Demand for quality retail investment properties remains high across multiple product types — core product, single-net lease buildings, and, especially value- add plays — yet buyers are finding a dearth of deals available, as owners are reluctant to part with strong properties in high-performing markets.
“Last year, deal activity was robust, but this year there is less product available,” said Derrick Almassy, first vice president with CBRE’s National Retail Investment Group. “Financing is strong and there is a lot of capital, but buyers are finding it difficult to locate opportunities.”
According to Almassy, the situation is compounding itself, because even if an owner wants to sell, the lack of product on the market makes it difficult to find a satisfactory 1031 exchange — a preferred method for sellers to reinvest their earnings back into real estate.
“Even if an owner wants to sell, they are hesitant because they are having a difficult time putting their proceeds back into real estate,” he said. “If they do find product, it is typically of lesser quality and not as appealing. That is really keeping a lot of would-be sellers on the sidelines.”
Core quality product is still the most coveted product type — especially
offerings that are grocery/necessity anchored or are assets located on high streets.
“Grocers are still considered the strongest anchors right now,” said Almassy. “The Chicago market saw one major grocer, Dominick’s, close in the last several years, but most of those vacancies have been back-filled either by competitors expanding or new grocers entering the market. Investors like to see healthy grocery stores as an anchor because it ensures good traffic flow for the property, keeping it relevant for shoppers.”
An excellent example of this is the Danada Square East shopping center in Wheaton, Ill., which is currently on the market. It sold for $32 million in 2013, and was anchored by a poor performing Dominick’s at the time. Since that trade, the Dominick’s box was backfilled by Whole Foods, which relocated from the adjacent Rice Lake Square. Because of
this change, the property is expected to sell for a tremendous profit.
According to Almassy, another market that is thriving is the single-net properties.
“Investors are chasing single-net leases with corporate credit when they become available,” said Almassy. “With a lack of big product on the market, many investors will try and combine multiple single- net lease properties to fulfill investment goals.”
VALUE-ADD MARKET FROTHY
After core, perhaps the next most desirable product in today’s market is value-add properties. Critical factors are location and the general fundamentals: a strong anchor, credit-worthy co-tenancy, and manageable vacancy that can be easily backfilled.
However, like the overall market, the value- add market has too few opportunities, and what would be considered quality
value-add properties are becoming too expensive.
“If a value-add property comes up in a strong retail market, pricing may get too frothy and some investors will have overpaid for a facility that would not be desirable once stabilized, as it can fall into the stabilized, non-core class.” said Almassy.
On the other end of the spectrum, value- add properties in poor markets may be considered too risky and require too much effort to see a favorable return.
“The problem with value-add today is that it is value-add for a reason,” said Almassy. “With the current market dynamics, it is very difficult to find an affordable, smart value-add play.”
Even though the retail investment market has been somewhat slow through two quarters in 2016, Almassy predicts a return to normal, as investors have been more active in recent months.
“The beginning of the year was slow with some hiccups in the CMBS and international financial events such as Brexit, but, we had a huge July in terms of activity,” said Almassy. “I think the rest of the year will be similar to what we saw in 2015 and activity will be back on pace. Of course, it is an election year, so how November goes will also determine how the fourth quarter and first quarter of next year plays out.”