Foreign investors seek U.S. retail property bargains

In the fourth quarter of 2015, cross-border acquisitions of U.S. retail properties hit $9 billion, reports New York City–based Real Capital Analytics. After a first-half decline in 2016, cross-border retail investments climbed back to just over $8 billion in the third quarter. Then the dam broke. By third-quarter 2017, cross-border retail acquisitions had slumped to about $2.5 billion, reviving slightly to just over $3 billion by the final quarter.

In comparison to other property types in 2017, the volume of retail deals lagged behind office, multifamily, industrial and hotels.

The trend line for cross-border has not been good, says Jim Costello, a senior vice president at Real Capital Analytics. “Retail was only 6 percent of the cross-border market in 2017, down from 9 percent in 2016, which has been the long-run average for the sector.”

The worst should be over, however, and expectations are that the market will be better for shopping centers in 2018, if for no other reason than that retail properties make for a smoking deal relative to other sectors.

CBRE’s Americas Investor Intentions Survey for 2018 reports that industrial is increasingly the preferred property type for active investment this year, with the percentage of those interested in this sector increasing to 50 percent, from 38 percent previously. The next two most popular investments expected for this year are multifamily and office, but the percentage of respondents there decreased. Retail placed fourth, but the number of respondents expressing interest in the sector did increase.

“Foreign investors, not dissimilar to a lot of domestic investors who are diversified across multiple product types, have experienced strong premium pricing in the industrial and multifamily space for the core markets,” said Geoff Tranchina, a JLL executive vice president in Los Angeles. “By that measure, and by comparison, retail does look like a bargain right now. From a global perspective, retail is definitely seeing an uptick in interest.”

In 2017 the top cross-border buyers of retail real estate, in declining order, were from Canada ($1 billion), Australia ($815 million), Germany ($477 million) and China ($254 million). Last year Unibail-Rodamco announced that it would pay $15.8 billion for Westfield, an Australian company that operates 33 malls across the U.S., but that deal has yet to close.

Tranchina sees an uptick in global investors led by interest from the Middle East, Europe and parts of Asia. “Recently, there has been a multitude of larger shopping center opportunities where joint venture interests are being offered in class-A regional shopping centers around the country,” he said. “We have seen an uptick in these offerings since the end of 2017. All of those deals should attract a multitude of foreign investors.”

By way of example, Tranchina points out that insurer Northwestern Mutual has offered its interest in Broadway Plaza, a dominant regional mall in Walnut Creek, Calif., that Macerich operates. “Sellers are looking at a combination of global investor demand and a lack of high-quality product in the market,” Tranchina said. “If you are invested in the highest-quality assets, this is a good opportunity to pare down exposure to retail.”

One of the ways cross-border investors will access the retail market is by taking 50 percent ownership rather than buying a property outright, Costello says. “These investors like the direct ownership aspect, more like a joint venture than investing via a fund,” he said. “They can leverage the expertise of the local owners who have relationships with people in the market. That is one of the key things: If a sovereign wealth fund decides to buy a property outright, it comes with all the management issues. By buying a partial interest from an existing owner, you are leveraging expertise.”

According to CBRE, nearly half the real estate investors buying in the Americas will deploy less than $500 million, in the aggregate, for real estate purchases in 2018. That said, institutional investors — comprising sovereign wealth funds, insurance companies and pension funds — have different expectations: 50 percent intend to deploy upwards of $1 billion in capital this year, while one-third are looking at paying in upwards of $2 billion. This is actually a problem in the retail real estate marketplace, as Costello explains.

“One of the issues for cross-border investors is that they can’t buy smaller properties,” said Costello. “Except for large malls, other types of shopping centers are often valued too low to consider. One client of mine in the Middle East said they are not even hopping on a plane unless they can spend $50 million at a time. The kinds of assets foreign investors want to buy are just not transacting that much. The average deal size in the market has trended down. What is selling today is a lot more smaller properties. So in the sense that cross-border investors are involved in deals, fewer of the large assets that they want to buy are out there in the market.”

Transactions were down last year by about 36 percent for retail real estate deals north of $25 million, according to the Real Estate Alert newsletter. But 2018 is looking to be an entirely different sort of year, observers say.

“Given some of the potentially larger transactions in the mall space that are getting done in the first and second quarter, volumes should rise significantly,” said Tranchina. “We continue to see growing demand from global investors. Retail will surpass the volume of deals done in 2017.”