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Managing To The Third Power

Big REITs are getting bigger, gobbling up properties across the country, and, with them, the management responsibilities. That's making it harder for third-party managers to expand — but not impossible.

The key to growth, say independent management-firm execs, is to be more proactive — to actually go out and find profitable retail properties for institutional and private investors with the proviso, of course, that they get the management contracts.

“Active investors are saying to us that if you can bring us product, ‘we will give you the third-party management and leasing,’” says Steve Huber, executive managing director of Insignia/ESG Inc. “That activates another side of our business, the acquisition side.”

One possible option is investing in a shopping center project to help get it off the ground. While Huber says his firm hasn't taken that step yet, “It's not something we would rule out.” But, he adds, “it would depend heavily on the type and quality of the property and whether it fits any investment criteria that we had at a particular stage of the game.”

The need for management firms to beat the bushes to generate new opportunities has never been greater.

“Look at how the REITs are growing,” says Greg Maloney, who took over as president of Chicago-based Jones Lang LaSalle Retail Group in March. Ten to 15 years ago, he points out, the majority of shopping centers were owned by institutional investors.

“Now about 50 percent to 55 percent of the shopping centers are owned by REITs,” says Maloney. By Huber's calculations, with roughly 1,300 regional malls 400,000 square feet or larger, that would leave more than 600 belonging to institutions and private investors. Some manage their own malls, but most seek outside help. “Our best estimate is that at any time there are probably 300 to 400 malls that are out there and available for third-party management.”


What the non-REIT investors are looking for are the opportunities where, simply put, the REITs are not. Generally, these investors don't try to compete with REITs for property. Private owners usually seek higher returns for their investors than a REIT.

In recent years, many opportunistic investors have been looking at middle markets. For example, Atlanta-based Gregory Greenfield & Associates, working with JLL, now has 14 such malls. One example is Magic Valley Mall, a 480,000-square-foot mall and adjacent strip located in Twin Falls, Idaho.

Anchored by The Bon Marche, Sears, J.C. Penney and ShopKo, the center includes about 60 additional specialty stores. Greenfield purchased the property from Fund A, Magic Valley Inc., a pension fund investment group conglomerate of several corporations' employee retirement funds.

The challenge, then, for third-party managers is to identify valuable properties, assist private investors in finding them and then forge working relationships with those owners.

“In many cases, what you like to try and do is identify an investor, or a number of investors, who are out there in the acquisition mode (but) do not want to build an infrastructure to manage or lease,” says Huber. “They are looking for companies such as ours to provide that third-party service in management and leasing.”

Finding those investors, of course, means being out there among them.

“We're out there,” Huber says. “We know the market and we're talking to people, whether it's at the ICSC convention or through our new business development people. We track on a monthly basis who's buying properties.”

“The REITs are on such an acquisition spree right now that the third-party business is, as a defense mechanism, consolidating into a couple of ‘fortress’ providers, if you will,” notes Webber Hudson, president of leasing and marketing for Urban Retail Properties Co. in Chicago. “We're seeing a rising of one or two third-party providers to give a level playing field for the independent owner against the REITs.”

With the REITs — and their portfolios — getting so large, “the lowly owner of one or two or five or six centers is having a hard time competing on a leasing scale, on a management scale, with the people who own 50, 60, 70, 100 malls,” says Hudson. As a result, firms like Urban are stepping in and assembling large portfolios (in Urban's case, 40 million square feet) of independent owners to provide the scale to compete with large REITs.


The mall owners themselves look to multi-faceted managers like Urban to bring greater perspective to the table, Hudson says.

“Over the years I've worked with many” third-party managers, says Rick Graf, Development Director for HCW Development Co. in Branson, Mo. What distinguishes the best from the rest, he believes, is their ability to “put themselves in the position of being the owner and investor and comprehending what that means, rather than just being the leasing and management company.”

Urban was awarded the contract to lease and coordinate development of Branson Landing, HCW's mixed-use waterfront development in downtown Branson. The project features the city's first major convention center, a new town square, a marina, a 300-room hotel and a wide range of destination retail, dining and entertainment venues.

“We looked at all the big boys, and took submissions from several,” says Graf. “We chose Urban basically because I think they understand the perspective of the owner and developer of the center, given their background and having been developers in earnest themselves.”


What should third-party managers' response be in the face of REITs' burgeoning growth?

“Well, it's a hard thing to answer,” says Maloney, “because there are still institutional investors who want to own property. There are also institutional owners who want to partner with REITs, or with other people. Obviously if they've partnered with a REIT, the REIT is generally going to manage that.”

Looking ahead, Maloney believes the best way to compete effectively with REITs is simply to “continue to look for good products for our clients to purchase so they can meet their return threshold.” In the next three months, a lot of properties will hit the market. “At least, that's what brokers tell us.”

Another factor to consider, Maloney adds, is the prognosis for the retail REITs themselves. Questions concerning tax laws, ongoing portfolio diversification and other such factors may change the scenario radically.

“If you look five years ago at regional mall developers, then look at them today,” says Huber, “my guess is they are 33 percent to 50 percent fewer in number — and I think you'll see more consolidation this year and next.”

Third-party managers may even be helped by the REITs' ongoing process of acquisition, Huber suggests. “As they acquire, they're looking at their portfolios and saying, ‘Okay, I have a certain number of malls that no longer fit my criteria and are not performing to the level I would like, so I'm going to dispose of those to free up capital.’”

Thus, the cycle works in reverse too, completing retail real estate's version of the circle of life. “They're trying to increase the size of their portfolios, but at the same time doing some selective pruning,” Huber says. And the cycle is at that point where the private investors are stepping in, buying the properties, developing them, and hiring management specialists. “They know we have the talent and ability to enhance the value of their asset,” he says.

REITs or no, the opportunity for growth will remain, he says.

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