Investors also buying neighborhood malls

It's not just superregional malls that are getting investor interest.

In October, Terramar Retail Centers LLC bought Spring Street Pavilion Center with an undisclosed institutional investor partner for $42.2 million from the long-time owner, the Weingart Foundation. Spring Street is a 93,873-square-foot grocery-store-anchored, neighborhood retail center in Long Beach, Calif.

Stephen M. Bowers, president and CEO of the Carlsbad, Calif., firm, said Terramar and the investor, which he declined to name, bought the shopping center as part of a strategy to buy neighborhood and community centers in Oregon, Washington and California. But they weren't the only interested buyers.

“Demand for this type of center is very strong because of the stability of the tenancy, the stability of the grocery store, Pavilions, and the credit of Safeway, Pavilions' parent company,” Mr. Bowers said.

Very few high-quality shopping centers have been sold this year and in 2011, he said; the ones that have been sold went for a high price.

“Each investor has its own threshold in terms of rate of return,” he said. “In our case, in our investment in Spring Street, it has a high-quality, stable cash flow that will be durable through multiple real estate cycles.” Mr. Bowers wouldn't discuss his firm's rate of return on Spring Street.

Even the debt of upscale malls in struggling regions is being sold at jaw-dropping prices.

General Growth Properties Inc., a real estate investment trust that is a big owner of retail centers, refinanced its first mortgage, selling $835 million in a commercial mortgage-backed security linked to the Fashion Show Mall in Las Vegas.

“Las Vegas is a deader-than-a-doornail market but investors are lining up,” said Edward L. Shugrue III, CEO of real estate debt investment firm, Talmage LLC, New York. “I guess the phoenix rises in Las Vegas.”

Investors aren't lining up to buy all retail properties, said Andrew Miller, president of Miller Capital Advisory Inc., Skokie, Ill. Like the overall real estate market, the retail sector is bifurcated.

The retail assets at the top of the food chain are having a very good run and raise rents and push down vacancy rates, he said. Centers at the lower end are battling to maintain their market share.

That has worked to the benefit of the more dominant centers, said Derek Williams, director, private real estate of Russell Investments, Seattle. “These centers have gotten stronger and stronger as retailers pare underperforming stores and open new stores in new locations.”

“Strip centers were down year over year,” Mr. Williams added.

According to Real Capital Analytics Inc., $8.5 billion of regional malls sold this year through Sept. 30, as up 234% from the same period last year, while $13.4 billion in strip centers sold in the nine months, down 33% from the year-earlier period. However, last year's numbers include Blackstone Group's $9.4 billion purchase of mainly strip centers from Centro Properties Group, which skews this year's numbers, said Dan Fasulo, managing director at the New York-based real estate research firm.

So investors that want to own the highest-quality retail centers have to pay dearly, but many expect to make up for the price with a long-term income stream.

“The most sought-after product is highly bid up and those below that are difficult” to sell, said Spencer Levy, executive managing director in the Baltimore office of CBRE Capital Markets.

“There's great interest for some assets and no interest for others, unless they're selling for a highly discounted price.

“Institutional investors are looking to buy a lot more and have trouble finding product they like.”