NEW YORK CITY-Economic turbulence and political uncertainty in the US is not stopping the CRE industry from opening their wallets and doing big deals. Top executives at the International Council of Shopping Centers’ and NAIOP’s 2011 Real Estate Capital Marketplace Conference at Chelsea Piers in Manhattan agreed that investors and developers can still find acquisition and development opportunities hot gateway markets--if they act now.
“There are so many ways we can access capital during down cycles, including using our equity, and that is a great tool to use,” said Jeffrey Olson, CEO of Equity One. Inc., of North Miami Beach, FL. The company recently acquired Capital & Counties for $600 million, one of the largest owners of retail real estate in the San Francisco Bay Area. In addition, Olsen announced that an apartment complex in Pasadena, CA is now under contract, with a cap rate in the low-4% range. “We made the decision to grown our company through an aggressive acquisition program focused on A quality assets, but in particular, rather than using leverage, we use equity.”
Similarly, Scott Rechler, CEO of New York City-based RXR Realty LLC, is focusing on class A assets as well. “What we’ve seen historically, and this goes back through the last 20 years of cycles, is that B quality assets are a value trap,” he said. “People think they are getting good returns and people think they are getting good deals until you get down to the down cycle, where you have to invest almost as much as you spend to buy the building, re-build the building and get the same rent that you got ten years ago.”
RXR Realty just acquired the 2.3-million-square-foot Starrett-Lehigh Building at 601 W. 26th St. in Chelsea for $920 million and assumed $450 million in debt. But despite meticulously calculating and evaluating risk in the company portfolio, Rechler said as the company got closer to the closing of the sale, Standard & Poor’s downgraded the US’ sovereign credit rating. “If this was a CMBS deal, there is no way that it would have been done,” he said. “It was a wake-up call for us.”
However, that isn’t stopping the company in Manhattan. RXR is under contract to acquire a controlling stake in 620 Ave. of the Americas. “These are very volatile times, and firstly, take nothing for granted. It is very difficult to know what is going to happen,” Rechler said.
On the retail front, Kenneth Bernstein, CEO of Acadia Realty Trust, explained that given advancements in technology retailers are evolving to meet the needs of the time period. “While there are host of cyclical issues, there are also some secular issues that are defined by the demise of Borders, the shrinking of Best Buy and the changes happening at Barnes & Noble,” he said. “So not only do you have to be worried about owning A assets today or acquiring more of them. You have to spend a lot of time thinking about what kind of retail formats will be relevant in years to come.”
As a result, Acadia is shifting its attention to urban core properties. The company recently acquired a 440,000-square-foot shopping center anchored by Trader Joe’s, Urban Outfitters and Express in the Lincoln Park section of Chicago. However, Bernstein said that investors need to think how their properties will perform in the long run instead of for the moment. “They may be A assets today, but in five to 10 years due to changes in technology, we need to think long and hard about what an A asset will look like,” he said.
Alex Klatskin, partner of Forsgate Industrial Partners, of Teterboro, NJ, said his company is focusing more on the quality of tenants rather than occupancy alone. “Rather than run for the highest rent we could get on the property, we are always focusing on the credit and viability of the customer,” Klatskin said. Forsgate has built and owns 10 million square feet of industrial property. “The only thing you can’t change about a building is where it’s located. One opportunity we have as developers is finding what we consider a B building in an A location.”
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