Jablonski Featured in Crain’s Cleveland Business

flag_cclblogoNortheast Ohio shopping center market is booming

Sales of such properties account for 42% of commercial dollar volume so far this year

Originally Published: July 20, 2014 4:30 AM  Modified: July 21, 2014 6:17 AM
Even before Golden Gate Shopping Center in Mayfield Heights changed hands for $47 million, investment sales analyst Alec Pacella told himself that the market for shopping center sales was “on fire” in Northeast Ohio.Shopping centers accounted for 30% of the dollar volume of commercial properties traded this year, until the 370,000-square-foot Golden Gate deal hiked the ratio to 42%. His survey of investment commercial properties selling for more than $1 million in the region shows retail far surpassing the next largest classification — industrial properties — which make up 22% of the dollar volume so far in 2014. Given that four years ago failures of retail chains and uncertainty meant there was virtually no market for shopping centers, the shift in activity is profound.Moreover, the respectable but not eye-popping prices that buyers are paying promise to produce more deals throughout the balance of the year or until market conditions, such as interest rates, change.To show that, Scott Wiles, an Independence-based Marcus & Millichap senior vice president who is part of a busy three-person team focusing on retail properties, points to his pipeline of pending deals, many in Ohio but also extending east of the Mississippi River. His team forecasts it may sell more than $100 million of shopping center properties, most in Northeast Ohio and Columbus, but also in other parts of the Midwest, in the next 90 days. It has closed $243 million of shopping center sales in the region during the last 12 months, he said.Several factors — many national in nature — put a match to this situation.Wiles and others say a lot of money is chasing real estate deals now. At the same time, large, publicly traded real estate investment trusts and investors are shedding lesser properties to concentrate on buying higher-quality properties. Locally, aging owners and investor groups see it as a good time to sell, as was the case at Pavilion Shopping Center in Beachwood and Independence Square Shopping Center in Independence. Those centers sold, respectively, on April 1 and June 13.The sale of Golden Gate fits that model because it was sold as part of a strategy by the publicly traded, Cleveland-based real estate developer Forest City Enterprises Inc. to shed properties that are not in major metropolitan cities, which offer the most growth in rents and population, among other factors.

The hammering has stopped

The turnaround in appetite for shopping centers also is because retailing has stabilized compared with a few years ago, Pacella said, from when the sector “was getting hammered by national retailer bankruptcies.”Moreover, during the downturn, few additional shopping centers were developed in Northeast Ohio compared with typical periods, so there is greater security in owning existing properties, Pacella said. In the meantime, brokers who lease empty selling space are busier than they have been in some time, although the market’s vacancy rate only has inched downward to 8.2% as of June from 8.6% in September 2013, according to CoStar, the online real estate data service.Buyers generally are focusing on the market’s top-performing retail centers.On one hand, those are large power centers with national retailers, such as Golden Gate, a category with 3% vacancy this June. The other hot property type is smaller, neighborhood shopping centers that are anchored by supermarkets and have a vacancy rate of 4.6% according to CoStar. Pavilion, for example, is a grocery-anchored center, as it has a Giant Eagle on its tenant roster.Another factor fueling the frenzy is low interest rates, in the 4% range for well-located, high-occupancy centers, which investors feel will not last forever. Although financing remains tough to obtain in historic terms, large enough loans are available to boost investor returns, said Mark Jablonski, president of University Heights-based CenterMark Development.

Value shopper

Consider a recent deal by Jablonski. An affiliate of CenterMark in May sold Village Green Shopping Center, a 47,000-square-foot shopping center at 18235 Euclid Ave., Cleveland, for $2 million to ProVest Properties LLC, a Miami Beach-based investor group. That’s a big change from the $860,000 it paid in 2005 for the then 30% vacant center.Jablonski said his development company is a value investor that looks for opportunities to buy properties where it can add value, as it did with adding a Save-A-Lot grocery store to Village Green along with a multitude of other steps to improve the center, including selling off some vacant land.“With 94% occupancy, we felt it was the best time to profit from our hard work. We can then redeploy capital to another project,” Jablonski said. He said he benefited from the strength of investor appetite for grocery-anchored shopping centers.“Any grocery-anchored shopping center is in demand now, whether it is a high-income neighborhood or a low-income one. The feeling is online retail is not going to do away with your need to buy food, pick up dry cleaning or get a pizza,” Jablonski said. “However, you still have to ensure they have a positive experience when they are there with a well-maintained center.”His brokers were able to secure six offers to buy the shopping center, Jablonski said.“If you are an investor who thinks the stock market is unreliable, you want a steady-eddy return, and like sticks and bricks, these are nice investments to own,” Jablonski said.

A close look

Moreover, he noted some buyers may now secure yields as high as 15% if they can add bank loans to their transactions. He said investors post-bust are more cautious than previously. Buyers now scrutinize crime rates, household income and nearby retail, he said, compared with the early 2000s, when buyers typically focused on cash flow.So far this year, the highest prices have been secured by Golden Gate and Pavilion, which both snared more than $125 a square foot, according to Wiles’ statistics.Other properties have garnered from $20 to almost $90 a square foot so far this year, his statistics show.“Anytime you can get more than $100 a square foot for a retail property in Cleveland, you are doing well,” Pacella said. “You’re on a par with prices similar properties in Chicago and Atlanta are getting.”

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