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Passing the Test

Neighborhood centers exhibit resiliency in a post recession climate.

Every decade a challenging economic environment and capital markets liquidity crisis seems to reshape real estate capital formation, institutional investment hypotheses and even how real estate capital companies are organized and operated. I believe that the severity of the current recession and illiquidity in the capital markets has also changed the underlying dynamics at the property level in virtually every property sector, especially neighborhood shopping centers.

Neighborhood shopping centers have historically been viewed as a defensive investment compared with real estate investment alternatives in the more cyclical office, hotel, and industrial sectors. That theory was put to the test over the last 24 months as large, diversified high-quality shopping center portfolios faced the worst economic environment in more than 80 years. They largely weathered the storm and managed to maintain occupancy levels of 90 percent or greater. In turn, that performance bodes well for neighborhood centers as investors seek attractive risk-adjusted returns with predictable income streams underpinned by hard assets.

In fact, in recent months institutional investors' favorable view of neighborhood shopping centers and the resiliency of their demand has been reflected in asset prices. Looking forward, historically low stock market returns, moderating increases in long-term interest rates, consumer spending recovery and a decrease in new supply should continue to attract investors to the mid-to-high single digit returns provided by neighborhood shopping centers.

Driving factors

The recession has had other effects that favor the neighborhood shopping center. Less new product in the near future (including for lifestyle centers and malls), changing consumer shopping habits and the dominance of the reinvigorated traditional grocer will create a unique window of opportunity for the industry to redevelop and reinvent neighborhood shopping centers in strong demographic trade areas with established shopping patterns.

The investment returns gained from this redevelopment activity will likely exceed the returns on new acquisitions and even new development. New investment in remerchandising, renovating and reconnecting to the neighborhood shopping centers in trade areas with strong demographics is the best strategic use of our capital today. Further, we have been able to augment these returns through innovations in social media and sustainable building and maintenance practices.

Our investment strategy at Edens & Avant over the past decade has been based on owning and developing shopping centers in locations with both strong income levels and population densities. The importance of demographics in sustaining a neighborhood shopping center's operating performance and value across economic cycles was confirmed during this recession.

Shopping centers with strong incomes and densities held up exceptionally well in retail sales, occupancy, collections and downtime. In contrast, neighborhood shopping centers dependent on proposed residential construction or a change in consumer shopping patterns performed much worse over the last 24 months. These centers will not see much improvement for an extended period of time. This bifurcation has reflected greater gapping in property values than ever before.

The recessionary challenges of the last several years have affected everyone's bottom lines, but we've still managed to acquire real value in the lessons we've learned. By reexamining the manner in which we operate, taking advantage of the unique opportunities this economic climate has created and redeveloping strategies for long-term growth, neighborhood shopping centers have not only weathered the recent downturn, but been positioned for continued growth.

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