The first quarter of 2014 exhibited continued signs of recovery for the retail market. The demand from investors for retail assets is the strongest I’ve seen in a long time. Investment sales had their best start since 2007, with pricing for some properties surpassing all-time highs.
These are encouraging signs for the market, especially considering the tepid U.S. economic and job growth overall. We explored retail and retail real estate on a recent episode of the “Commercial Real Estate Show.”
Surge in Sales
In the first quarter, investment sales totaled about $19 billion nationwide, nearly double the amount of the first three months of 2013, said Dan Fasulo, managing director of Real Capital Analytics. “The recovery has been broad, covering nearly every kind of retail and city.”
For large, institutional assets, there’s a broad range of interested capital, including pension funds, insurance companies and foreign investors. Public and private REITs also are gobbling up assets nationwide.
The higher yields available in retail are pulling money away from other sectors, like multifamily and CBD office, that were preferred early in the recovery cycle, Fasulo said. “With low yields in other sectors, capital is flowing in and causing cap rate compression,” he added.
Cap rates for assets in prime locations in major metros are as low as 4 percent, Fasulo said. “Depending on the segment, we have seen cap rate compression of 30 to 90 basis points, and that’s in an environment where interest rates have creeped up over the past 12 months as well.”
As fundamentals improve, investment sales are expected to increase even more. “Everyone is waiting for fundamentals to really pop, for rents to take off and occupancy to increase,” Fasulo said. “There’s a lot of money trying to get ahead of true improvement. That could be the next leap forward.”
Tenants Coming Back
Tenant demand continued to increase. On top of the numbers are new and nimble tenant trends.
Last year, tenants started to re-enter the market, said Robert Fransen, CIO of Coro Realty Advisors. “We are even seeing smaller tenants, new concepts and franchises popping up, with some local tenants opening multiple stores.”
Even though the recovery is in full swing, some retailers are still asking for tenant improvement (TI) money, Fransen said. “We are seeing pushback from smaller retailers that don’t have the capital to build out spaces,” he added.
Finding the right location and footprint is paramount to a retailer’s success, said Mike Puline, Director of Leasing, DLC Management Corporation. “Retailers have learned that a bigger store doesn’t necessarily mean bigger profits in the long run,” he added. “Flexibility [in leases] to contract or grow if necessary is important.”
It’s also important for tenants today to focus on the experience they are providing, which means there’s more emphasis on the aesthetics of a shopping center than ever before. “Unless you are going to compete on price, which is tough to do unless you are a dollar store or Walmart, you have to offer an experience,” Fransen said.
Tips for Landlords
Landlords today should be heavily focused on tenant mix, according to Fransen. If you know a tenant would be good for the center, consider leasing to that firm even if it’s at a cost. For example, Coro Realty Advisors recently leased an outparcel to a popular restaurant at a discounted rate because they knew it would bring great traffic to the center.
“Tenant mix is one of the most important things in a shopping center today,” Puline said. “Sometimes even though a tenant’s paying less, it’s worth it if it’s good for the tenant mix.”
Providing great customer service to your tenants is key, Puline said. “If you provide great customer service, your tenants will tell everyone about the center and bring more tenants to you.”
The Commercial Real Estate Show (TM) is protected by trademark and copyright laws. The information from this site and show is not to be copied, distributed, or sold without express written permission from the Commercial Real Estate Show. Because of the limitations of web sites and talk radio shows, the information from this site and the show are not to be relied upon as professional, accounting or legal advice. The show information is for enlightenment and entertainment purposes only and is not deemed reliable for your particular property, situation or location. Consult a referred and licensed commercial broker, accountant & attorney who has entered into a representation agreement with you and knows all the details of your location, property and situation for professional advice. For a professional referral contact the Commercial Real Estate Show at Info@CREshow.com or 888-612-SHOW (7469). All rights reserved. (C) 2014