White-Hot Demand for Centers Poised for Decline

LAS VEGAS-Demand and pricing are peaking for open-air retail centers, but rising interest rates have owners more nervous than ever that a downward trend is drawing nigh. That is one of the main observations to come out of a roundtable discussion withsenior executives with Eastdil Realty Co., New Plan Excel Trust, Transwestern Investment Co. and DJM Asset Management at the International Council of Shopping Centers annual trade expo here at the Las Vegas Convention Center.

Eastdil Realty managing director Eric Zimmermann says that demand and, therefore, pricing, for the past few years has been driven purely by capital's desire to get in real estate. "The majority of [retail center dispositions] in early 1990s were institutional and we've seen a shift," he says. "Now primarily the sellers are developers and the REITs and pension funds are accumulating the assets."

With interest rates now expected to continue rising, Zimmermann says owners who have experienced record pricing are getting a little uncomfortable with the durability of the market. "This is by far the most activity I have seen in the first part of the year," Zimmermann says. "My impression is we will see a change as the year goes on, we'll start seeing a little push back, seeing people say they will wait out the capital markets."

Erwin Aulis, managing director and chief investment officer for Chicago-based Transwestern Investment Co. says that given the rise in interest rates, he's curious to see what happens over the next six to 12 months in terms of asset pricing. "Capital flows are absolutely enormous, risk premiums are at historic lows," he says. "With the rise in interest rates there likely will be rotation of real estate and into other alternatives, but we've been saying that for two years and it hasn't happened yet."

Aulis says the last time he saw cap rates fall through 6% was the mid-to-late 1980s, which was followed a few years later by a recession. "Our decision to sell, aside from being motivated by the finite life of our value-added fund, is related to that," he says. "No one ever lost money taking a profit."

Regardless of pricing, retail centers will continue to come to market, says Glenn Rufrano, chief executive of New Plan Excel Realty Trust. "I will bet that there will be a lot of dispositions coming out of public REITs," he says. "We're always culling; Wall Street is very focused on quality assets; they don't know what they mean but they talk about it a lot; we're pruning so what's left is perceived as quality."

The retailers themselves are doing same thing on an individual building basis, says Emilio Amendola, a principal with DJM Asset Management, which repositions tenant leaseholds among other things. "We still have healthy pruning from good strong retailers in order to satisfy Wall Street," he says. "There are also some industries that will be hit and have to sell because they've been outmaneuvered by a stronger competitor, like in the supermarket industry and restaurants."

In addition culling and pruning, Rufrano says selling assets is a way to fend for yourself without having to resort to additional public offerings, which is often frowned upon by common shareholders. "We internally fund by selling assets so we don't have to go back to public market," he says.

As for how to best dispose of the asset, for the time being it's not that hard if you have an institutional-grade property. "In the early 1990s, the negotiating style was begging because we just needed an offer," says Zimmermann. Now that the tables are turned, "I do apologize," he says, as in, 'I'm sorry, but you're going to have to put up more non-refundable money and accept a lower cap rate if you want the property, because I've got several others in back-up position who will do so if you don't.'