Rising commercial real estate prices are enticing more retailers, including Macy's and Sears, to sell their properties, creating a growing source of real estate deal flow.
Many retailers are suffering financially as they try to compete with online competitors, and rising real estate prices are making property sales attractive to the companies and their private equity and activist hedge fund owners.
The trend is set to increase deal flow for real estate managers worldwide that had a combined $254 billion in capital available to invest as of June 30, the highest amount on record, according to London-based alternative investment research firm Preqin. That was up 37% from the $185 billion so-called dry powder at year-end 2014.
But because many of these deals involve the often troubled retailers leasing back the sold properties, some industry insiders wonder whether these transactions could be increasing risk in investors' portfolios by adding a possibly iffy tenant at a time when a downturn could be looming.
While no one interviewed for this story spoke of a commercial real estate bubble, they did wonder whether managers and investors are looking to maximize gains at a time when they should be focusing on reducing risk.
This is a time when real estate investors “should be bear-hugging quality” and testing their portfolios against downside scenarios, said Michael K. McMenomy, global head of investor services in the Los Angeles headquarters of real estate manager CBRE Global Investors.
“When prices are up and yields are down is when people focus on outsized gains and taking on more risk in the name of increased yields. And they have it exactly backwards,” said Chris Macke, managing director of research and strategy for American Realty Advisors, a Glendale, Calif.-based real estate investment manager.
This is a time to focus on properties in the best markets that will recover more quickly after a downturn and on real estate with better tenants that can survive a downturn, Mr. Macke said.
“We are not staying away from retailers, rather focusing on select retailers,” he said. “We are doing it across property sectors focusing on the companies (tenants) that will have better access to capital during a downturn.”
Still, one money manager believes while this trend works out well for the retailers, who are able to sell at high valuations and into a flood of waiting capital, it won't have much impact on the real estate market.
Macy's this month became the latest retailer to announce it is putting its real estate holdings on the market. It already has trimmed its properties — selling a Pittsburgh store to developer Core Realty Holdings LLC, among other sales — but activist investors such as hedge fund Starboard Value LP pushed the department store chain to unlock the value of its entire portfolio.
“The primary reason for some large retailers unloading their real estate is that they have a need for the cash and to unlock the value of the real estate ... is more in favor than the operating company,” said Mr. Macke.
In June, The Bon-Ton Stores Inc., York, Pa., announced it was doing a sale-leaseback on six properties to one of W.P. Carey's non-traded REITs, CPA:17-Global, for $84 million. The same month, Hudson's Bay Co. announced a joint venture with REIT Simon Property Group. Hudson's Bay sold 42 of its properties, including the Saks Fifth Avenue in Beverly Hills, Calif., to the joint venture for $1.7 billion, and holds an 80% stake in the joint venture.
In July, Sears Holdings Corp. sold 235 properties to a new real estate investment trust the company formed, Seritage Growth Properties for $2.7 billion. (Sears had already sold off properties for a combined $770 million in 2012 and 2013.)
Prices for U.S. commercial real estate increased for the year ended June 30 in four of five categories: up 10% for the industrial sector; 11% each for retail and apartments; and 19% for the hotel sector. Office prices were flat during the period, according to real estate research firm Situs RERC's second-quarter report quoting from research firm Real Capital Analytics data.
U.S.-based retailers aren't the only ones looking to offload their properties. Wm Morrison Supermarkets PLC, a U.K. chain, has sold much of its roughly £500 million ($774 million) property portfolio. In the first quarter, Morrison's sold five properties for about £300 million.
Mr. Macke said he expects more companies to spin off their real estate and lease some of it back, especially those owned by private equity firms.
“If I'm a private equity firm I have a much shorter-term focus than the retailer,” Mr. Macke said. “Private equity is trying to harvest their investment out of those assets, and to the private equity firm it doesn't matter if they own the asset. If anything, they might want to unload the asset and get the cash out.”