Investors Revisit Lifestyle-Center Concept

Lifestyle centers, which are identified largely as open-air retail concepts that feature a few anchor tenant surrounded by retail chains that focus on discretionary sales, had fallen out …

Lifestyle centers, which are identified largely as open-air retail concepts that feature a few anchor tenant surrounded by retail chains that focus on discretionary sales, had fallen out of favor with investors for some time, but are now on the upswing. Developers have since learned that they must be built in warm climates in areas with growing population, and the handful that have done this are seeing a slow recovery. This, in turn, is attracting a new round of investors to the niche who are interested in developing new properties or buying into existing concepts. For more on this continue reading the following article from National Real Estate Investor.

It may be hard to believe after the bad rap lifestyle centers had gotten during the downturn, but investors are once again interested in this product type, even if they’ve become much pickier about which properties they are willing to put money in.

Statistics put together by Real Capital Analytics, a New York City-based research firm, show that year-to-date investment sales volume in the lifestyle center sector, including closed deals and transactions under contract, totals $1.7 billion. That would put 2013 on track to match or break the record set in 2007, when lifestyle center sales totaled $1.75 billion, according to Dan Fasulo, managing director with RCA.

The total number of lifestyle centers sold this year may be only 19, but then again, it’s a rather small segment of the retail universe to begin with.

Ryan Severino, senior economist with Reis Inc., a New York City-based research firm, estimates that there were only 12 lifestyle center sales that took place over the past three years, which carried an average cap rate of 8 percent.

“Amazingly, we could see a record year,” says Fasulo. “Part of it might be the fact that it’s a relatively new niche for real estate, so a lot of developers were building these centers over the past five or six years and with the market recovering, it’s looking like a more opportune time to sell.”

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On the upswing

Since lifestyle centers as a group tend to represent newer properties, they are commanding relatively high rents—an average of $21.99 per sq. ft. in the third quarter versus $14.55 per sq. ft. for all retail assets, notes Ryan McCullough, real estate economist with the CoStar Group, a Washington, D.C.-based research firm. Like the rest of the retail universe, they have also benefited from an improvement in fundamentals over the past few years. For instance, the overall vacancy rate for the segment has dropped 60 basis points from its peak of 8.3 percent at year-end 2011 to 7.7 percent today.

Of course, the vacancy rate for all retail properties reached its peak a year earlier, was lower by 110 basis points at 7.2 percent and has dropped by 70 basis points since then, to 6.5 percent, McCullough points out.

“It would appear that we are in recovery, but it’s a weaker recovery than across the entire retail class,” he notes. “What the fundamentals are telling us is that it’s not the strongest asset sub-type.”

That has meant that when investors look into buying lifestyle properties, they are paying very close attention to the details, according to Fasulo. The centers that are getting picked up tend to be located in markets with high population growth and warm climates, including Los Angeles, San Francisco, Atlanta and major Texas cities. (Since lifestyle centers tend to be open-air, building them in cold places like Minnesota turned out to be a mistake, as developers found out during the Recession.)

Other key considerations include the prevalence of high-income consumers in the trade area (since lifestyle center tenants tend to focus on discretionary merchandise) and the amount of money the retailers are bringing in sales.

“Some of these centers that are a little more established and in infill locations, I look at them almost the same way I look at high-end class-A malls,” says Ryan Severino. “Where the trade area really supports them they are still kind of in favor.”

At the same time, Severino adds, “I remember working for investment firms [in the mid-200s], and every time you turned around there was a new deal to build a lifestyle center. But if you looked at the people who were going to be the customers, they weren’t ideal.”

What seems to be less of an issue for investors than developers is the centers’ size. While developers quickly found out that a 100,000-sq.-ft. lifestyle property with no anchor tenants may be a leasing nightmare, if investors want to buy a lifestyle center today they need to concentrate on the centers’ performance, rather than GLA, notes Fasulo.

Given scant product availability (there are only about 100 million sq. ft. in lifestyle center space in the U.S. today, in a retail universe that totals 12 billion sq. ft., according to CoStar statistics), the acquisition criteria “is a lot less scientific than you may believe,” says Fasulo. “If you are an investor and you have to wait for a center that’s x square feet you might be waiting forever. It’s more the pricing range versus the square foot range.”

This article was republished with permission from National Real Estate Investor.


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