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Many of the major US pension funds are investing in retail properties through a single-account manager. One of these is the California Public Employees Retirement System (CalPERS). The pension fund has an interest in a wide variety of assets. These include everything from regional malls to grocery-anchored shopping centres.
One of its single-account investment programmes is with Illinois-based Miller Capital Advisory. CalPERS looks to buy fashion-oriented retail with this manager. The transactions include the purchase of wholly-owned speciality retail outlets and partial interests in dominant regional malls. One of CalPERS’ most recent deals was the acquisition of the 650,000ft2 (60,389m2) Jefferson Pointe Shopping Center in Fort Wayne, Indiana. This is a lifestyle centre. The main anchor is a Von Maur department store that occupies 140,000ft2.
CalPERS also seeks to buy ‘necessity’ type retail properties. These are typically grocery-anchored shopping centres. This investment programme buys assets through Maryland-based First Washington Realty. The pension fund looks to buy assets nationwide in the major metropolitan areas.
CalPERS uses these programmes mostly to acquire core assets but there is opportunity for up to 25% of the properties to be value-added transactions. The strategies used to improve them include redevelopment, re-leasing, or a new marketing strategy. The pension fund does want to be a significant player in retail in the future. Investment officer Randy Pottle says: “We still think there are both core and non-core deals to be found in the marketplace that it makes sense for us to own.”
Sacramento County Employees Retirement System is another pension fund interested in buying retail properties, preferring grocery-anchored shopping centres. These assets are acquired by its separate account real estate manager, BlackRock Realty. The portfolio is managed by Cornerstone Real Estate Advisers and it is already up to weight.
Sacramento County is mainly interested in core-asset only deals. Its chief investment officer, Jeff States, says: “We like this kind of retail as we feel good about the centre being anchored by a strong tenant.”
Sacramento County will continue to pursue these kinds of deals nationwide in the major metropolitan areas. Its cap rate requirements are in the 7.5-8% range.
Los Angeles Fire & Police Pension System still has a yearning for retail. The pension fund looks to buy both lifestyle centres and grocery-anchored properties. The next acquisition could be a lifestyle centre in Tulsa, Oklahoma. This asset is being acquired through separate account manager Heitman. Many of its retail properties are purchased through this relationship.
Los Angeles Fire & Police has targeted total IRRs in the 9-10% range. This return assumes a holding period of between three and seven years. But the timing could be altered as many pension funds have chosen to take advantage of all the capital in the marketplace and take profits. This has resulted in holding assets for two years or less.
Los Angeles Fire & Police has a new strategic investment plan for real estate that could lead to it becoming a more active player in the future. Its chief investment officer, Tom Lopez, says: “The new plan could allow us to invest more capital into retail over the next 12 months.” Under former arrangements the pension fund invested 25% of its allocation to real estate into retail.
The new plan provides more leeway. It does not insist on specific limits for each property type. It states that no single property type can total more than 40-50% of the total portfolio. There is no limit on the low end. This means it could be as little as 2-3%. The new strategic plan was put together by the pension fund’s real estate consultant, The Townsend Group. It will become effective during the first quarter of 2006.
Many of the largest pension fund real estate managers are looking at direct investment in a variety of retail property types, with one exception. None is targeting core transactions on the regional or super-regional mall assets. This kind of retail is now controlled by the publicly traded REITs, led by such companies as Simon Property Group and General Growth Properties Trust. This is a major change from 10 years ago, when it was more of a level playing field for the malls.

The movers and shakers for direct-investment retail property include the likes of Pramerica Real Estate Investors, Principal Real Estate Investors, AEW Capital Management and Heitman. The retail that is being targeted comes in a variety of shapes. Some managers are going after lifestyle centres. Both the smaller and typical-sized power centres are attracting capital sources. And there is still some solid interest in buying the community and neighbourhood centres anchored by grocery stores.
Much of the capital that is being invested in retail is on the value-added side. This is being done largely because the weight of capital chasing core assets has driven down yields to levels that the industry has never seen before. The scenario is not likely to change soon as there is more pension fund capital waiting to be invested in this marketplace.
One recent trend to hit the marketplace is for buying older, outdated malls and converting much of the space using a lifestyle centre approach. One of the managers doing this is Pramerica Real Estate Investors. Pramerica is using this strategy at the former 750,000ft2 Hunt Valley Mall in Hunt Valley, Maryland.
The new name of the property is the Hunt Valley Town Center. The two main anchors of the property, Sears and Wal-Mart, are staying. The inside of the center is being replaced with more lifestyle-type tenants. These will include restaurants, a bookstore and a high-end grocery in the form of New York-based Wegman’s. This tenant now occupies 120,000ft2. It offers speciality foods and a very high-end delicatessen. This location is the chain’s first store in Maryland.
Hunt Valley Town Center has now reached 90% occupancy. Pramerica has similar projects in other markets around the US and potential transactions are slated for San Antonio and Sacramento.
Pramerica has great ambitions for its role in the retail sector. Roger Pratt, managing director of the firm, sees it being a major player in this property type. He says: “We expect that retail will make up around 15-20% of our transaction volume for the next year.” The gross volume of its transactions for all property types is $1.5bn (e1.3bn).
Pramerica has a development programme in place with Memphis, Tennessee-based Poag & McEwen to develop new lifestyle centres. Properties in the programme are located in East Hartford, Connecticut, Lehigh Valley, Pennsylvania, and Houston, Texas. The next property will be in Manteca, California. The pension fund manager has not set aside a prescribed amount of capital for these deals but is moving forward on a deal-by-deal basis.
Principal Real Estate looks for two kinds of retail deals. For core deals it looks to buy grocery-anchored centres and power shopping centres. It looks at both primary and secondary locations.
The real estate manager has also established an acquisition joint venture with Florida-based Woolbright Development. Principal has invested between $200m-300m of equity so far in pursuit of value-added opportunities. This means buying existing assets and then improving them through re-leasing, redevelopment or expansion. They could be grocery-anchored, community or lifestyle centres. Only Florida assets are being considered.
Principal has set up the venture to take advantage of Woolbright’s market knowledge in the Sunshine State. Principal’s director of portfolio management, John Berg, says: “We think they can create deal flow and they know all the players in that market.”
AEW feels core regional malls are not a good real estate play right now. Bob Plumb, a principal with the company, says: “It just doesn’t make any sense to try buying regional malls today. That kind of retail asset is really controlled by the public REITs. Our strategy is more to look at a value-added or opportunistic scenario. This could be a repositioning or a redevelopment of existing malls into power centres and the development of new centres as well.”
AEW would like to invest around $400-500m in retail assets over the next 12-18 months. This would be done for a variety of commingled funds and separate account transactions. Markets that it is taking a look at include Phoenix, Arizona, and the mid-Atlantic coast.

For the past few years there has been a significant amount of pension fund capital chasing grocery-anchored shopping centres. This has driven yields down to historically low levels.
Some deals are hitting the 6% range. Some investors are now questioning this strategy, pointing out that these properties are more like bonds than real estate. The bond-like characteristic is based on the situation where there is a major grocery store with a flat lease that runs for a couple of decades.
Heitman’s president, Maury Tognarelli, claims there is another important factor. He says: “There is a consolidation going on in the grocery store business. This is the fallout of the effects that retail_giants Wal-Mart and Target have had on the grocery stores around the country.”
His firm is not a player in regional mall acquisitions. He says: “The major retail assets in malls are held by the public companies. This surely wasn’t the case 10 years ago. We think a good way to access these properties is to create either a joint-venture or operating partnership with these companies.”
Heitman is involved in a joint venture with a Florida-based operating company to find opportunities in the Sunshine State. The pension fund adviser has invested around $150m of equity into the venture. The kind of retail being pursued includes community centres and mixed-use projects with a retail component.
Heitman estimates that it will invest in all property types to the tune of $2bn over the next 12-18 months. The retail component would be in the region of 25-35%.
One of the newer trends for retail that Heitman will be participating in is for smaller power centres. A typical power centre has 400,000- 800,000ft2. There are now some smaller power centres being created in the 100,000-200,000ft2 range.
These centres have some tenants in common with their larger relatives but will only have five or six tenants in total. The properties enable retailers to go into markets which are new to them.
Heitman is in the process of trying to buy such a centre in Tulsa, Oaklahoma. The property is the 138,000ft2 Woodland Plaza Shopping Center. Two of the tenants in the property are Bed Bath & Beyond and Old Navy. The pension fund adviser is currently conducting due diligence. It would buy the property for its separate account pension fund client, Los Angeles Fire & Police Pension System.
Heitman would also like to be a player in other kinds of retail assets including lifestyle centres. Another is highstreet retail in an urban setting. There also is the redevelopment or repositioning of existing retail centres where it would bring in a different retail mix. The pension fund adviser reckons it will look for these kinds of transactions nationwide in major metropolitan areas and the deals would be done mostly for separate account pension fund clients.

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