COSTA MESA, CA—No longer dominated by traditional big-box retailers, today's power centers offer the needs-based stores and services to which consumers are drawn, Donahue Schriber Realty Group's chairman and CEO Pat Donahue tells GlobeSt.com. We spoke with Donahue after the recent announcement of the privately held REIT, which specializes in retail, receiving a $250-million equity investment from institutional investors advised by J.P. Morgan Asset Management and New York State Teachers' Retirement System. We discussed with him why institutional investors are interested in certain types of retail and what exactly the definition of a power center is today.

GlobeSt.com: Why are institutional investors like J.P. Morgan Asset Management and NYSTRS interested in investing in grocery-anchored retail centers?

Donahue: It's really the safety, stability and predictability of the hard assets. The grocery-anchored sector has behaved the way it's supposed to in good times and in bad times. Our average rents across our portfolios only went down about $1.5 per square foot during the darkest of the recession, so you look at that and say, while nobody is bullet-proof, this thing behaved as it was supposed to during the most difficult economic times of my career. The model—which isn't that big, about a 100,000-square-foot anchor and the rest is shop space—is a very effective model of relative predictability for a pension fund.

GlobeSt.com: Traditional power centers have gone through a bit of turmoil in recent times. Why is this category of interest to institutional investors now?

Donahue: You have to ask, what is a power center? They've been hot and then they're not, and it has a lot to do with the definition of what a power center is. The old definition of a power center could have been three large boxes lined up next to each other on a thoroughfare: Linens & Things, Circuit City and Mervyn's. But power centers as we define them today are larger in scale—approaching 500,000 square feet or more—have multiple anchors and multiple smaller tenants. They're a shopping center and a shopping destination. In our portfolio, some of the strongest sales per square foot are coming out of those power centers. They are tremendous draws, and other tenants are benefiting from that.

The power center has had the reputation—and rightly so—of having too many players, and subsequently there was going to be a fall-out. There were three or four electronics firms or home-goods retailers to choose from, all of these different players in certain categories, and if you didn't bet right, if you played the wrong hand and went with the underperformers or the second or third player in a market, you could be holding vacant boxes in a power center. A lot of that weeded itself out after the recession.

The number-one investment for these pension funds is a fortress mall, and power center sand neighborhood centers are in that mix. You need good real estate, a good tenant mix and good operators linked together. There's a lot more differentiation between good properties and average or below-average properties. The type of property I would want to invest in is a very good power center. It's been a definitional conversation for a long time. There is a daily-needs aspect to every one of our power centers. That's how we differentiate. We've shown to the pension funds that this is about bringing people goods and services and customers to the property. It's a question of how many of those customers can I get into the parking lot.

GlobeSt.com: Aside from institutional investors, who are the primary investors in this type of real estate?

Donahue: Grocery-anchored and power centers probably fit into the same bucket, but from my experience, the neighborhood-center business was very entrepreneurial and independently operated for many years, and in the '90s the public companies got involved in that business. That's what we did. If you couldn't compete in the mall business, then that was another category where you could try and compete and assemble enough properties to create efficiencies and a company. It's gone from the independent developer/operator to more of an institutional model. Regency Centers would be a good example of that, along with firms like Equity One and Weingarten. So that's one of the things that's happened. There's been a lot of capital interest in it, and real estate people who were independent formed private or public companies with capital backing them to compete effectively. That's where we are today. Without capital, it's difficult to maintain or acquire a portfolio.

GlobeSt.com: What does the retail sector have to offer investors that other sectors can't?

Donahue: This is all about asset allocation. The institutional investors are not in this because they're not somewhere else—they're in everything. A pension fund needs to have some 5% to 10% of its resources allocated to real estate. This jumped form years ago because of the massive amounts of capital in the market. They have bought commercial real estate, and it has become a staple of their asset allocation, doubling from 5% to 10%. That's billions and billions of dollars. They invest, then wait and rebalance accordingly.

Neighborhood centers tend to be highly sought after because of their historic performance and their liquidity. They're a size that can be bought and sold in all markets. We were able to sell three neighborhood-center properties that were not A+ properties during the downturn to create equity for the company because of their size. It's good for the investor.