The Gerrity Group held a first close for its third retail fund on $200 million last month, PERE has learned, putting the California-based manager halfway to its $400 million target.
The firm will use the vehicle, Gerrity Retail Fund III, to acquire neighborhood shopping centers in the western US, most of which will be anchored by grocery stores, a source familiar with the fund said. The value-add fund will target a gross internal rate of return between 14 and 16 percent with 65 percent portfolio-level leverage. Gerrity raised $313 million for its previous retail fund and is on track to wrap up fundraising on Fund III by the middle of next year.
Gerrity Group will target neighborhood centers anchored by necessity and experiential retailers, PERE understands. Target markets include northern and southern California, Denver, Seattle and Portland. New York-based Evercore is serving as a capital advisor for the fund.
Gerrity is not the only manager seeking to raise capital in the embattled US retail space. Its third fund is one of 14 North American shopping-focused vehicles currently in the market, according to PERE’s database. Targets range from $50 million to $1 billion and risk-return strategies run the gamut.
“The narrative by many in the media is that retailing and retail real estate are doing poorly, but in reality some are doing well and others aren’t doing well,” Brad Hutensky, chief executive of Connecticut-based Hutensky Capital Partners, told PERE. “It’s really a tale of two cities. You have to look at the individual properties and not make a generalization about the whole industry.”
Broadly, retail assets have underperformed in recent years as steadily more goods are purchased online and demographic shifts make it difficult for second- and third-tier malls to retain tenants. Retail properties have delivered a total return of 4.38 percent over the past three years, according to NCREIF, compared with the 6.89 percent return produced by the research group’s total property index. During the second quarter of 2019, retail properties registered a return of -0.11 percent because of depreciation.
Lackluster performance has hampered fundraising. In 2018, managers closed on $550 million for North American retail-focused funds, the lowest total since 2010. On the deployment side, $28.5 billion of US retail transactions closed through the first half of 2019, putting the market on track for its lowest total in a decade, according to Real Capital Analytics. Yet, this hesitancy has led to opportunity for some managers.
So far this year, the average US retail property has traded hands for $9.2 million, according to RCA, the lowest mean transaction price since 2010. Falling prices paired with diminished demand have left an opening for savvy investors, Hutensky told PERE: “The risk-return ratios in retail have never been better. Pricing is lower and, if the operator knows what they’re doing, the risk is actually less.”
Through the first three quarters of 2019, North American retail fundraising is up substantially, totaling almost $1.4 billion. Doug Weill, managing partner of the New York advisory firm Hodes Weill & Associates, said retail is not a top priority for most investors but some will commit capital under the right circumstances. “There’s openness to retail, but it has to be a team that has a track record executing the strategy on a consistent basis, and it has to be the right markets,” he said. “There isn’t broad-based interest, so managers have to catch the attention of the investor and present an interesting thesis for this point in the cycle.”
Shopping centers anchored by necessity retailers – typically grocery stores and pharmacies – are particularly popular, Weill told PERE, because traffic remains steady even through economic downturns. Such assets typically sell for between $25 million and $50 million, he added.