Shopping Centers Today

SEP 2018

Shopping Centers Today is the news magazine of the International Council of Shopping Centers (ICSC)

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44 S C T / S E P T E M B E R 2 0 1 8 value-add deals, but the internal rate of return can be much higher. LBG has fetched returns in excess of 60 percent by executing such strategies, Lundin says. "In order to really harvest the value from distressed assets, you have to take a leap of faith and do some things that are not set in stone when you first buy the property," Lundin said. "You can really knock it out of the park — or you can fail really big." LBG focused on grocery-anchored value-add invest- ments early in the cycle and then plowed its profits into some big opportunistic deals. Last year the firm teamed up with Aviva Investors to acquire e Shops at Hilltop (formerly Hilltop Mall), in Richmond, Calif. is 1.1 million-square-foot regional property had been in fore- closure for several years and was about one-third vacant. But it came with entitlements for 10,000 residential units and nearly 17 million square feet of commercial space. In addition to a substantial renovation of the 42-year-old mall, the redevelopment includes the imminent addition of tenants catering to the local Asian population. New, value-based retailers, restaurants and an entertainment district are to follow there in the coming months. In yet another distressed play, Unison Realty and Alto Real Estate Funds paid $21.1 million last year to acquire Commons at Hooper, in Toms River, N.J., in a bankruptcy auction. is 120,400-square-foot community center, with Dollar Tree, DSW and Michaels as anchors, is about 86 percent occupied. e partnership's strategy here includes sprucing up the parking lot and the facade, recruiting new tenants and developing a pad site. "e previous owner could not pay for tenant improvements to attract national retailers," said Scott G. Onufrey, Alto Real Estate's president and managing partner. "We've already seen interest from some major national brands." Alto Real Estate's value-add investments include Cran- berry Square, a 195,200-square-foot community center in suburban Pittsburgh that the firm acquired this year in partnership with M&J Wilkow, for $23.5 million. is property enjoys high occupancy, and its retailers include Barnes & Noble, Best Buy and OfficeMax, but it also pro- vides opportunity to recapture some space for re-lease at higher rates, Onufrey says. A closed Toys 'R' Us is one im- mediate candidate. "We feel very comfortable with the real estate and our basis in the deal," he said, "even though we are aware that uncertainty surrounds some of the retailers." Value-add investor Pacific Retail Capital Partners is tions. What is more, the majority of investors choosing to stick with retail properties are already crowding into such acquisitions, sources say. Only about two in 10 investors are looking for core properties — all the rest are focused hard on these value-add or opportunistic deals, according to a Real Capital Markets survey released in May. Moreover, at this late stage of a comparatively long real estate cycle, retail properties tend to be fully valued. Conse- quently, many sellers are reluctant to budge on price, even with interest rates inching up, observes P. David Bramble, a managing partner at Baltimore-based investment firm MCB Real Estate. "We see opportunities, but it is a su- per-challenging environment for value-add investments," Bramble said. "Right now the big issue is a pricing disloca- tion between where buyers and sellers are, and there are a lot of head winds and risks in the retail space." Much the same can be said for distressed-property investing, says John DiOrio, vice president of investor rela- tions at Unison Realty Partners, a Boston-based shopping center owner and operator. "While there certainly is oppor- tunity to be had in the distressed markets, now, more than ever, [the] buyer must beware," he cautioned. "At this point in the cycle, distress can oen be a signal of a fundamental property or location issue." Value-add buyers look for underperforming properties in which they can increase yields, and which they can then sell off following some real estate and tenant improvements. ese assets may be suffering from deferred maintenance, modest vacancy, struggling anchor tenants or underutilized parcels, points out John Riser, a principal of Indianapolis -based Riser Retail Group. In some cases, budget- constrained landlords may be charging retailers below-mar- ket rental rates, unable to charge more or to reposition the asset absent a substantial upgrade. In other cases, equity partners may simply want to trim back their retail property holdings. Typically, value-add investors target an internal rate of return in the high teens or higher. Distressed properties can be much more risky, depending on the situation. ese assets may be in foreclosure, or the owner might be upside down on a mortgage. Worse, cash flow may be deteriorating, or income may be nonexistent, according to Leslie Lundin, a managing partner with LBG Real Estate Cos., a Los Angeles–based investment manage- ment firm. Extensive redevelopments and long hold periods are more common among distressed plays than in the DISTRESSED cash flow may be deteriorating,

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