Biggest retail buyers put their money where the malls are

Despite the high-profile deals struck last year by a who’s-who list of institutional players, the clouds gathering over the retail market played a large part in quelling investment into retail real estate throughout the U.S. in 2016, according to a recent report from brokerage JLL.

The year’s total transaction volume was $64.3 billion, marking an 18.7 percent fall from the market’s peak in 2015. Some market watchers are questioning how long the current economic cycle’s growth can last, while others say it’s already over.

“A lot of people feel like the shoe may have to drop at some point,” said Jason Shapiro, managing director of Miami lending firm Aztec Group. “That being said, I’ve seen an unprecedented level of international investment coming into the retail market throughout the U.S.”

The most recently available national numbers appear to show the retail market is still on decent footing: JLL’s figures from the fourth quarter show vacancies hit 5.1 percent in major U.S. markets, falling from 5.7 percent at the end of 2015. In the same time frame, average asking rents climbed to $16.54 per square foot from $15.84. That said, in markets like Manhattan, availability rates ticked up significantly in the first quarter of 2017, while rents started to decline.

But amid the stark signs of trouble and the cautious attitude, major deals were — and are — still going down. The Real Deal combed through a wealth of records from data firm Real Capital Analytics to come up with a list of the country’s most prolific retail investors — including a cadre of pension funds, investment managers and real estate investment trusts that accounted for nearly $14.8 billion worth of purchases from March 2016 through the end of February of this year.

Brookfield Asset Management ($2.9B)

In 2016’s single largest U.S. retail deal, Brookfield Asset Management bought a majority stake in Rouse Properties and its collection of 35 malls as part of a cash deal valued at $2.8 billion, including about $1.6 billion worth of debt.

The purchase was a multibillion-dollar vote of confidence for the U.S. retail market by Toronto-based Brookfield, which already owned about 33 percent of Rouse. The deal raised eyebrows for some, as most of Rouse’s 24 million-square-foot portfolio is Class B regional malls — an asset type increasingly associated with risk because of competition with e-commerce and increasingly prevalent news of store closures from national retailers, according to CBRE Senior Managing Director Mark Bratt.

Brookfield CEO Bruce Flatt wrote in a fourth-quarter letter to investors that Rouse was “undervalued as a standalone public company,” which meant Brookfield could acquire the company at a discount compared to the value of its holdings. Brookfield took its first stab at taking Rouse private in January 2016, when it submitted an unsolicited bid of $17 per share. A month later, the two agreed upon a closing price of $18.25 per share.

Though it claimed 2016’s top spot for retail purchases, Brookfield still has plenty on its plate for this year. The company entered a highly publicized partnership with Macy’s in November to evaluate development options for roughly 50 of the retailer’s properties.

Blackstone ($2.6B)

A perennial player in almost every commercial real estate sector, New York private equity firm Blackstone nabbed the No. 2 spot on the list with slightly over $2.6 billion worth of retail purchases.

The bulk of that sum came from the May closing of Blackstone’s $1.9 billion deal to purchase all 49 properties in Canadian REIT RioCan’s U.S. retail portfolio.

The properties are located primarily in Texas and the Northeastern U.S. For RioCan, the cash influx means replenished coffers to help fund its buyout of partner Kimco Realty Corp.’s share of 22 properties in its home country.

Blackstone now has roughly $102 billion worth of real estate assets under its management, and its property division alone is sitting on another $32 billion worth of funds waiting for investment opportunities, as revealed in a first-quarter earnings presentation.

That cash isn’t exactly burning a hole in Blackstone’s pocket, however: President Tony James said in an earnings call this year that he believes the U.S. real estate market is softening and worthwhile investment opportunities are harder to find. That sentiment is reflected in Blackstone’s tally of retail purchases last year, which fell roughly $400 million short of the $3 billion the company spent between March 2015 and February 2016.

DRA Advisors ($2.4B)

Keeping with the trend of corporate buyouts among last year’s top retail spenders, investment manager DRA Advisors completed a $2.3 billion deal to acquire Inland Real Estate Corp. and its assemblage of 130 retail properties throughout the Southeast and Central U.S.

With a commitment letter from lender Wells Fargo in hand, DRA and Inland agreed to a purchase price of $10.60 per share in December 2015, along with the assumption of existing debt. The deal’s closing the following March heralded a huge upswing in retail investment volume for DRA, which had racked up only $531 million worth of purchases across 19 properties during 2015. Its latest pickup added roughly 15 million square feet to the company’s retail war chest.

DRA, which is based in New York and specializes in real estate, has grown the dollar value of its portfolio by more than half over the past two years with its acquisition of Inland, as well as its $1.07 billion purchase of Cabot Properties’ 184-building industrial portfolio this past February. The company’s total assets under management now stand at more than $10 billion.

PGIM Real Estate ($2.3B)

PGIM Real Estate, the property investment division of insurance giant Prudential Financial, was hugely active in the commercial real estate scene over the past year, with $12 billion worth of international real estate deals struck during 2016 alone.

And despite its focus on coastal U.S. apartment and office properties, where the company said it made nearly 75 percent of its purchases last year, Prudential still managed to rack up $2.3 billion in retail acquisitions over 139 properties and more than 16 million square feet of leasable space.

CEO Eric Adler said in a February news release that PGIM sees real estate as a solid bet because of underlying economic support, despite the volatility and uncertainty that have pervaded the market in recent months. One of the company’s largest pickups last year was its $500 million purchase of the Avalon, a mixed-use development housing 276 apartments and roughly 390,000 square feet of retail,  anchored by a Whole Foods, in Alpharetta, Georgia.

TIAA ($1.5B)

One of two pension fund operators to breach the upper crust of 2016’s top retail investors last year, TIAA tallied up $1.51 billion in shopping center purchases over five properties and 1.2 million square feet.

The crown jewel of its acquisitions was a 50 percent stake in the Fashion Show Mall, a high-profile, 48-acre retail center on the Las Vegas strip for which it paid $1.25 billion to General Growth Properties. The company has some $15 billion worth of U.S. retail assets in its wheelhouse.

TIAA, which manages investments for academics, researchers, medical workers and others, views real estate as the first option outside of investing in financial markets, especially in times of inflation, Chief Investment Officer Phil McAndrews said in an interview with Barron’s early last year.

Simon Property Group, Invesco ($1.1B)

Not to be outdone, retail giant Simon Property Group and its partner Invesco closed a similarly massive deal last year, spending $1.1 billion to purchase the luxury Shops at Crystals enclosed mall in Las Vegas. The sellers were MGM Resorts and Infinity World Development, which built the mall and the surrounding $8.5 billion CityCenter mixed-use project.

The acquisition gave Simon and Invesco a swath of high-end retail at the heart of a Las Vegas megadevelopment, and broadened Simon’s already considerable 1.9 million-square-foot portfolio in the area. According to Simon’s 2016 year-end report, the mall is 89 percent occupied with a collection of coveted tenants like Louis Vuitton, Dolce & Gabbana, Fendi and Prada.

The purchase price broke down to a whopping $4,193 per square foot.

Miller Capital, Calpers (1.09B)

TIAA wasn’t the only financial firm headed to Vegas last year. In a single $1.09 billion deal, Miller Capital Advisory and pension manager CalPERS bought out the Miracle Mile Shops from Tristar Capital and RFR Holding.

The two buyers made the purchase through their joint-venture company Institutional Mall Investors (IMI), which has accumulated a retail portfolio of more than 20 million square feet across the U.S. since being founded in 2003. IMI’s latest trophy houses more than half a million square feet of rentable space anchored by the Axis theater, where the likes of Britney Spears and Jennifer Lopez are resident performers. It’s also attached to the Planet Hollywood Resort & Casino, which boasts nearly 2,600 hotel rooms.

The mall’s prominence on the strip and its proximity to a major casino likely played a big role in attracting CalPERS, which has shifted its focus from total returns to stability for its real estate investments. “Las Vegas continues to set record visitor numbers, and that is certainly reflected in the traffic we see at Miracle Mile Shops,” Andrew Miller, president and CEO of Miller Capital Advisory, said when the deal was announced in October.

CalPERS and Miller’s closing price equates to roughly $2,227 per square foot.

Acadia Realty ($817M)

Last but certainly not least among our ranking of the top 10 retail players last year is Acadia Realty, a Rye, New York-based real estate investment trust that bought 31 properties for a total of $817 million.

A significant chunk of that sum came from the company’s August $147 million purchase of the retail space at Chicago’s landmark Sullivan Center, which brought with it roughly 176,000 square feet of rentable space anchored by Target.

Overall, Acadia added nearly 2.1 million square feet to its retail portfolio during 2016. The company’s holdings reside mostly on the East Coast and are primarily made up of High Street-style retail properties along urban corridors.

Acadia announced in September that it had pulled together $520 million worth of investor commitments for a new fund aimed at “opportunistic” real estate deals. Taking leverage into consideration, the fund now has some $1.5 billion worth of buying power — a sum that could help propel Acadia higher up on the ranking of the top retail investors in 2017.