Retail sector outperforms

Who would have thought the retail sector would be a top performer in commercial real estate in the middle of the current economic downturn?

The multifamily industry has been investors’ favorite for some time now. For the fifth consecutive quarter the sector experienced uninterrupted growth, according to the latest figures from the National Multi Housing Council’s Quarterly Survey of Apartment Market Conditions. The demand is expected to continue to grow for both apartment units and apartment properties.

Mark Obrinksy, chief economist for the council, said in a statement, “The strength of the sector’s recovery has attracted capital to the industry. … We anticipate this increasing further in the coming years due in part to the large number of younger households moving into the housing market and a greater preference shown for renting.”

However, other commercial real estate studies are concluding housing prices and other factors are contributing to make buying a home or condominium more appealing than renting. The apartment sector, which has been a top property type by total return for the past five quarters, was not one of the top two best returning property sectors during second quarter 2012, according to the NCREIF Property Index (NPI), produced by the National Council of Real Estate Investment Fiduciaries (NCREIF). During second quarter 2012, the retail sector performed the best with a total return of 3.04 percent; multifamily was ranked third with a total return of 2.77 percent. Within the retail sector, neighborhood centers were the best performer with a total return of 4.70 percent, followed by community centers at 3.14 percent.

DDR Corp., The Blackstone Group and Starwood Capital Group were the largest buyers, accounting for approximately $4 billion in acquisitions in the second quarter, according to Jones Lang LaSalle’s Mid-Year Outlook. JLL reported retail real estate sales in the second quarter were $11.6 billion following $12.5 billion in first quarter. Los Angeles, South Florida and Chicago had the greatest transaction volume at $5.2 billion.

Consumer sales growth has provided stability to the overall U.S. retail real estate market. According to the U.S. Census Bureau’s recent figures for July, the value of consumer transactions increased by 0.8 percent last month, compared with June, and is 4.1 percent higher than a year earlier.

“Upward retail sales figures and a growing population continue to drive a modest recovery, though many remain cautious because of the European crisis and upcoming U.S. presidential election,” says Greg Maloney, president and CEO of Jones Lang LaSalle Retail. “We are seeing retail real estate stability and growth in select core markets and expect to see some secondary markets with stronger economic drivers soon emerge from the downturn.”

Andrea Waitrovich is web content editor of Institutional Real Estate, Inc.

The future of retail in the age of the Internet

What is the future of retail? That’s a question many property investors are asking. The rise of Internet shopping — it grew nearly four times the rate of total consumer spending in the first half of 2012— is likely to take a toll on physical stores. Just look at all the difficulties Best Buy is having now. (Let alone the disappearance of Borders and Circuit City. RIP.)

Smart retail investors say it’s importance to focus on the very best properties in the very best locations. Go prime or go home.

And pay attention to the type of tenants. Category matters. While some segments — grocery-anchored for example — are fairly to resistant to Internet cannibalization, others such as books, electronics and clothing are seeing increasing amounts of transactions moving online.

Many retailers are adopting a hybrid strategy, selling online and in retail stores, which can become showrooms for their best products. A recent study by the American Marketing Association found that over the long term, retailers benefit from having physical stores. “In the long run, sales in both the online and catalog channels benefit from the presence of retail stores. The physical presence of a store attracts new customers to the direct channels and encourages existing customers to buy more,” concludes Dr. Jill Avery, assistant professor marketing at the Simmons School of Management in a release from PR Newswire.

But there’s a flipside to the rise of e-commerce: While retailers will need less square footage to sell the same amount of product, they will need better logistics facilities to service the back end of the e-commerce process. The fall issue of European Real Estate Quarterly will take a look at that dynamic, and says Internet retail will be a boon for warehouse investors.

Of course, what will happen to all the existing retail properties if more and more shopping moves online? They could die. Or they might become libraries.

Loretta Clodfelter is a contributor to Institutional Real Estate, Inc.

Brazil readies stimulus

Now that the London Olympics have come to a close, attention turns to Brazil and the 2016 Olympic Games in Rio de Janeiro. Emerging markets offer growth potential and positive demographic fundamentals.

However, the BRIC countries (Brazil, Russia, India and China) are not immune from the various challenges facing the world economy today. This year economic growth in Brazil is expected to grow at 2 percent or less.

President Dilma Rousseff of Brazil on Aug. 16 announced plans for a $66 billion dollar stimulus plan to invest in infrastructure. As part of this plan, the Brazilian government would sell concessions in nine highways and 12 railways to start before moving into other parts of infrastructure. This would help ease some of the infrastructure bottlenecks that businesses face on a daily basis.

This is a positive development, yet a number of questions remain: What will the final details from the government look like in terms of structure and terms for the private sector? How long will it take to implement? Will this program be better managed than past infrastructure programs in Latin America?

At our sixth annual Institutional Investing in Infrastructure conference we will be examining Brazil and other emerging markets during our Opportunities in Emerging Markets session that will focus on Asia and South America.

After Brazil’s credit rating was raised to investment grade by Standard & Poor’s in 2008, more and more institutional investors have been looking at this country and investing in a wide range of assets and asset classes.

Do you think now is the right time to invest in Brazil? Let us know your reasons why or why not.

John Hunt is conference program manager at Institutional Real Estate, Inc.

The new normal

A few years ago, during PIMCO’s Secular Outlook Meeting, they coined a term that captured where all markets where then and still are now and most likely will be for the next several years going forward — “The New Normal.”

This past July, Bill Benz, managing director at PIMCO, wrote an article called Secular Outlook: Implications for Investors. According to Benz, the new normal is defined by deleveraging, reregulation and eventual re-inflation. Uncertainty is one common theme, and another is the potential for more extreme outcomes, good and bad. For investors, then, the biggest challenge is not continued volatility, that’s a given.

“The challenge is moving from a world of normal distributions, with expected occurrence around the mean, to one of bi-modal distributions where more extreme scenarios prevail,” Benz notes.

How does this outlook impact on real estate investing?

In the article, Benz argues that managers need to have more, not less discretion so that they can “play both offense and defense in a bi-modal world.”

Makes sense in theory. However, don’t you run the risk of chasing the tail and zigging when you should be zagging?

John Hunt is conference program manager at Institutional Real Estate, Inc.

P3 sweet spot

According to Infrastructure 2012: Spotlight on Leadership, ULI and Ernst & Young’s annual report on the industry, constrained public budgets and a growing recognition at the local level of the importance of infrastructure — combined with lack of action at the federal level — are causing states, regions and cities across the U.S. to seek innovative infrastructure approaches and solutions. Local governments are using a range of strategies, including ballot measures taken directly to the public, increased use of technology and pricing, and public-private partnerships (P3).

“The private partner ‘sweet spot’ for bidding on projects ranges from $500 million to a couple of billion dollars,” the report notes. Projects of that size are just the type to catch many institutional investors’ interest.

And with the help of renewed federal level support, the market for infrastructure P3 seems ready to take off.

According to industry source Public Works Financing (PWF), 2012 already is outpacing 2011 for P3, $11 billion of projects expected to close this year compared to $1 billion in the past year, and with new federal support, “The deal-flow pendulum is swinging toward P3s. The market is being stimulated by the new MAP-21 law passed on July 7,” notes PWF. “Congress increased the leveraging ability of the federal TIFIA loan program to over $20 billion next year and $30 billion in 2014,” PWF notes. By comparison, the entire federal-aid highway program of grants is $40 billion, and that amount will be shrinking every year.”

This should be welcome news for pension plan sponsors and other institutional investors eager to build diversified portfolios — energy assets have been the most accessible investments in recent years, and now it seems the universe of U.S. transportation assets and opportunities is poised to grow.

Increased federal level support is certainly a positive development for the U.S. infrastructure market, but before investors and investment managers ready the champagne to toast winning bids, they should take heed of what some in the industry consider one possible downside — with limited funding, only the most qualified projects received TIFIA financing; however, with more funding comes more projects, and due diligence becomes all the more important. The champagne may be better appreciated years after winning the bid, when a project’s financial success or failure becomes clear.

Drew Campbell is senior editor of Institutional Investment in Infrastructure.

How has core evolved?

What is core? Is it simply fully leased, class A buildings in premium locations, or is there more to it?

Core has evolved over the years. At one time 50 percent leverage seemed to be the standard, then you had some core players leveraging up to 70 percent. How much leverage is appropriate? What are the right benchmarks to evaluate the correct amount of leverage? Should it adjust with the market cycle or never go beyond a stated percentage?

Although it’s considered to be a plain vanilla investment, there are a number of conflicting issues to examine. At VIP North America 2013, we will examine these and other key questions during our session, A Different Look at Core: What’s Really Driving it?

How would you define core property? What do you think the right amount of leverage is and why?

John Hunt is conference program manager at Institutional Real Estate, Inc.

16 fund closings raise a paltry $7.4 billion in Q2 2012

Investment managers seeking to raise capital for new funds are facing tough competition and an LP audience that is hesitant to pull the trigger on new commitments in today’s uncertain and weak economic climate. Fundraising activity in second quarter 2012 produced another lackluster performance as 16 real estate funds announced final closings raising an aggregate of $7.4 billion, according to Institutional Real Estate FundTracker.The quarterly total was down from the first quarter mark of $10. 2 billion raised via 19 fund closings.

Funds in the market are typically extending their fundraising schedules and often come up short of their initial equity targets. However, while most investment managers struggle to raise capital, a select few proven managers raising multi-billion funds are enjoying success. It seems investors are more comfortable placing capital with these established firms. For example, The Blackstone Group has reportedly raised about $10 billion toward its $13 billion target for its Blackstone Real Estate Partners VII (BREP VII). Brookfield Asset Management recently announced a first closing of $2.4 billion of equity commitments for its latest opportunistic real estate investment fund, Brookfield Strategic Real Estate Partners. Brookfield is eying a $3.5 billion fund raise. In addition, Westbrook Partners has raised more than $1.5 billion for its Westbrook Real Estate Fund IX, which is pushing toward a final close of $2 billion.

When BREP VII holds its expected final close later this year, a $13 billion fund raise would eclipse the aggregate quarterly market totals achieved in seven of the past eight quarters.

Larry Gray is editorial director of Institutional Real Estate, Inc.

GIC’s cash holdings increase to 11 percent

The Government of Singapore Investment Corp. (GIC) increased its allocation to cash from 3 percent to 11 percent during the fiscal year ended March 31, 2012, in light of global market instability, according to GIC’s annual report on its management, released at the end of July.

“Due to the heightened uncertainty in global markets, we allowed the cash inflow from investment income and fund injection to accumulate during the year in preparation for better investment opportunities,” notes Ng Kok Song, GIC’s group CIO, in the report.

Ongoing turmoil in the capital markets also saw GIC decrease its exposure to public equities from 49 percent to 45 percent. In addition, GIC reduced its exposure to fixed-income assets from 22 percent to 17 percent. “We reduced the allocation to bonds,” says Ng, “because bond yields in the developed markets had been pushed down to abnormally low levels by the flight to safe assets and central bank intervention.”

For the financial year ended March 2012, GIC’s 20-year annualized real rate of return was 3.9 percent, unchanged from previous fiscal year ending March 2011.

Geographically, GIC’s distribution of assets was mostly unchanged during the year, with 42 percent in the Americas, 29 percent in Asia, 26 percent in Europe and 3 percent in Australasia, according to the report. Within Europe, the exposure to the troubled markets of Portugal, Ireland, Italy, Greece and Spain was 1.4 percent as of March 31 and primarily was invested in real estate and selected equities in Italy and Spain.

Jennifer Molloy is editor of The Institutional Real Estate Letter – Asia Pacific.

Is Japan an attractive investment?

Japan has an aging population and shrinking population. According to Monami Yui, in 1965 there were 9.1 working adults to support one senior; today it’s 2.4 working adults per senior.

There’s nothing on the horizon to stop this from continuing to trend down. The economy is moving at a snail’s pace, and national debt is estimated to be more than 230 percent of GDP.

George Soros has stated that he thinks it’s a bond bubble that will pop in five years. He went on to say, “I wouldn’t be surprised if we see a default happening tomorrow.” Given that backdrop of fundamentals, why would anyone want to invest in Japan? Yet capital keeps coming in. We will be discussing how the positive aspects outweigh the obvious challenges in Japan at our Developed vs. Developed session at VIP – Asia 2012 conference in Singapore.

Do you find Japan an attractive investment or not and why?

John Hunt is conference program manager at Institutional Real Estate, Inc.