Este informe no está disponible en español.


Sales in Puerto Rico

Shopping centers among highest in sales in the USA; stateside investors buying them up


March 3, 2005
Copyright © 2005 CARIBBEAN BUSINESS. All Rights Reserved.

Buy, buy, buy...

Stateside investors find cap rates of local shopping centers very attractive, along with an average occupancy rate of 95% and consumer spending more than double that of the U.S. mainland

There were many excellent factors encouraging the flurry of acquisitions in the local retail industry during the past year, when about $1.5 billion in stateside money poured into the purchase of large shopping malls.

Among the motivating factors were consistently higher–and increasing–sales per square foot compared with the mainland U.S.; a presence of big retailers’ best-performing stores; occupancy rates surpassing 90%; and limited space to grow. While some of the malls’ selling prices are said to be slightly below market value, other mall owners were able to get a good offer in line with market value, according to industry sources.

Acquisition activity is expected to remain strong in 2005, and CARIBBEAN BUSINESS has learned of local and stateside companies that are very willing to buy up all kinds of malls in Puerto Rico, even though property price tags are expected to be a bit higher now as interest rates continue increasing. After all, it seems some investors don’t mind paying a higher price to get their hands on a piece of Puerto Rico shopping-mall real estate.

The stateside companies that want to buy up local malls have close ties to many big-time retailers, which means new chains could be introduced to the local market. CARIBBEAN BUSINESS has already broken the news that Best Buy and AutoZone will set up shop on the island and has learned of more retailers who are cooking up plans to come here with the help of shopping mall owners.

For instance, Best Buy is one of the most prominent anchor tenants in stateside malls owned by Developers Diversified Realty (DDR), the company that recently purchased 15 local malls for $1.15 billion. The chain is going to open its first local store in Plaza del Sol, one of the malls DDR purchased.

Buy, buy, buy!

Last year saw shopping mall acquisition activity like never before, when stateside investors snatched Centro Gran Caribe in Vega Alta, Plaza Carolina, and 15 centers from Caribbean Property Group’s (CPG) portfolio, including Plaza Río Hondo and Plaza del Sol, both in Bayamón.

In April, New York-based Thor Equities purchased the 387,546-square-foot Centro Gran Caribe for $61.5 million from Decemcor, the partnership that built the property more than a decade ago. Thor renamed the mall The Gallery at Gran Caribe.

The following month Indiana-based Simon Properties snatched the 1.1 million-square-foot Plaza Carolina for $309 million from the California Public Employees’ Retirement System and the State of Michigan Treasury.

The DDR was the main character in the latest and biggest shopping center acquisition deal so far on the island. In November, the company finalized a $1.15 billion purchase agreement with the CPG for its 15 malls, altogether an estimated five million square feet.

Expectations for 2005

CARIBBEAN BUSINESS has learned of many local and stateside companies looking to purchase malls that are already operating. They are also eyeing malls that are still in the planning or construction stages. These investors are looking for all kinds of malls, from enclosed regional shopping centers to community strip malls. Every single mall owner CARIBBEAN BUSINESS contacted has received offers from investors wanting to buy.

Availability of malls may not be a problem, as projects for new malls are constantly being submitted to government authorities. What is true is that these new malls will not be very large because not very much developable land is left to house regional mall projects. The major complaint from investors searching for properties here is that everyone is willing to buy, but nobody wants to sell.

Specifically, it seems locally owned malls will not be up for sale soon, while malls owned by stateside or foreign investors are the ones up for grabs. The problem is, nonlocally owned malls have already been sold, and it would take some years for their new owners to want to resell them and be able to get a return on investment, unless they sell the assets to a joint-venture partner, something very common in the industry.

Most industry insiders agree, for instance, that a mall such as Plaza Las Américas will not be sold, not because of a lack of suitors, but because its owners are local. "Owners of locally owned malls are more fond of their properties; they don’t see them merely as investment tools as a real-estate investment trust might," said one source.

However, sources in the real-estate industry have told CARIBBEAN BUSINESS that Plaza Las Américas is actually in discussions with a Spanish mall developer who wants to buy the property, the largest mall in the Caribbean at about 2 million square feet. "The fact alone that [owner Jaime] Fonalledas agreed to meet with the Spanish firm is reason enough to believe he could sell if the price is right. He never agrees to meet with potential buyers," said a source.

Lorraine Vissepó, communications director for Empresas Fonalledas–parent company of Plaza Las Américas and Plaza del Caribe–denied there are any negotiations underway to sell Plaza Las Américas. "There have been rumors that we will buy Mayagüez Mall and Plaza Centro [in Caguas], but those aren’t true either," she said.

Other locals also said they wouldn’t sell their malls, but would certainly buy if they found the right one. Locally owned Interservice Group is one of the companies looking for malls to buy and is eyeing properties in Vega Alta. "We prefer to purchase existing properties, preferably close to mid-to-upscale residential projects," President Fernando Márquez said. "We’re in the market for buying [malls], not selling."

Sources in a stateside company that owns and manages six strip malls in Puerto Rico also confirmed that local investors have been offering to purchase some of the malls, but that company is not selling either.

A stateside company that already owns a couple of malls here is offering to buy strip malls that haven’t even begun construction. In fact, sources said the company is offering to pay more than the amount at which the projects are valued.

This company is also evaluating whether to form a joint venture with a mall management partner to build or buy more malls, or to perform the transactions itself, sources said. The sources didn’t want to disclose the name of the company for fear of ruining the negotiations, which are still in a very early phase.

Other sources said Kimco is also on the lookout for local shopping malls. This company was spotted at a recent shopping mall convention in San Juan, although it doesn’t own any malls here.

Thor Equities, which purchased Centro Gran Caribe (now The Gallery at Gran Caribe) in 2004 for more than $61 million, is also on the lookout for more malls to buy. "We will certainly entertain opportunities to make more acquisitions in Puerto Rico," said Carl Reggie, Thor Equities’ director of corporate marketing. Local real-estate sources confirmed this company is actively seeking properties to buy.

Simon Properties is expected to hold on to Plaza Carolina and Thor Equities may do the same with The Gallery at Gran Caribe for several years. Simon and Thor are companies that are focused on the development and management of shopping centers. Both companies have already announced renovation plans for their new malls.

Meanwhile, although the DDR’s business is focused on the acquisition and development of shopping malls, it has already said it is deciding which of the recently acquired malls will be sold to Australian joint-venture partner Macquarie DDR Trust.

"[The DDR] is currently in discussions with the manager of the MDT regarding certain assets in the CPG portfolio that meet MDT’s investment criteria which MDT may purchase in the future," reads a company report. The DDR owns 14.5% of MDT, which was established in November 2003.

DDR Vice President of Investor Relations Michelle Mahue added the MDT won’t take an active role in running the malls it might buy, although it would own them. The DDR will remain in charge of leasing, accounting, and management. The MDT likes to retain assets for a long time, instead of reselling them to make a short-term profit, Mahue said. This company has already hired some executives in Puerto Rico to run the local operations. Among the newly hired is Xavier González, who was formerly the general manager of Plaza Carolina. González is now DDR’s regional general manager.

How to increase value

Recently purchased shopping centers have already begun renovation or expansion projects to increase their value and attract more consumers.

The DDR told CARIBBEAN BUSINESS that it plans to expand some of its local malls vertically by adding multistory parking structures, a strategy it is reluctant to implement in its stateside properties. "There isn’t a lot of space in Puerto Rico. Given the demand for parking spaces, it’s more efficient to build upward," Mahue explained. Retail spaces also may be located in the new buildings, Mahue added, and said the DDR is evaluating the cost of relocating tenants during construction.

Thor Equities is scheduled to complete an estimated $2 million renovation of The Gallery at Gran Caribe in Vega Alta during the first quarter of 2005 to make the property more attractive to consumers and future tenants, according to Reggie. Plaza Carolina is also getting a $2 million face-lift.

Are cap rates the dealmakers?

Some real-estate experts believe one of the main factors influencing investors’ decisions to enter the Puerto Rico market is the attractive capitalization–or "cap"–rates local shopping centers have had. The higher the cap rate, the lower the property value. Cap rates are part of the formula needed to determine the value of a property.

"To establish the value of a property, you divide the property’s cash flow by the cap rate," Michael McDonald, senior vice president of corporate finance & advisory services for Banco Popular, explained. "For example, let’s say that one shopping mall has a cash flow of $1,000. If we divide cash flow by a cap rate of 10%, the property value is $10,000. However, if we divide the cash flow by a cap rate of 8%, we’ll get a property value of $12,500."

McDonald, who was involved in the transactions of Plaza Carolina and The Gallery at Gran Caribe, said the cap rates of local shopping centers are very attractive to investors because they are lower than in comparable malls stateside. "In the States, cap rates had decreased because the market had been exploited, thus making the cost of purchasing a mall there higher," he explained.

Still, he said, the average cap rate of 7.4% at which DDR purchased 15 local malls was pretty low (meaning more expensive) for the local market. "[The DDR] could have obtained a better deal for those malls if they had sought some assessment. Basically, what happened was they received a pre-emptive offer and just took it."

However, the DDR thinks it got a great offer. "Based on an analysis of comparable investment opportunities in the U.S. and abroad, similar quality assets are trading at more aggressive cap rates," it said in a company report. "Pricing on this portfolio is particularly attractive considering its sales productivity is 50% higher than the U.S. average," the report stated.

Sources said Plaza Carolina, a Class-A mall, sold for a cap rate between 7% and 8%. Compared to cap rates at Class-A malls stateside, Simon got a pretty good deal for this top-notch mall.

On the U.S. mainland, from 1978 to 2004 retail real estate experienced a cumulative net value appreciation of 53%, with almost half in just the last three years, according to a report by Principal Real Estate Investors, Real Estate Research Corp., and Torto Wheaton Research. For this reason, buyers have flooded the sector and sent cap rates to historic lows, and price tags to highs–a trend that will slow, according to the report.

A research report conducted by National Real Estate Investor magazine and Marcus & Millichap Real Estate Investment Brokerage Co., revealed Class-A retail properties in the States are currently selling at cap rates in the range of 6.5% to 7%, with some markets, such as California, seeing rates dipping below 6%.

On the other hand, McDonald said, some investors looking at Puerto Rico noticed that cap rates here were not adjusted to market value, which gave them the opportunity to buy for a very attractive price. "The latest top-tier shopping centers sold in Puerto Rico had cap rates near and slightly under 7%, second-tier malls have cap rates in the mid-8%, and community malls are in the 9% range," he stated.

Another real-estate source, who preferred to remain anonymous, said cap rates weren’t the dealmakers. "The prices paid for the shopping malls [recently sold] were normal, and cap rates were similar to those on the U.S. mainland, where the average is about 7%," he said, adding that interest rates must be looked at also.

"Five years ago, malls being sold stateside had cap rates between 8% and 10%. More recently, those malls have had caps of 7% because interest rates were at their lowest point in 40 years," he said. With interest rates so low, many a buyer seized the opportunity to expand portfolios.

"But you’ll see that as interest rates continue increasing again, shopping malls’ cap rates will increase," the source said. Basically, this means mall owners may try to create a balance so the higher interest rates don’t translate into much higher property prices. In addition, controlling mall prices should keep interest in local properties alive.

What makes Puerto Rico so great?

The companies that have acquired local malls seem to think the world of Puerto Rico. This should come as no surprise. As the DDR said in its report on its local acquisitions, "[Puerto Rico is a] densely populated island whose economy is fueled by consumerism; combined with physical barriers constraining new supply this creates a highly productive retail environment."

On the island’s high barriers to entry it says, "developable land is limited due to physical barriers of mountains and floodplain; as a result the major retail trade areas are mature and very dense."

Other attractive factors for the DDR were malls’ occupancy rates, which average over 95%; consumer spending that is more than double that of the mainland U.S.; and a business-friendly approach to investment, offering businesses faster permitting, less regulation, favorable taxes, and lower operating expenses than on the mainland.

Of course, many a developer in Puerto Rico will probably laugh at the notion that Puerto Rico offers businesses "faster permitting," as the DDR says. Companies such as Walgreens and Wal-Mart are known to have waited more than 10 years to get a permit for a project. That isn’t to mention all the shopping mall projects that have been paralyzed for years because of the island’s cumbersome permitting process.

Beside the debate regarding the permitting process, Puerto Rico has proved to be good to retailers and shopping malls. For instance, Simon Properties spokesman Les Morris told CARIBBEAN BUSINESS that Puerto Rico "is among Simon’s primary retail property markets." Company reports indicate that Plaza Carolina’s total annual sales are about $275 million. The mall receives more than 30,000 visitors every day.

While Simon’s mall portfolio–excluding Plaza Carolina–had an average occupancy rate of 91.8% as of the 3rd quarter of 2004, Plaza Carolina alone has a historic occupancy average of 98%. Sales per square foot fare similarly. While the portfolio saw average comparable sales per square foot at $421, Plaza Carolina boasts sales of more than $450 per square foot, according to company reports.

Popular’s McDonald said that sales per square foot have been steadily increasing in Puerto Rico’s malls, although the rhythm of such growth is not the same for every type of mall. "The best malls in Puerto Rico, known as Class-A malls, have average sales per square foot between $300 and $400, while stateside they usually don’t surpass $300. Of course, a local mall like Plaza Las Américas has tenants boasting sales per square foot of up to $1,000, but Plaza is superior to any other mall," he explained.

Overall, sales per square foot in local malls were at $350 in 2000, double that of 1980, when sales per square foot averaged $160. "In 1989 they averaged $278 and in 1992, $300," he explained.

Many retail chains have already experienced the high sales the Puerto Rican market offers. It is common industry knowledge that some of the highest-grossing stores of chains such as JC Penney, Sears, and Kmart are right here in Puerto Rico. This alone looks like reason enough for investors to want to own a piece of retail heaven.

Retail REITs expected to do well

There is one thing stateside analysts agree on: retail real-estate investment trusts (REITs) are sure to see solid performance this year. In fact, retail real estate’s composite value increased 6.6% in 2004, more than other segments within commercial real estate. The national average composite value increase for all types of commercial real estate was 4.2%, according to national Real Estate Index, published by Global Real Analytics.

This year, retail real estate is expected to remain the leader, followed by industrial, apartment, and suburban office, with central business district office trailing. However, while the Real Estate Index predicts the rate of rental growth in retail real estate may slow, a survey performed by Marcus & Millichap and National Real Estate Investor revealed that at least 79% of investors in retail believe rents will increase or remain stable.

Market stability is one of the factors contributing to the healthy outlook, but as has been seen in Puerto Rico, growth in the sector will also be fueled by constant renovation, redevelopment, and expansion of malls. In fact, 62% of the survey’s respondents indicated they have plans to renovate, redevelop, or expand properties in which they currently invest.

Also, similarly to Puerto Rico, the intense competition to buy retail real estate is the biggest challenge stateside investors face. This has already contributed to a drop in cap rates stateside and will certainly raise the value of local properties.

National Average Increases in Class-A Commercial Real Estate Segments in 2004

Retail 6.6%

Apartments 4.4%<BR>Industrial 3.7%

Central Business District Offices 3.3%

Suburban Office 0.9%

All Commercial Property 4.2%

Puerto Rico’s Largest Shopping Mall Owners / Managers*

Plaza Las Américas (Hato Rey): Empresas Fonalledas

Plaza Carolina (Carolina): Simon Properties

Mayagüez Mall (Mayagüez): Empresas Villamil

Plaza Centro Mall (Caguas): RD Management

Los Colobos (Carolina): RD Management

Plaza del Caribe (Ponce): Empresas Fonalledas

Plaza del Sol (Bayamón): Developers Diversified Realty / PMI

Plaza del Norte (Hatillo): Developers Diversified Realty / PMI

Plaza Escorial (Carolina): Developers Diversified Realty / PMI

Western Plaza (Mayagüez): RD Management

Las Catalinas Mall (Caguas): Vornado Realty / Berenson Associates

Montehiedra Town Center (Río Piedras): Vornado Realty / Berenson Associates

San Patricio Plaza (Guaynabo): Caparra Center Associates

Ponce Towne Center (Ponce): RD Management

Santa Rosa Mall (Bayamón): Commercial Centers Management

Plaza Río Hondo (Bayamón): Developers Diversified Realty / PMI

Rexville Towne Center (Bayamón): RD Management

Plaza Palma Real (Humacao): Developers Diversified Realty / PMI

Yauco Plaza (Yauco): B.V. Properties

The Gallery at Gran Caribe (Vega Alta): Thor Equities

*Many malls are owned and managed by the same company.

This Caribbean Business article appears courtesy of Casiano Communications.
For further information, please contact:



Self-Determination Legislation | Puerto Rico Herald Home
Newsstand | Puerto Rico | U.S. Government | Archives
Search | Mailing List | Contact Us | Feedback