Institutional Investors Reveal Trends
In a roundtable moderated by Trammell Crow and Shopping Center Business, institutional investors give a reading on the market and reveal new trends for the industry.
Moderated by Lynn DeMarco and Randall Shearin

The institutional investors roundtable was held at the Westin Times Square in September.

Shopping Center Business and Trammell Crow Company’s East Coast Retail Investment Team recently co-hosted a roundtable of institutional investors, to see what the market is buying, what it wants to dispose of, and what the trends are for institutional owners. The roundtable was held in September at the Westin Times Square in New York. Attendees were David Craine, LaSalle Investment Management; Dean Bernstein, New Plan Excel Realty Trust; Steve Vittorio, Prudential Real Estate Investors; George Fryer, AEW Capital Management; Tom Caputo, Kimco Realty; Dan Weaver, RREEF; Adam Ifshin, DLC Management; Jim Thompson, Regency Centers; and John Hendrickson, Federal Realty Investment Trust.

Lynn DeMarco

DeMarco: Are we in a buyer’s market or seller’s market? Have you adjusted your acquisitions and portfolio strategy? Have your target investments changed?

Fryer: It remains a seller’s market, but not so much as last year. For centers of B-minus quality or less, it has moved even more neutral. AEW has shifted its criteria to pursue more value-added product as opposed to core assets. We have increased our transaction size because of the need to apply our resources efficiently and to ensure liquidity on exit to institutional sources.

Vittorio: From a pricing perspective, it is very much a seller’s market. Strangely enough, though, there is a lot of opportunity out there. In that sense, it is somewhat of a buyer’s market because there is a lot of product.

Hendrickson: We do not want to be forced into a position to buy simply for the sake of buying but will be creative and aggressive when we identify the right opportunities. We have been exploring South Florida as a new target market and are considering a couple of other markets that will share our current markets’ characteristics: dense populations, high household incomes and significant barriers to entry.

Weaver: It’s definitely still a seller’s market when it comes to high quality retail property. Although cap rates might have hit a plateau for Class A retail, we haven’t seen any evidence that cap rates are rising in this sector. Where we have observed pricing backing up and deals taking longer to close is on the more generic, run-of-the-mill product. These trades are often predicated on higher leverage as part of the capital structure.

Thompson: We are seeing the same thing. On those less-than-institutional-quality centers, we are seeing the time to close increasing dramatically. Financing issues, re-trades and a smaller pool of buyers for the lower-quality product has lengthened the time to close.

Adam Ifshin

Ifshin: The only reason your timing has changed is that you haven’t sold to me recently! The back-up in rates has pushed some private, highly leveraged buyers from making a stupid decision. It is still very competitive. We are not in the Class A market unless we are selling something that we have repositioned. If we look at what we’ve sold versus what we’ve bought this year, there is probably a 125-basis point swing in cap rates between the two. The market is starting to bifurcate. The issue is whether or not this will continue.

Bernstein: I am no longer seeing the institutional buyer aggressively going after individual asset purchases at low cap rates without a growth story.

Ifshin: Tom [Caputo], you bought the pure core deal. [Editor’s note: Kimco, at the time, had entered into an agreement to purchase Pan Pacific Realty Trust. The deal has closed since.] That struck me as the deal that was really high quality. A lot of the portfolio deals, when you strip them away, there was no way to get to the private share price. When we have looked at some of these deals, and looked at what we would break up and sell off, you were looking at negative cap rate arbitrage between the portfolio price and those centers that you had to get rid of.

Tom Caputo

Caputo: We are very excited about the merger. There are a number of value-added opportunities in the Pan Pacific portfolio. PNP is not nearly as big as Kimco, and the company did not have the luxury of an in-house redevelopment team. We view this as an opportunity to take the properties that have redevelopment opportunities and either add density or reposition them in their markets. In addition, there are a number of properties in the portfolio located in secondary and tertiary markets. We think some of these properties may be vulnerable in the future and we probably will sell a number of these centers in short order.

Shearin: Have any you adjusted your typical market size or property type over the last 12 months?

Caputo: In terms of markets, we have always been attracted to the West Coast and East Coast because both markets have a combination of significant barriers to entry or population growth and job growth. Our investment criteria include all open center formats, including neighborhood, community and power centers.

David Craine

Craine: As an institutional buyer, the only time we would go to a smaller market is to chase yield. We have some clients who have yield requirements that may be higher than others. In order to satisfy them we have to find opportunity. We recently bought something from Kimco in a Midwestern market to chase yield. The center had great tenants in place and we think we got a premium for buying it.

Fryer: We are not afraid of tertiary markets if they have some really special characteristics. University towns, for instance, have a diverse employment and cultural base. We find secondary port cities desirable. There are also a number of leisure-oriented and affluent retirement communities that are attractive. This year alone, we have done deals in Destin, Florida; Hilton Head Island, South Carolina; Charlottesville, Virginia; and Melbourne, Florida. We believe these locations will remain liquid in a downturn, unlike other tertiary markets that don’t have the same dynamic characteristics.

Vittorio: Where Prudential is active on the retail front in tertiary markets is on the development side. We are taking advantage of opportunities, but we generally aren’t looking to hold those assets.

Shearin: What are some of the markets where you’ve invested?

Vittorio: Sherman, Texas; Destin, Florida; and D’Iberville, Mississippi.

Ifshin: Cap rates are split in two, geographically. Florida is still priced at an unbelievable level. In the Midwest, you can buy in a strong market — with some manufacturing exposure — for a lot less. Take two centers, one in Florida and one in the Midwest, that are identical with demographics and credit profile, and see a very wide swing in cap rates between the one in South Florida and one in the Midwest. I would, except Chicago and a few other cities. But in Indianapolis, Columbus and Cleveland, the swing would be very wide.

DeMarco: In Florida, how are you looking at insurance? It seems that the insurance rates have gone through the roof. How are you adjusting your underwriting and how are you adjusting your portfolio for Florida and other hurricane-prone zones?

Craine: I am looking at a deal in New Orleans now. There are astronomical wind insurance premiums. You have to make sure the asset is insurable. We happen to be able to insure the property, as a company with tons of assets. Many smaller investors are unable to procure the insurance at any price. We’ve seen a lot of major tenants self-insure. We just have to make sure we get the proper certificates that go with that.

Thompson: Overall, insurance is spiking, especially in coastal areas. Throw in the earthquake-prone areas out West, and the two coasts, where everyone likes to buy, and insurance is becoming very expensive for most owners. One of the positives of being a larger, national company is that you have a national platform of assets that spreads the underwriting risk, which is a pricing benefit to Regency as an owner. Loss history becomes a big issue in pricing as well. We have a large portfolio in Florida, but fortunately our loss history over the last few years has been very low, despite the large number of named storms that hit the state. This history coupled with our diverse portfolio has held our premiums in check. Fortunately this year has been a very quiet one for hurricanes, which should relieve some of the pressure on increasing insurance rates. We are, however, seeing buyers come to the closing table who can’t get insurance, or are looking at significantly higher premiums for coverage, which translates to higher pass-throughs for existing tenants. That is becoming a significant factor for smaller companies buying centers in coastal markets.

Ifshin: Details matter, especially insurance, now. How that anchor tenant lease is written with regard to insurance is very important. Is the insurance in the CAM and stopped out subject to some maximum increase? Is it outside the CAM? A lot depends on what the original developer gave away to get the anchor store lease. That could be several million dollars in value right now in a Florida deal. We are a net seller in Florida because of the cap rate arbitrage opportunity, not because of the insurance situation. Insurance has slowed the rate deals are being done there.

Caputo: We have about 80 centers located throughout Florida. Our insurance group advised us our insurance rates [in Florida] may double next year. Fortunately, since we have ownership interests in approximately 1,150 centers, our current premiums are relatively inexpensive so the increase will be manageable. We have a preferred equity group with a business model similar to a mezzanine lender. They were approached by a developer in Florida who was trying to sell a trophy supermarket-anchored property. The developer’s insurance premiums went through the roof, up to $3 per square foot. This was a Publix-anchored center and the anchor had caps on common area maintenance, including insurance. The owner was interested in a preferred equity deal for 3 to 5 years until the insurance premiums settle back down, with a goal of selling the center in the future. The developer wanted us to manage the center and use our insurance policy in the meantime.

Weaver: RREEF’s situation is similar to LaSalle’s. Our insurance costs have definitely gone up dramatically in Florida. However, we aren’t heavily invested in Florida, so we are not having any difficulty getting coverage under our blanket policies. Going forward, our underwriting takes into account the higher costs. So it isn’t really having an impact on our investment strategy. That said, I have to think that it is going to get factored into the rental rates and total charges a tenant is willing to accept as the added costs work their way through the system.

George Fryer

Fryer: If insurance was a stand-alone issue, it wouldn’t be terribly meaningful. We are talking about a rise of 40 cents to 50 cents per square foot. However, the increase in insurance premiums seems to be coinciding with some heavy inflation in other expense areas as well. Real estate tax assessments have risen dramatically, for instance. Given ‘anchor exclusion’ pass-throughs, the multiplier effect on the small shops is large. We are seeing pass-through charges that should be $5 or $6 per square foot, becoming $10 or $13 per square foot for small shops. Eventually, that is going to bear on the market rent.

Ifshin: We are not underwriting major tenant exclusions in acquisitions now. We just won’t. We will pass the deal first. You can’t collect them. In places like Florida, there is starting to be case law that will give you a hard time in collecting them.

Craine: It also affects the overall health ratio of the center. The charges need to be in a range that the tenants can handle.

Shearin: Where are we in the real estate cycle? Interest rates are stable for the time being, but they have risen; cap rates are headed lower. Does anyone see the bubble getting closer?

Weaver: Both NCREIF and NAREIT returns suggest that we could be approaching, or are at a peak for retail. Retail has been extremely strong during the past few years but we don’t foresee further cap rate compression. Over the past 5 years or so, the office, industrial and apartment markets were far more volatile than retail, and are now having their day in the sun with stronger absorption and above-inflation rent growth projected over the next few years. We are seeing a strong bias in the pension advisory business towards apartments and office, based in large part on a recovering fundamental play and a sharp increase in replacement costs. Apartments and office are still viewed as growth vehicles, while retail is viewed as typically more ‘bond-like.’ During the past year, while some of us were inflation bears, retail investment was generally viewed as dicey and a poor inflation hedge. All this said, with some sentiment shifting in the direction of a possible economic slowdown and muted inflation, retail’s predictable cash flow characteristics may make it a preferred property type again in the very near future.

Steve Vittorio

Vittorio: I would agree with what Dan [Weaver] says regarding retail getting toward the end of the cycle. Other property types are just beginning to ramp up. But there is still strength in retail market-by-market. Some of the markets that were hit hard in the tech bust are really earlier in the cycle than some of the markets that weren’t affected by that. The beauty of retail is that the barriers to entry somewhat constrain the supply growth. The extent of the peaks and valleys of retail cycles are certainly a little less than in other property types.

Caputo: When we were here last year, we said the same thing about pricing and financing. The world is so awash in capital right now that anyone of us can obtain very attractive financing for any institutional quality asset. We do not see any let up in demand on pricing for Class A assets.

Vittorio: The end comes when the capital dries up. The capital will dry up when the interest rates go up.

Craine: Or when other investment opportunities become rosier, whether it be the stock market, bonds or private equity investment. Real estate still seems to be the key.

Fryer: It certainly doesn’t look like a typical cycle this time. I think we are entering a gentle downward slope off what has been a long plateau. There is already evidence of reduced capital for the shopping center sector. Foreign investment is way off from last year. REIT investment is down a bit. The syndicators are also down. This has all been made up by the pension institutional capital this year, but if AEW’s allocations are an indicator, we see it cycling over to office as well as value-added opportunities. Don’t get me wrong — there is no cliff at the end of this plateau. Fundamentals are very strong: vacancy rates have been under 7 percent for 4 or 5 years running and there has been so much uplift in market rents that there is a lot of cushion against bad events.

John Hendrickson

Hendrickson: Federal Realty largely focuses on strong properties in our existing core markets: Washington, D.C.; Philadelphia; New York; Boston; and Northern and Southern California. We haven’t seen a slow down at all on the deals we have been pursuing. I don’t see the end in the markets where we are active any time soon.

Caputo: I do think the interesting phenomenon folks have talked about here is that there are a number of multi-asset class portfolios in the market for sale. The intermediaries advise us that most multiple asset class investors are not interested in the retail component of the portfolios. The investors are willing to pass on the retail assets since office fundamentals have improved significantly, and both the industrial and multifamily markets are healthy. When you are underwriting these three asset classes you are not burdened with long-term leases and options. Your upside is limited in retail due to the lease structure, but your downside should be very limited as well. Investors in the other asset classes have free rein to make optimistic assumptions about rent and expense growth rates. The internal-rate-of-return buyer is going to be attracted to these asset classes far more than retail.

Ifshin: One of the things we haven’t talked about that is driving the length of the cycle is that many buyers have taken less equity in deals. The pension guys, who have the really big money, or buyers like Regency, when Macquarie Bank invested with them, fundamentally changed what the buyers could underwrite for higher quality assets. The benchmarks, which had been fluctuating slightly, moved 20 to 30 percent down. A lot of that is correlated to the long-term performance of the stock market when people are looking at how they are going to allocate dollars. Those hurdle rates came down. That is probably the largest single determinate in lengthening the cycle. Last year, would we have gone this long and not talked about Inland and their impact on the market? They may become a net seller in the future, not a net buyer. They had a huge role in pushing cap rates lower. They are not having a big role in extending that. Other capital sources are.

Caputo: Five years ago, investors were able to acquire centers with cap rates in the high 8 to 9 percent range and generate 12 to 15 percent cash-on-cash returns. When interest rates declined, there was an enormous influx of private buyers willing to accept cap rates of 6 or 7 percent. Cash-on-cash yields were cut in half. Co-investing with institutional partners enabled many public companies to continue investing in a very competitive market.

Ifshin: All of the domestic sources lowered their hurdles because they weren’t in the game either. Some of that had to do with the level of competition from the foreign money and the Inland money. Instead of looking at historic S&P returns of 11.5 percent in the stock market, some investors went back to their actuarial tables after Warren Buffett forecasted mid-single digit returns. Investors wanted to be in something that would make the same or more returns where there is a much lower volatility. The answer was real estate.

Vittorio: There was a flood of capital as real estate became an acceptable alternative investment from pension fund clients. Many pension funds had never invested in equity real estate. These are $100 billion plus funds. When they allocate a few percent of that to real estate, it floods the real estate market. When you have that phenomenon coupled with the lack of alternative investments, returns on real estate are driven down. It has become an acceptable investment alternative. Our pension fund clients can’t get enough real estate. We have to hold the throttle back on them on some deals. I don’t think we are unique in that aspect, either.

Weaver: I would agree. Most of us have been very successful the last few years, investing capital at unprecedented levels. The change that we are experiencing with our clients at RREEF is a much higher degree of interest in value-add and development, and, to some extent, offshore investing, as they diversify from their core holdings.

Craine: We have more value-added demand than ever before. In many of those instances, we are looking to partner up with the publicly traded companies that have the expertise and a mind on where the product may be to get those funds placed.

Shearin: Do you see any competition from private equity funds or tenant-in-common buyers?

Caputo: I think the private equity funds are primarily investing in other asset classes including office and multifamily. These non-retail assets are easier to underwrite for IRR buyers. The private equity/opportunity funds seem to be avoiding retail, other than buying some of the retailers. We don’t see them as major competition on straight up property acquisitions. We do not have much experience with TIC buyers. Most offers we receive from TIC buyers include numerous contingencies and, therefore, we have worked with other investors on our dispositions.

Dean Bernstein

Bernstein: When we are up against a TIC buyer, it is usually rather easy to beat them out because there is so much uncertainty regarding their execution and closure. With most of the institutional buyers, the execution risk is limited as long as the numbers make sense and there are no major due diligence issues.

Ifshin: Their pricing model has changed. The interest rate rise from November 2005 to April 2006 thinned the TIC field out because their loads are so high. They won a lot of deals in 2004 and 2005. I have not seen them materially in the market the way they were in 2004 and 2005. They have cooled considerably over the last 6 months.

Caputo: We have not seen the TICs in the best and final round of bids for any of our recent sales.

Ifshin: The 1031 player is still in the market, though.

DeMarco: Have any of you explored adding ethnic-oriented centers in your portfolios?

Caputo: We just purchased an Asian-oriented center in Cupertino, California, anchored by a Ranch 99 grocery store. It is one of the most successful centers in our portfolio. The demographics are great. It is located across the street from Hewlett-Packard’s headquarters. In Seattle, we had a QFC supermarket close in one of our centers. The QFC was generating under $200 per square foot in sales. We replaced it with an H-Mart, which is an Asian-oriented supermarket. The center, which had very little daily traffic when it was anchored by QFC, is now mobbed. We also own several centers in urban areas, which are anchored by Asian or Latino supermarkets. These centers have been very successful because of the barriers to entry and enormous population density.

Fryer: We have made a few purchases of ethnic-oriented centers. We purchased a center with a vacant box with the objective of attracting an Asian grocer to the market. We brought in H-Mart and it has completely ramped up the center. Last year, we made a big commitment to this strategy by acquiring a majority interest in Metro Center Mall in Phoenix. It is 1.2 million square feet and is going through a substantial repositioning toward its Hispanic community. When we enter an ethnic market, we want to ensure that we’re not buying just in a first-generation enclave. We want the areas that retain the second and third generations of that ethnic group so that the center can enjoy the rising incomes and stability of the merchandising strategy we’ve chosen.

Ifshin: About 40 percent of our portfolio is in census zones that are at a minimum of 35 to 40 percent of one ethnic population. Some of them are well north of 50 percent ethnic trade areas. We have a whole joint venture set up to develop centers in ethnic areas. We are going to build our first public-private partnership next year in Las Vegas on a city-designated site. It will be a grocery-anchored center tailored for the Hispanic market. With the ethnic grocers, their sales growth is three to four times the rate of the established main line grocers. We opened an ethnic grocer in Jonesboro, Georgia, 3 years ago and it has consistently grown its sales at 15 percent per year. This grocer is up against a Wal-Mart Supercenter, Publix, Kroger and another ethnic store, and it still has phenomenal growth. You can’t just pick the demographic. You have to understand the intricacies of the market.

Bernstein: The national supermarkets have been slow to react to this market but some of them are recognizing this. For example, Publix started a new concept called Sabor that tailors its goods to the Hispanic market. Some of the others are changing concepts as well, gearing the goods and services in their stores to the ethnic mix of the local clientele, which is a positive trend.

Vittorio: We have been attempting to establish a Hispanic initiative for years. We teamed with a group from Los Angeles, Primestor, about 3 years ago. Arturo Schneider, who runs Primestor, is originally from Mexico. Their goal is to provide quality retail centers in Hispanic neighborhoods. We have probably done four or five deals with them, and we’d like to ramp that up dramatically. The demographics and pent up spending power are amazing. It is typically very concentrated and it’s typically in infill locations where it is difficult to find sites to develop or redevelop. If you find the right partner, you can get your toe in the water.

Ifshin: In the right ethnic markets, you have rapidly expanding per capita household income and disposable income. Household size is growing dramatically in those neighborhoods as well. There are a lot of undocumented dollars in every household. The demographics are hard to track.

(left to right) Randall Shearin and Dean Bernstein.

Shearin: What are some of the new trends that are being innovated by the retail industry? Obviously, lifestyle is here to stay. Is everyone trying to incorporate lifestyle into grocery-anchored and power centers?

Hendrickson: So much talk about lifestyle versus shopping centers. We have the creative ability and expertise to acquire, create and/or redevelop properties to meet the needs as long as retail is the primary use.

Vittorio: ‘What is lifestyle?’ is always a question. Prudential is the capital behind most of the Poag & McEwen Lifestyle projects. They still adhere to the original concept of lifestyle. We are also behind M.G. Herring & Associates, which is also a lifestyle developer, but it’s an entirely different product [than Poag & McEwen]. M.G. Herring’s properties are really malls without roofs. Both developers’ projects have similar characteristics, but they also have their differences. One has traditional department store anchors and the other doesn’t. The M.G. Herring projects tend to be more mixed-use. Lifestyle is tenant-driven and the tenants like the formats. Lifestyle is not without risk, co-tenancy being the most apparent risk. Ultimately, you have to build a product that services those tenants. There is a very strong group of tenants that like that product. Are there too many lifestyle projects planned? Probably. A lot of them won’t get built. And a lot of them that do get built won’t survive long term.

Fryer: At AEW, we see a hybridization of the pure sub-product types. Power centers, lifestyle centers and malls are converging and combining elements. Each of the pure forms has proven to be much more flexible than they were originally designed to be. Now, the types can be combined to work very effectively. The entertainment center is the only property type that I would say is in the museum. We just bought a project called The Loop in Orlando that is in an area of half-Hispanic, half-Caucasian demographics. Power, entertainment and lifestyle components are all represented; we call it a “power village.” It performs like an engine with 12 cylinders.

Weaver: Consumers are becoming increasingly demanding, especially within our targeted upper-middle income demographic. Unless they have no other choice, they aren’t going to patronize bland or unattractive shopping centers and unpleasant older stores. Traditional grocers are responding, and most bad department stores have long since died. The top mall owners are coming up with innovative solutions to remerchandise empty department store boxes, or alternatively tear them down and add interesting lifestyle components. Basically, shopping center owners need to remodel periodically to maintain sales and their competitive position. If you don’t renovate your center, someone will steal your customers with a high-design lifestyle center. Ugly shopping centers and stores that don’t keep up with current trends, which consumers used to be more willing to put up with, are headed for the museum. Just go to the Web site deadmalls.com and look at the extensive list of property that is now obsolete.

DeMarco: Let’s talk about mergers and acquisitions. There are three different types of mergers and acquisitions going on in the industry right now: owners buying owners; owners acquiring retailers; and retailers acquiring retailers. What are your thoughts on what will have the most impact on the industry?

Ifshin: The big one as it relates to retail is private equity buying retailers. You see a company like Michaels that has no debt and plenty of cash on its balance sheet. Michaels has never had an investment-grade credit rating. The group that’s going to buy it is going to put about $1.6 billion on the balance sheet. It is a tenant that has historically been known as one that drives a very hard bargain with landlords. It did it based on the fact that they had a clean balance sheet. Now, it is going to be a very different tenant in my mind. When you are a retailer, there is a big difference of who buys you. If Bain Capital is driving that deal, they have a huge amount of retail experience. But there are players in the market who have less retail experience. The fear is the amount of leverage that is going on the books of these retailers. Michaels is a company that has a very loyal customer, but who doesn’t necessarily do a huge per-square-foot volume. If you have a lot of leverage on a chain that does an average of less than $200 per square foot and you have a recession, you have problems.

Caputo: Private equity investors generally either reposition or expand the retailer and often take the retailer public again. Petco is a good example of a retailer who was taken private, expanded significantly and then went public again a few years later.

Fryer: My concern is more with the acquisitions of retailers specifically to unlock the real estate value. I’m less concerned about private equity buying retailers to operate retailers. When real estate-savvy investors are acquiring retail chains to control those spaces, it is likely to result in liquidation and a lot less control by the landlord than they used to have when retailers simply gave up their space. That adds a lot of uncertainty to the market.

Caputo: Our retailer solutions group is very involved in this area and provides capital to troubled retailers when other traditional lenders will not. Our investment is secured by the value of the retailer’s real estate. We help the retailers through a difficult situation and if they do not survive, we help the creditors liquidate the real estate. In some instances, we actually buy retailers or team up with others to purchase retailers. If you take the case of Albertsons, which is our most recent investment, SuperValu took over the stores they wanted in the West and Northeast. Albertsons’ biggest problems were in areas where they were not competitive. Would you want to be a supermarket operator in Florida where you were competing with Publix? Kimco is teamed up with a group of investors who are very experienced in repositioning retailers. The consortium hired a supermarket CEO and evaluated the operating stores to determine which stores have a future as supermarkets. We plan to recycle the stores that do not have a future as supermarkets. Logical replacement tenants include soft goods operators and other category killers. As a public company, Albertsons chose not to close many underperforming stores. As a private company, our consortium can close unprofitable stores and recycle them into other uses and make them productive retail space.

Fryer: I would rather be the one controlling the re-use if I own the center.

Caputo: We understand!

DeMarco: What is the most important demographic metric that you look at when entering a market? What helps determine whether it is a market that you want to enter?

Hendrickson: From Federal Realty’s standpoint, we have found that, particularly in true infill locations, population growth isn’t something that we see as a good thing. It indicates that the market is not built out. We find that our best properties are in markets where the population growth is close to zero or maybe declining, but whose income is growing rapidly. When you look at the aggregate income — the average household income multiplied by the number of households — that is our Number 1 [criterion], a point that was highlighted in a recent Merrill Lynch study on public shopping center competition.

Jim Thompson

Thompson: For Regency, we believe the key metric is average household income, especially in our core portfolio of grocery-anchored centers. By way of example, we have 63 grocery-anchored centers that are located within 3 miles of a Wal-Mart Supercenter. The average household income in those centers is roughly $80,000. Those grocers are doing over $22 million, or $400 per square foot with last year same-store sales increases over 3 percent. We feel those customers with higher incomes will be able to choose service over price, allowing traditional and specialty grocers to effectively compete long term with discounters.

Vittorio: I find that density of population is more important than average household income because you can tailor your retailer to the income. We have properties in what would be considered less affluent areas that do just fine. They are infill properties that have high barriers to entry. But you have to tailor the product for the neighborhood. We just bought a big tract of land across from the Detroit airport. The lack of retailers servicing that less-affluent area is amazing. Residents there have to drive quite a distance to go to a discount retailer. We see that as opportunity.

Ifshin: DLC is population density-driven. When you get high population density, you are acquiring existing retail in a market that may have anywhere from 7 to 15 square feet of GLA per capita, as opposed to 22 square feet per capita. You are also going to acquire at a pretty good discount to replacement cost because you are going to buy something older that needs work. You have the combination of barriers to entry, a lot of rooftops and a low replacement cost scenario. The flip side is that you have to dig pretty hard at what’s in the density to know which way the market is going. Our largest tenants are those like TJX, the grocers and Walgreens and CVS. It is a value proposition for us.

Thompson: Certainly the higher the population density, the less significant the household income metric becomes. The barriers to entry as well as the depth of retail remerchandising opportunities increase dramatically with density. With 150,000 people in a 3-mile ring, you have so many more opportunities for alternative use should a grocer go dark or if you lose a big box tenant. However, Regency does a significant amount of ground-up development, and when developing in less dense, high growth markets, top-tier anchors and high average household income are very important components to insure long-term viability against competition.

Vittorio: On all of our acquisitions, we always look to see where Wal-Mart is and where Wal-Mart isn’t.

Ifshin: From our perspective, if you have 150,000 in 5 miles, I want the center with the third or fourth best grocer in the market and I want to get the box back. With 30,000 people in 5 miles, I don’t want the third or the fourth grocer no matter what.

Fryer: At AEW, we focus on household income growth. I don’t care so much where the income starts; it’s where it’s going that counts. I am certainly happy to go to dense areas, but I still want to see the income growing above the metro average. In certain areas, we like to see true gentrification. Over time, this can expand your merchandising opportunities and your pool of available tenants. It also lessens the resistance to price points. It allows the center to be a lot different 5 years from now than it is today.

Weaver: Our view has remained consistent. We have always focused on market density and above-average income. Infill markets with barriers to entry are our primary focus. While we might consider buying a power-anchored center in a middle-income market, we insist on higher-income markets for traditional grocers and lifestyle centers. Middle-income markets (and lower) are too susceptible to Wal-Mart’s dominance to take a chance with what have become products for the upper-middle demographics.

Ifshin: Once you get to a certain income demographic, that customer goes away from Wal-Mart. Even if Wal-Mart is there, that customer trades up.

Craine: There are a lot of mothers who don’t want to be seen squeezing a tomato at Wal-Mart. Whether that income number is $65,000 or $75,000, it may vary from market to market. This is a bigger issue in the South. There are some areas that will never see Wal-Mart. Inside the Beltway in Washington and parts of Atlanta, for instance.

Bernstein: New Plan looks at population density as well. In its former life, New Plan’s strategy was to buy the dominant center in the smaller cities and towns. Over time, that strategy backfired because when you lose your anchor tenant or grocer, or Wal-Mart comes into town, you may not have a retailer to replace them. In a dense area, there always seems to be a solution with another retail use. The downside risk is more limited in a dense area than in a smaller town.

Shearin: What is the attitude of lenders today? Is it easy to get a deal financed today? Is there a question that you can’t get a deal financed?

Bernstein: There is money everywhere but there has been a bit of a flight to quality. We are still selling off some of our assets located in smaller cities and towns and we are seeing buyers taking longer to get deals done and a lot of lenders with much stricter requirements than they had before. That is affecting the B and C class market without question. If you have an A quality transaction though, the lenders are still lining up at the door with financing.

Weaver: I would agree that there is currently an abundant amount of financing available. We don’t typically push for very high leverage. So, for everything from core deals to value-add and development, we are typically receiving an extensive list of quotes when we pursue a financing proposal. For long-term financing, spreads remain tight and we are getting a lot of flexibility features, including transfer and assumption rights, collateral substitution, and more flexible prepay. So far, we haven’t experienced any change in the ability to get a deal financed.

Fryer: I agree; spreads have tightened for Class A product.

Caputo: As interest rates started to head up, the spreads came in. You still end up with very attractive financing.

Ifshin: We buy a product type that is a cut down from everyone else in the room. We have had no issues in finding financing. Spreads are highly competitive. Terms are exceedingly flexible. The big difference is that there is better pricing when you are buying B class centers and repositioning them, given the level of what your sponsorship is. We’re seeing that we can get a better financing than some of our competitors, which enables us to step in, pre-empt and close out a deal.

Fryer: One thing we are finding very attractive is that the life company lenders are being more competitive with the CMBS providers. The flexibility down the road with that sponsorship is certainly preferable.

DeMarco: In terms of other capital that has been in the market, such as foreign investment and private equity, are you seeing the same appetite from them as in years past? Are there any different groups coming in that are attracted to the U.S. retail market?

Fryer: Our stats say foreign investment is down from last year, but last year’s volume was unprecedented. For us, our foreign capital has remained constant, but the specific investors may have changed complexion. We’ve had a big increase from Irish sources and high-net-worth European individuals.

Weaver: We’ve seen some changes. For example, we’ve seen a fall off from some of our highly active German investors. It has been driven, in part, because the yields have gotten too low in the U.S. to satisfy their investment criteria and secondly, they’ve had some valuation issues on some of their non-U.S. investments, which has had an effect. They have been on the sidelines now for more than 12 months or so. Our Australian investment account continues to remain very active. While not back in yet, we are seeing some rekindled interest and serious inquiries from Japanese investors about returning to the U.S.

Thompson: From our friends in Australia [at Macquarie Countrywide] we continue to have very high interest and demand for new investment opportunities. As I understand it, they are investing Australian pension fund money in U.S. real estate, and continue to have a robust appetite for solid investment opportunities.

Bernstein: We’ve recently observed a trend in Australia that the public markets are not as cost effective as they once were and we are pushing our partners to source more private money which may be currently cheaper in that market.

Vittorio: Our foreign investors’ appetite has remained stable over the past year. It has maybe marginally increased. Our German clients have increased their appetite slightly. The overall appetite of clients for international investment has increased dramatically.

Ifshin: This year, the driver has been domestic money rotating out of other investments and coming to real estate. That’s clearly the driver at the leading edge of the market. Last year, the Australians were front and center. They are still driving some deals. Centro Watt’s bid for Heritage Realty Trust is an example of that.