By Joe ClementsUnderscored by the ongoing implosion of Kmart, retailers everywhere are experiencing a difficult time these days, but while many stores are battling to survive, retail properties themselves are increasingly leading the shopping list for many commercial real estate investors.

Underscored by the ongoing implosion of Kmart, retailers everywhere are experiencing a difficult time these days, but while many stores are battling to survive, retail properties themselves are increasingly leading the shopping list for many commercial real estate investors.

I think it will be a more active year than normal for retail, predicted Michael G. Smith, a principal with the investment services division at Spaulding & Slye Colliers. The assets we have [for sale] are getting a lot of attention.

There are a lot of people beating their drums for retail right now, concurred Edward C. Maher Jr. of Cushman & Wakefield. When something becomes available, you just have a real feeding frenzy for it.

Indeed, Maher said the biggest challenge at present is trying to find retail properties to trade. There is clearly more money chasing retail than there are assets available, he said. They are as rare as hen’s teeth.

Spaulding & Slye Colliers broker James M. Koury agreed there is a dearth of properties in circulation, but noted that such assets typically lag office deals annually in volume of deals completed. Spaulding & Slye is a specialist in retail property sales, having handled such recent deals as the sale of 19 centers anchored by Shaw’s, a package that fetched $117 million. The firm is about ready to close on four grocery-anchored centers in the next three weeks, including the Plaza One Fourteen property in South Lawrence, a 103,000-square-foot asset with an asking price of $11.5 million.

Koury would not discuss details, but said the four properties slated to close will total about $60 million. Another four centers comprised of 750,000 square feet are near being sold, with that group expected to command another $57 million.

Part of the problem in securing additional assets to sell has been a perceived barrier to entry in New England, with a lack of land, strict environmental regulations and community opposition said to keep the region traditionally undersupplied in retail square footage. Although there has been a recent surge in development, including the new Gateway Center in Everett, investment-quality opportunities remain difficult to find.

Lower mortgage rates are one reason, according to Finard & Co. partner William J. Beckeman, with some owners who might otherwise have sold their properties opting to refinance. These refinancings have limited the number of shopping centers available to satisfy the investor demand, Beckeman said in a recent report assessing the 2002 investment outlook.

Until recently, retail had also been on the back burner of investor game plans, with office and multifamily properties having been the main targets in the past few years. Many pension funds now feel they are over-allocated in those property types, however, while Maher said certain classes of retail are also considered more stable in a down economy. Necessity shopping by consumers is playing a role in investor decisions, agreed Beckeman, maintaining that grocery-anchored retail is seen by many investors as a safe haven or recession-proof investment class that offers attractive yields compared to other opportunities.

Investors have even been willing to go off the beaten path a bit to acquire grocery-anchored retail, said Maher, noting that Lend Lease Real Estate Investments recently paid $26.2 million for the Fesitival at Hyannis, while Cowesett Corners in Warwick, R.I., fetched $16.1 million. Maher’s group brokered the two sales on behalf of TA Assoc. According to Maher, the properties had 21 offers, including domestic advisors, offshore funds, regional investors and several 1031 exchange buyers. In the end, the two assets fetched 98 and 99 percent of their respective asking prices.

It’s a highly specialized segment of the market, but it is attracting an incredible amount of interest, Maher said. There are caveats, however, he said, with most investors requiring a top-brand grocer as the anchor, while the percentage of business the grocer does vs. other tenants is also important. Smith agreed that most grocery-anchored investors are looking for stability vs. yield, making the 11 percent to 12 percent returns one might reap from that class more palatable than when they were competing with the booming office segment.

‘Good Timing’
Although Cushman & Wakefield has no retail assets available at present, Maher said the investment sales team is performing valuations for several clients. Depending on the final numbers, Maher said some owners may choose to enter the bidding fray.

Beckeman agreed that conditions may never again be as favorable for garnering top price, maintaining that if the economy rebounds at mid-year, The impact to retail property investment demand will not necessarily be positive. One reason, he asserted, is that any rise in interest rates would dampen demand by private investors, a source that has been able to compete effectively heretofore with pension funds and other capital, keeping prices inflated. Also, if the financial markets perceive the economy is nearing the bottom of the cycle, investors might be encouraged to turn back toward office properties in a search for greater upside.

A year from now, those who sold their [retail] properties in the past six months may look back favorably upon their good timing, Beckeman said in his outlook. Those who sell in 2002 may feel nearly as fortunate.

The prospect for other retail concepts is less certain, with Maher citing the Kmart situation as one intangible. If the retail giant files for bankruptcy, as some analysts are predicting, Maher said there would likely be a number of properties put up for sale or lease. While that might appear problematic for the real estate industry, Maher suggested it could also attract additional capital. As one of the first major retailers to foray aggressively into New England, Maher said the company possesses some of the area’s most desirable retail locations. Some buyers are going to view that as a real opportunity to get into the New England market, Maher said.

A less-desirable investor target will likely be the power centers and big-box properties that have found their way onto the sales block, said Maher. Power is a four-letter word right now, he said, largely because such buildings are often in subpar locations or are so specialized they are difficult to adapt from the existing layout.