Retail REITs Bulk Up

For retail property owners, size matters. In the past year the biggest shopping center owners in the country substantially increased their national footprints, mostly through acquisitions. REITs, in particular, have been on a roll. They make up the top five retail buyers this year, according to data compiled by Real Capital Analytics.

Developers Diversified Realty leads the pack so far in 2004 with the $2.3 billion purchase of 110 shopping centers from Benderson Development, which will bring DDR's total portfolio to 100 million sq. ft. With the buy, DDR surpasses Kimco Realty Corp. as the nation's largest grocery-anchored shopping center owner. Also making waves on the grocery side is Inland Retail Real Estate, which has picked up close to $1 billion in centers in 2004.

Of the top 10 shopping center owners, all are REITs. In the latest survey, Simon Property Group retains its crown as the largest retail owner in the country. It further bolstered that status by announcing in June that it has agreed to acquire Chelsea Property Group Inc., the biggest owner of outlet malls, in a deal valued at $3.5 billion.

Not to be outdone, General Growth Properties (GGP) bought $2 billion of malls last year, and announced plans to buy another $1.5 billion in the first quarter.

The companies are taking different paths. While GGP has shown a willingness to buy prime centers at 6% cap rates, Simon has been less eager, buying less frequently and focusing more on development. GGP's rapid growth has caused analyst John Litt of Smith Barney to worry that the REIT is “building a reputation for overpaying, rather than building a mall empire.”

John Bucksbaum, CEO of General Growth Properties, brushes aside that notion. “We're paying what we're required to pay. There is no question that the market has become more expensive. To us, what is more important is how are these properties going to fit into our own portfolio?”

New Construction on the Rise

Because the spread between development and acquisition yields is as high as ever, REITs are turning to development to maximize returns. Michael McCarty, president of the community centers division at Simon Property Group, says his company thrives because it has the skill set to build a variety of retail developments. “If you are just a regional mall developer or just a lifestyle developer, you are going to go the way of the dinosaur,” he says.

Of Simon's five development projects, totaling 4 million sq. ft., all are open-air centers. The ability to be flexible shows in GGP's Jordan Creek Town Center, set to open in West Des Moines this summer. The center totals 1 million sq. ft. and is a mix of a traditional regional mall along with a lifestyle center.

Analysts have been warming up to traditional regional mall owners turning to open-air concepts, but there is some skepticism since open-air centers have shorter track records than enclosed malls

With acquisitions of trophy properties pricey, redevelopment of older centers is also key. GGP will spend $670 million on redevelopment over the next two years. Outward-facing retail and restaurants are a growing component in such projects.

But the ever-increasing amount of new development in the sector this year versus last year worries many. Retail construction starts were up 16.7% year-over-year in April, according to Smith Barney.

Still, fundamentals are strong for mall owners, with occupancies in the 90% to 91% range. In the grocery-anchored arena, occupancies have remained above 95%.

Challenges and Opportunities

Kimco spent the last year leasing up space left vacant by Kmart when it filed Chapter 11. But since this upside is now mostly complete, core NOI growth is likely to slow, according to a report by Smith Barney's Litt. Kimco will need to do something to grow earnings, and Litt wonders if perhaps the driver will be a participation in Target's plan to dispose of its Mervyn's chain.

Consolidation is a quick way to grow earnings, and public companies have been gobbling up all or part of major portfolios. In the past year, Kimco merged with Mid-Atlantic Realty Trust, Pennsylvania REIT bought Crown America Realty Trust's mall portfolio, and Developers Diversified picked up the Benderson portfolio.

Acquisitions continue to be difficult in the grocery sector as pricing is at historically high levels, while the cost of debt inches upward, says Hap Stein, CEO of Regency Centers. He calculates that cap rates in the sector have dropped 100 basis points in the past year.

Developing properties is no easier, Stein says. “Entitlements are more difficult every day to obtain — because of the growing shadow of Wal-Mart and the focus on same-store growth.”


Company % Increase GLA owned (2003 survey) GLA owned (2004 survey)
Developers Diversified Realty* 39.7 million sq. ft. 100 million sq. ft. 152%
CBL & Associates Properties 31.4 million sq. ft. 61 million sq. ft. 94%
Pennsylvania Real Estate Investment Trust 11.8 million sq. ft. 33.4 million sq. ft. 183%
*Total includes acquisition of Benderson Development Co. portfolio this spring.
Source: 2003 and 2004 NREI Top Shopping Center Owners lists

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