properties with discretionary tenants. Shopping centers continued to be profitable, notes Holuba, especially those with high-end service tenants.

“Retail rentals in outdoor shopping malls increased in 2021 and landlords are experiencing high occupancy, increasing rents and high demand from tenants,” said Holuba.

The initial CenterSquare acquisitions are also located in metropolitan areas that are among the nation’s busiest retail markets, with Atlanta and Houston ranking in the top 10 metropolises for second-quarter sales volume, according to RCA.

As for CenterSquare’s existing high-end service properties, the company has performed strongly through 2020, with its nationwide portfolio collecting 91% of rents due while most retail businesses have seen major disruption in the market. cash flow due to rent collection issues. CenterSquare also saw occupancy rates increase to 95% over the course of the year, at a time when many malls were seeing vacancy rates rising rapidly. This consistent performance and resilience laid the foundation for the new joint venture with Arch Street.

Despite investor apprehension, 2021 brought some encouraging signs for retailing more broadly: a significant slowdown in store closings, a resumption of commercial leasing, and a slow but certain return to all services. According to senior CoStar consultants, these trends indicate that “we expect quality retail to perform relatively well in the short term.”

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