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| Dec. 22, 2003 |
Retail Lures Eager Buyers
by Sharon Simonson - Silicon Valley / San Jose Business Journal |
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Seemingly insatiable demand for retail properties nationwide continues to pull Silicon Valley centers to market, where sellers anticipate top dollar, particularly for their most desirable holdings.
Already, the number of the largest centers in Santa Clara County that have changed hands this year is only one center short of the total that sold from 1999 through 2002, according to research from Marcus & Millichap Real Estate Investment Brokerage Co.
Now San Jose's Target-anchored Westgate Shopping Center is drawing close to new ownership. M&H Realty Partners of San Francisco is said to be seeking $90 million for the 650,000-square-foot property. Other significant Westgate tenants include Safeway, Burlington Coat Factory, Nordstrom Rack and Ross Dress For Less. A sale is expected early next year.
In addition, the 215,000-square-foot Mercado Santa Clara on U.S. Highway 101 at the Sunnyvale city line also has been quietly put on the market. Its San Mateo owner, Interland Corp., is seeking $40 million to $45 million for the nearly seven-year-old property, sources say. It's anchored by one of the most-selling AMC Theatres in the country as well as T.J. Maxx. The center is 100 percent occupied, though high vacancy at surrounding office buildings has depressed some sales, two restaurant managers say.
Interland is looking to sell the center both because it wants to cash in on strong demand for retail but also because its own investment strategy centers on offices and apartments, an inside source says. The company owns three Santa Clara apartment buildings as well as San Francisco and other Bay Area offices.
An M&H official confirmed Westgate is on the market though declined further comment. However, an insider in the Westgate sale says he expects that center to sell for "a very attractive price."
"[Westgate's] location and tenant mix is so exceptional that it does very well despite what's an atypical layout" with a mix of interior space and open-air shopping, he says. "Target is also one of the strongest performing retailers in the business right now, so that is a boost." Eastdil Realty is marketing the center.
Investors nationwide have grown increasingly interested in retail properties in the last 18 months to two years, as they seek safe haven for their money at acceptable yields and as other possible investment venues such as the stock market and office buildings have grown less attractive. The turnaround is reasonably dramatic compared to the late 1990s, when investor interest in retail waned. Investors considered offices better bets because the potential tenant stream seemed larger and rent upside stronger. At the same time, bricks-and-mortar retail appeared risky because some experts believed the Internet threatened its financial strength, says Jim Costello, a senior economist for Torto Wheaton Research in Boston.
Locally, that strong interest has expressed itself in several ways. Buyers are willing to accept lower and lower returns on their investments, says Dan Wald, a senior vice president in BT Commercial's investment services group. In the last year, capitalization rates, a measure of investment yield that divides annual rent income by purchase price, have fallen on better quality properties to 7 percent and in some cases below 7 percent, he says. That's a full percentage point below a year ago.
He and others expect cap rates to continue to stay low this year, assuming interest rates don't rise.
In addition, retail centers have increasingly drawn multiple bids, says Dave Taxin, a partner with Meacham/Oppenheimer Inc. of Campbell, which specializes in retail leasing. "Almost all of our deals have five to 10 offers," he says.
The interest in retail also has expressed itself in the valley via regional and super-regional malls. In August, Simon Property Group of Indianapolis paid $333 million for a 51-year lease of the 1.3 million-square-foot Stanford Shopping Center in Palo Alto. The center is extremely well-regarded for its exceptional sales -- in excess of $500 million in 2002 -- and its swanky shops, including Neiman Marcus, one of the center's five anchors.
The Mills Corp. of Virginia bought Milpitas' Great Mall of the Bay Area in August as well, paying $265.5 million for the 1.3 million square foot mall. That was some $50 million more than the Great Mall's former owners, Florida's Swerdlow Group, paid for the center, including an $85 million reinvestment the owners completed right before putting the property on the market. Mills has since sold a half-interest in the center to a German company for $118.6 million.
In addition, the 476,000-square-foot Vallco Fashion Park Shopping Center in Cupertino (excluding department store square footage, which wasn't on the market) sold to a group of local investors in June. The purchasers, led by the valley's Alan Wong, did not disclose a price but bought Vallco out of foreclosure, making this transaction considerably different from others.
Still, these three sales represent more activity in 2003 in Santa Clara County than in any of the last four years, says Keith Seabury, research manager in Palo Alto for Marcus & Millichap.
The pace of sales has been slower this year than in the previous four years for both strip centers and neighbor centers, he adds. But, that does not surprise Bernie Haddigan, national director for the national retail group for Marcus & Millichap in Atlanta. Nor does it mean the interest in retail in the Bay Area ends with large, wealthy investors, Mr. Haddigan says.
"In real estate, your best quality stuff trades the least," he says, and "when you look at the premium [U.S.] markets you want to be in, the Bay Area is clearly one of them."
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