Commingled funds that have shopping centers as their dominant property type dropped in value or underperformed property benchmarks in 1995, Pensions & Investments learned.
The benchmark NCREIF Property index returned 7.71% for the year ended Dec. 31. Property values in the index dropped 1.31%, while income was 9.12%. By comparison, the retail properties in the index returned 4.36% for the year; property values dropped 3.48% and income returned 8.06%.
A tough retail environment in which several retailers filed for bankruptcy protection, a glut of retail space and changing consumer tastes and shopping habits were the primary causes for the decline, retail experts said.
The drop in values didn't surprise, given the well-known troubles retailers are having and the performance of publicly traded retail real estate investment trusts. Public REITs often are a precursor to the performance of privately held real estate, and their share prices took a collective beating last year.
The decline in privately held retail real estate is just now becoming apparent because of a three-month delay in valuing those vehicles.
Atlanta-based Equitable Real Estate Investment Management Inc. told investors late last year to expect a 19% writedown in property values and a 0.4% loss in the Prime Property Fund (P&I, Feb. 5). The fund has about 55% of its assets invested in malls.
An attempt by The RREEF Funds, a San Francisco real estate manager, to create a new private REIT with malls from two commingled funds failed last year, in part because of a drop in mall values (P&I, Nov. 27).
Other commingled funds posting losses or meager gains include:
New York-based Corporate Property Investors, a private REIT with 93% of total assets in superregional shopping centers, returned 4.1% for the year ended Dec. 31. Property values dropped 1.3% and income was 5.4%, said William Lyons, vice president.
New York-based O'Connor Group's Retail Property Trust posted a return of 0.8% for 1995, according to Bruce Macleod, president of the trust. Property values dropped 6% and income was slightly better, resulting in the minuscule positive return.
New York-based Schroder Real Estate Associates' Fund A, with 60% of assets in malls, returned 3%; John Emmanuel, senior vice president, estimated property values declined almost 4% and income was a little better than 7%.
Heitman's Real Estate Funds I, II and III, lost 18.2%, 10.2% and 0.06%, respectively. Malls comprise a respective 51%, 45% and 51% of assets for the funds.
JMB's Group Trust II and IV lost, 8.1% and 4.6%, respectively. Malls comrised 76% of Group Trust II's total assets and 42% of Group Trust IV.
The Heitman and JMB funds are part of Chicago-based Heitman/JMB Realty Corp., though they were started when the companies were separate.
The drops in property values of the Heitman and JMB funds could not be determined because telephone calls to the company were not returned.
RREEF USA II and III returned 6.6% and almost 6.1%, respectively. Malls make up 76% of both funds' total assets.
It wasn't so long ago that shopping centers were the investment choice of pension funds and their real estate managers, resulting in a bidding up of prices into the early 1990s. Fundamentals, however, have caught up to the property type, and malls are now the poorest performing property type.
"Values have been impacted by the slowdown in rental growth resulting from retail bankruptcies, abandonments and slower growths by retailers due to poor sales, a decline in consumer confidence and particularly poor apparel sales due to the lack of a fashion draw," said CPI's Mr. Lyons, in a written response to questions.
"Clearly, the proliferation of retail space of all types has contributed to the industrywide declines in value," Mr. Lyons wrote. "To reverse those trends, the marginal and less productive space must and will be moved from the marketplace."
But retail construction continues in the face of decreased consumer spending and shifting buying patterns.
Retail sales grew an average of 9.6% per year between 1967 and 1981, according to Richard Hauer, manager, Real Estate Advisory Services Group with Coopers & Lybrand L.L.P. Since 1981, retail sales have slowed to 5.5%.
As retail spending declined, consumers also changed their shopping habits and patterns. The consumer of the 1990s makes fewer trips to malls and spends more on recreational products than on apparel, the staple of malls, said Mr. Hauer.
"The (retail) industry's response has been to build single-category shopping outlets - the so-called category killers that maximize selection and minimize price for a single category of goods," said Mr. Hauer.
"The result has been a glut of existing shopping structures, a glut that is going to get worse because the new construction is not generated by increasing demand."
Mr. Macleod of The O'Connor Group estimates it will be another year or two before the market distinguishes the strong properties from the weak. "There is little distinction in the marketplace (currently) between higher-quality properties and middle-market properties," said Mr. Macleod, who believes top-tier malls - which predominate in the Retail Property Trust - will survive the present shakeout.
Mr. Macleod likens the turnaround in high-quality regional shopping centers to the metamorphosis that department stores have undergone. "Five years ago people said department stores are gone, and it's back," he said.
"Regional malls will be back, and certainly top-tier centers will be back strongly."
