Buying or selling retail? After great numbers for Q1, fundamentals are strong for shopping centers. Severely limited new supply is driving up occupancy and rents are rising, which is great news for landlords and sellers.
“National retailers who want to expand are having a tough time finding appropriate space,” reports David Henry, CEO of retail specialist Kimco Realty. “They’re having to pay higher rents or move into secondary locations.”
Without new construction, investors who want to get creative in retail have to upgrade a center, buy the center across the street, expand upward or into mixed use, become a 24-hour center, or add lifestyle elements like gyms, movies, or spas. Owners are experimenting with a variety of approaches to serve shoppers and tenants.
There is good news for smaller centers. ‘Mom & Pop’ retail sales and small neighborhood center occupancy numbers are finally moving up. Local business is expanding again; a great sign for the economy.
However, mixed signals in economic reports are creating caution in the marketplace. Consumer spending is not what everyone would like. Apparel hasn’t seen any price inflation for years. Retailers in the middle are squeezed most of all since they struggle with the slimmest margins.
Having sold off assets outside the US, Kimco is putting money into new development, including 4 new centers in Texas, Ft. Lauderdale, Delaware and Philadelphia, each anchored with specialty grocer.
Kimco’s David Henry advises exercising caution on the buy side. It’s true, the fundamentals of retail are strong and the sector holds it’s own, but he reminds us that commercial real estate is a cyclical business and always will be.
What’s in the Numbers
Major deals are taking place in the retail world. We learned from Kevin Imboden, Director of Research at Real Capital Analytics, that Q1 2015 was almost the biggest retail quarter ever. Mergers and acquisitions activity are generating some big numbers.
“Blackstone acquiring Excel Trust is a $2 billion deal. Retail property is looking very affordable compared to office and apartments. Retail caps are only starting to compress.”
Retail Cap Rates
Class A & CBD
Urban & large malls
Imboden assures us we will continue to see lots of retail action. Assets are coming to market. Financing is dirt-cheap. International money continues to pour in. Not just from Europe and China, but now Australia and Korea are eager to get in.
Today’s investors are drawn to retail by its affordability and the attractive properties available. In growing urban centers, leases are expected to grow in value, raising the value of the property. Mixed use is in great demand, and exit strategies are including re-purposing and redevelopment.