Enriching: Woodfield Mall has been providing $700 per square foot in income.

CalPERS-GM pension fund deal is most expensive mall sale in years

CalPERS' pending agreement to buy the half interest of a suburban Chicago shopping mall that it doesn't already own is a relatively rare transaction in a white-hot corner of the real estate market.

The seller is the $94 billion General Motors Co. pension plan. The GM plan put the property on the block as it sought to sell off its illiquid assets as part of its transfer of $29 billion in pension liabilities to an annuity contract purchased from Prudential Insurance Co. of America, industry insiders say.

For its part, the $245.3 billion California Public Employees' Retirement System, which owns 50% of Woodfield Mall in a joint venture with the GM plan, jumped at the opportunity to own the entire high-performing superregional shopping center in Schaumburg, Ill. The $500 million transaction is expected to close this quarter, possibly by the end of this month.

If it closes as expected, Woodfield would be the most expensive trophy mall to sell in the last five years, according to New York-based research firm, Real Capital Analytics Inc.

“A trophy sale like this comes up every 10 years. It's a great sign of confidence for the Chicago market in general and investors' view of trophy or fortress malls in particular,” said Dan Fasulo, managing director at Real Capital Analytics. “At first glance it looks like pricing is aggressive, but there are few comparable malls in the middle of the country.”

Malls that consistently provide steady streams of revenue do not come up for sale very often because owners often hold them for decades.

“Institutional investors are looking for stability and cash flow for shopping centers and they want to hold them for the long term,” said Stephen M. Bowers, president and CEO of real estate investment firm Terramar Retail Centers LLC, Carlsbad, Calif.

When these retail centers do come up for sale, it is because the owner has to sell or the property is owned by a fund that is at the end of its investment horizon.

Over the years, Woodfield Mall, with about 2.7 million square feet, has been providing CalPERS' retail portfolio an average of $700 per square foot in income, said Andrew Miller, president of Miller Capital Advisory Inc., Skokie, Ill., a long-time CalPERS real estate investment adviser. By comparison, the average for regional centers in the U.S. is roughly $300 per square foot, he said. The average rent for retail properties in the Chicago area, including the suburbs, was $185 per square foot for the year ended Sept. 30. The median was $224 per square foot, according to Real Capital Analytics.

Investors have a big appetite for high-quality retail centers with stable cash flows like Woodfield, Mr. Miller said. “We would see a lot of buyers for these kinds of properties at this price,” he said. “Sales of these kinds of properties are rare.”

Sacramento-based CalPERS had an edge. Its joint venture agreement gave pension fund officials the right to have the first look at buying the General Motors' fund's share of the mall, Mr. Miller said.

GM executives are selling the pension fund's share of the joint venture to ensure its assets are more liquid, sources said.

GM spokeswoman El' Freda Agboka declined to discuss the deal. Joe D'Anda, CalPERS spokesman, said in an e-mail that “there is not a lot more we can add until the deal closes.”

“My understanding of the Chicago deal is it is more driven by the motivations of the seller, (than those of the buyer) which is getting out of the pension business,” said one industry insider.

This article originally appeared in the November 12, 2012 print issue as, "CalPERS-GM pension fund deal is most expensive mall sale in years".