Sales of Shopping Centers Slowing in Region
Fewer investors are buying shopping centers in Southern California this year than in any of the three preceding years, but the slowdown in sales is more a sign of what’s right with the region’s retail industry than what’s wrong with it.
That’s one of the conclusions in a new report showing that investors in Southern California shopping centers--who range from mom-and-pop owners to huge public companies--are holding on to their centers to enjoy the rental income rather than selling for a one-time profit.
Research by George Garvin, a vice president at commercial real estate services firm Grubb & Ellis who specializes in shopping center sales, shows 711 sales of centers in Southern California (Los Angeles, Orange, Riverside, San Bernardino, San Diego and Ventura counties) for the first six months of this year, compared with 2,000 sales for the full year last year, 2,086 in 1998 and 1,757 in 1997.
Even with six months to go before full-year 2000 figures are tallied, Garvin said, it’s clear that this year’s total will fall short of last year’s.
“Owners just do not have to sell,” Garvin said. As long as their centers are sufficiently leased and owners know they can fill space quickly when a tenant leaves, he said, owners today aren’t pressured to sell--in contrast with the post-recession days of the mid-1990s, when many shopping center owners went bankrupt or sold at a loss to get out from under mortgages they couldn’t afford.
Garvin said rising asking prices by sellers are another factor slowing sales of centers. He explained that a higher price typically means a center will return a lower percentage of cash flow, discouraging prospective buyers who are looking for higher investment returns.
His study shows that the median price per square foot paid for shopping centers is up to $108.05 this year, compared with $104.59, $98.90 and $88.81 respectively in 1999, 1998 and 1997.
“At prevailing prices, yields are not high enough to excite investors and drive a lot of transactions, given the inherent risks and management-intense nature of retail properties,” Garvin said. “We are in a slowdown with respect to retail property investment. We are not in a downturn.”
Garvin’s report points out that the recent bankruptcy of Edwards Theatres Circuit Inc. and the financial difficulties at some other theater chains and retailers pose a significant risk for certain center owners, but he said the shopping center industry overall should continue to do well because of the region’s strong economy.
The woes of theater chains and some other major retailers such as Crown Books may drive down asking prices for certain shopping centers, said Sandy Sigal, president of Tarzana-based NewMark Merrill Cos., which owns 3.5 million square feet of shopping centers.
“Not since the early 1990s have you seen tenants with financial trouble,” Sigal said. “There aren’t many of them, and we’re not in a recessionary period like the early ‘90s, but what’s happening might just be a sign that things are getting more rational.”
What’s happening, Sigal said, is that some center sellers are starting to lower their asking prices out of concern that the retail property market may be starting to turn downward after years of steady climbing.
“We’re in escrow right now to buy a project at a price that, I guarantee you, six months ago we wouldn’t have been talking about,” Sigal said.
Sigal said the downtick in prices that he foresees isn’t a sign of dire straits in the industry, just a departure from trends of the last few years.
“The industry had a run of about five or six years when everything was positive, every retailer was expanding, every shopping center was going for a higher price every time it sold,” Sigal said. “Now, that’s starting to change.”
According to Garvin, the change is being felt first among lower-tier properties. He cited continuing “high investor demand and top-of-the-market prices” for top-tier centers, but “lukewarm” demand for run-of-the-mill shopping centers and so-so retail properties.
Whether this is a good or a bad time to buy shopping centers depends on the center, according to Brian Shirken, a principal at Santa Monica-based Columbus Pacific Properties, which owns centers in Southern California and Ohio.
“It’s a bad time to be buying shopping centers that are anchored by tenants that have questionable credit,” said Shirken, who said the current crop of theater and retail bankruptcies might presage a trend toward financial difficulties for other retailers. He said Columbus Pacific, founded in 1995, “has made a conscious effort to avoid theater-anchored centers.”
Columbus Pacific focuses on finding centers that have credit-worthy tenants on long-term leases, along with potential to grow in value through expansion, Shirken said. For example, the firm paid $11.5 million in June for a 100,000-square-foot shopping center at Lake Hughes Drive and Interstate 5 in Castaic that is anchored by a Ralphs market.
The property was generating a cash flow when Columbus Pacific bought it and has the potential to generate additional revenue because it can be expanded by 40,000 square feet, Shirken said. Other factors in its favor include the quality of the center’s construction, a housing boom in the area and relatively little competition from other centers.
Shirken’s comments illustrate what Garvin of Grubb & Ellis describes as the “extremely local” nature of investing in shopping centers.
“Retail is a more complicated form of real estate. It has more moving parts,” Garvin said. No matter what any analysis indicates about general trends, he explained, properties must be viewed on a case-by-case basis to determine if it is a wise buy.
Potential investors may be cautious about sinking their money into shopping centers because retailing “as an industry is changing more than, say, office or industrial or residential,” said retail industry expert James S. Rosenfield, president of Santa Monica-based J.S. Rosenfield.
“It could be that some people are reluctant to invest in centers because they fear bankruptcies [by retailers], but for the most part, stores are continuing to do well and to expand in Southern California,” Rosenfield said.
Despite the current slowing of activity, Garvin expects the pace of shopping center sales to accelerate by early next year, provided interest rates keep creeping down and asking prices decline a bit.
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Yin and Yang
Sales of shopping centers have declined in SouthernCalifornia this year, but the median price per squarefoot investors are paying for the centers hascontinued to climb.
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Note: Southern California includes Los Angeles,Orange, Riverside, San Bernardino, Ventura and SanDiego counties
Source: Grubb & Ellis, Comps Inc.
