The observation has probably been made hundreds of times during four years of a slow and uneven economic recovery: There’s a lot of money sitting on the sidelines.
Almost $70 million of that investor money came back into the game within the last two months or so when investors purchased retail properties in Inland Southern California. A half-dozen shopping centers, large and small, reportedly changed hands during that period.
It means that at least six investors felt good enough about the local economy to make owning retail properties seem worthwhile in cities that include Redlands, Temecula, Riverside and Corona.
The transactions also are indicative of what people in the industry see as a better climate for that type of investment. Some of the positive factors drawing investors to the table include a dwindling supply of affordable properties, low interest rates that are likely to increase and the famous cliché about buying real estate: They’re not making any more of it.
Mary Sullivan, a Riverside-based commercial real estate consultant, said the demand for retail space lagged sales of other types of properties for about two years. But that segment started catching up in 2013; job and housing markets showed some improvements in the Inland area and consumer confidence has rallied.
These days, the buyers are doing a lot of evaluation, more than they used to do, and are looking at the potential returns before they write the checks, Sullivan said.
“There definitely are opportunities for some very savvy plays, but it’s been cautious pursuit of the correct deal in the right market,” she said.
Investing from Afar
All the investors are from outside the Inland area, but the state of the properties are diverse. Several have high vacancy rates, which makes deals a gamble but tend to lower the asking price. A couple of properties, including the Pavilion at Redlands and Michaels Plaza, located near Riverside’s Galleria at Tyler, had virtually no empty space at the time the sales were announced.
An unnamed Chinese investor paid $17.7 million for the Redlands property, which is anchored by a Food 4 Less, according to a statement from the commercial brokerage firm, CBRE Investments.
The top price in this late-summer rush of retail deals was the $18.5 million that Pathfinder Partners, a San Diego-based investment firm, paid for Bel Villaggio, a Temecula specialty center located in the heart of the city’s retail cluster.
Pathfinder Partners bought Bel Villaggio in separate deals from two different owners. Both the sellers were lenders.
And the complex, which is dominated by restaurants, is currently only 55 percent occupied, said Scott Eisendrath, managing director of Pathfinder Partners. The retail vacancy rate for all of Temecula is about 10 percent.
Those two factors made the price of Bel Villaggio look favorable, Eisendrath said, and he said the market for an investor appeared to be as good as it was going to get.
“We got it at a significant discount,” he said. “I think what has happened over the last four years is a lot of the weaker tenants have been flushed out of the market. The ones that are still there are the ones that can afford to pay rent.”
Bel Villaggio, which was built in stages between 2002 and 2005, is located very close to The Promenade, the area’s regional mall. Unemployment in Temecula was estimated at 7.4 percent in August, compared to 10.8 percent for all of Riverside County, which suggests a good consumer base.
Pathfinder Partners will invest in a face-lift for the property that includes upgrades to common and parking areas. Bids for that work will go out within three to six months, Eisendrath said.
Slow Healing Process
Across the Inland region the market for retail property is getting better but the healing process has been slow. According to a report by the Ontario office of Voit Real Estate Services, the vacancy rate was 8.23 percent in the third quarter, down very slightly from the 8.25 percent in the second quarter and from 8.56 percent 12 months ago.
The average asking point for a lease has increased even more marginally, from $1.35 per square foot in the third quarter of 2012 to $1.37. That means, for a person operating a 1,000-square-foot hair salon in the Inland area, the rent would average somewhere around $1,370 per month, according to Voit’s data.
However, the market has improved. Less than two years ago the vacancy rate was close to 10 percent. An estimated 2.5 million square feet was abandoned by retailers in 2009 alone.
Investors looking for bargains bought a lot of properties that were in foreclosure or were lender-owned during the lean times.
“There’s just not a great deal of supply in our niche right now,” said Bill Asher managing director of Hanley Investment Group, an Irvine-based brokerage firm. “And, there is still a lot of pent-up demand from investors looking for commercial real estate because it’s an alternative to the ups and downs of the stock market.”
Asher’s firm engineered the sale of Michaels Plaza on Riverside’s Magnolia Avenue to The Krausz Cos., an Irvine-based investor with properties in several states, for $15 million. The center features Michaels, David’s Bridal, Lamps Plus, GameStop and other retailers.
Hanley Investment Group also represented the seller of Stater Bros. Plaza, a grocery-anchored center on Arlington Avenue in Riverside, which was sold for $5.25 million. Both sales were announced in early September.
Rates Are Climbing
Asher said that the timing for the sales came at a time when interest rates were showing signs of creeping up. Throughout the summer there were discussions about the Federal Reserve ending its program of buying bonds to support the economy, which would cause rates to increase.
That probably kept some retail property investors at the table, he said. “The rates will move up, people just don’t know when and by how much,” Asher said. “But if you can invest in a fixed income stream you’ll be able to count on it for some time.”
Asher added that most of the owners of neighborhood centers are holding on to the properties. The industry trend is larger single-tenant properties, such as fitness centers.
Investors know that, with the economy still rebuilding itself, every move is a gamble. Last week NAI Capital announced it had helped broker a deal to sell a property called Green River Promenade, located just off Highway 91 on the west side of Corona. It is a collection of small retailers, restaurants and service providers, and it is currently 65 percent vacant.
If anything, it will give the new owners, an entity known as Corona Capital, incentive to offer favorable lease rates, said Marc Piron, an NAI Capital senior vice president. Piron is based in the firm’s Riverside office and did not help put the Corona deal together.
Piron said investors are weighing their risk against properties’ potential return very carefully now. A retail pad in front of a supermarket with a relatively unknown restaurant on it could yield a very solid 7 percent return. But the same pad with a McDonald’s, which would be a lot less of a gamble, might only bring the investor a 4 percent return.
“Still, it’s an attractive way to make your money,” Piron said. “It’s probably a little better than the stock market.”
Several retail properties in the Inland Empire worth close to $70 million have been sold in deals announced during the last six weeks:
Bel Villaggio, Temecula: $18.5 million *
Pavilion at Redlands: $17.7 million
Michael’s Plaza, Riverside: $15 million
Madison Marketplace, Murrieta: $7.6 million
Stater Bros. Plaza, Riverside: $5.25 million
Green River Promenade, Corona: $4.6 million
* Two separate deals