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O’Connor Capital enters open-air retail JV

The New York-based private equity real estate firm is buying a 49% stake in a portfolio valued at $600m.

O’Connor Capital Partners is buying a stake in seven open-air retail properties, according to a statement last week.

The New York-based private equity real estate firm is purchasing a 49 percent stake in a portfolio owned by real estate investment trust Washington Prime Group, a Columbus, Ohio-based real estate investment trust, in a deal that values the properties at $600 million. The REIT will retain its 51 percent interest and will continue to manage the properties, located in Michigan, Texas, Oklahoma and California. PERE understands that O’Connor purchased the stake through a separate account.

“We love open-air retail – we think that’s the retail of the future,” Joel Bayer, O’Connor’s chief investment officer, told PERE. “People like convenient assets that offer multiple reasons to visit.”

The deal is expected to close in the first quarter of 2017 and will generate $350 million in net proceeds for Washington Prime. A spokeswoman for the REIT declined further comment.

The duo entered its first joint venture in February 2015, when O’Connor bought a 49 percent interest in five open-air malls valued at about $1.6 billion from Washington Prime.

Consulting firm McKinsey & Company explained the growing appeal of open-air retail in a November 2014 report: “Although location remains the key real estate consideration for malls, a differentiated design and structure is increasingly important. Open air malls go a long way toward lending an atmosphere of a town center, especially when they incorporate mixed use real estate. Many of the malls being built in urban areas are open and fully integrated with the landscape.”

The economics of open-air retail are currently very favorable, John Scott, O’Connor’s head of investor relations, told PERE. “A number of retailers are looking to expand store count in this format. However, since the financial crisis, there has been very little development. Occupancy rates for the better centers are now at historic highs, leading to strong rent growth. By serving the daily needs of the consumer, these centers are less susceptible to the rise of internet shopping and tend to perform well throughout economic cycles.”

O’Connor closed its most recent commingled fund, O’Connor North American Property Partners II, in 2008 on $529 million, according to PERE data. Since then, the firm has invested via separate accounts. For example, in the second quarter of 2016, the State of Wisconsin Investment Board invested $130 million with the firm for the acquisition of the Shops at Canal Place, a New Orleans luxury shopping center, PERE previously reported. O’Connor purchased the retail asset for $235.4 million in February, according to data provider Real Capital Analytics. The 259,000 square foot mall’s major tenants include high-end department store Saks Fifth Avenue, jeweler Tiffany’s and luxury retail brand Armani.