It was a record year for retail real estate transactions in 2014, but no worries: Not everything was picked over — there are still plenty of bargains left on the table. Sales of retail assets exceeded $82.6 billion last year, surpassing the $81.4 billion generated in 2007, according to Real Capital Analytics. The pace of activity, too, is healthier than in 2007. Back then, portfolio and entity-level sales were the primary drivers. But 66.3 percent of last year’s total volume involved sales of individual assets, and last year’s $54.8 billion in total value superseded the $43 billion former high-water mark for individual asset sales set in both 2006 and 2007.
“If you look at 2014 and retail volume, overall sales grew 33 percent as compared to 2013,” said Jim Costello, a senior vice president at Real Capital Analytics. “That’s a great number after years of halfhearted sales volume and distressed activity. Now investor activity is focused on the fact there is a good story in retail real estate.”
Retail sales naturally build on consumer confidence, and with the jobs picture improving, the housing market stabilized and gasoline prices in decline, observers are expecting that more people will visit shopping centers more often. “Retail has always been a function of the economy,” said Bill Rose, a vice president and director of the national retail group at Marcus & Millichap. “If consumers feel confident, they will spend more — and sales drive rent, and rent drives value. Retail lagged the economy. Now we are in a market where consumer confidence is very strong, and you are going to see continued strong interest and investment in retail properties.”
Though 2014 was a boon for retail property investment, there is “still a lot of upside,” according to Spencer Levy, head of Americas research at CBRE Group. “We saw a disproportionate amount of core assets trading and disproportionately fewer value-add deals and deals for secondary-market assets,” Levy said. “Capital has not been moving to those other assets very quickly, which is not unexpected, as fundamentals have been slow to recover.”
Perhaps this may be seen in the neighborhood and community shopping center tranche. Only about 2.2 million square feet of neighborhood, community and strip center space was completed in fourth-quarter 2014, reports CBRE. This is in stark contrast to the 17.1 million square feet of space that was completed quarterly in the 2005–2007 period. This dearth of new construction was attributable to the slow pace of the recovery in this tranche. Net absorption of community, neighborhood and strip centers moderated to some 3 million square feet in the fourth quarter, according to CBRE research.
Levy is upbeat for this year, even so. “What we are seeing now is that capital is looking to move outside of the major markets, and we are optimistic [that] fundamentals are going to turn the corner, particularly for some of the open-air centers in secondary markets,” he said. “These events mean there will be even more upside for 2015 in terms of sales volume.”
Indeed, sales of neighborhood shopping centers grew by 32 percent in the fourth quarter year on year, says Costello. There were other surprises last year, he says. Transactions for big-box structures lagged the market, down by 18 percent in the fourth quarter. On the other hand, urban or High Street properties were very attractive to buyers. Deal volume for these assets rocketed by 60 percent last year, to $13.1 billion, according to Real Capital Analytics. The strength of the market was skewed slightly by a few $200-million-plus deals in New York City, but even excluding those, the segment saw deals leap by 45 percent over the previous year.
Another factor that will probably increase deal flow this year is the trend toward portfolio improvement. Average base rent, often considered an indicator of future performance, is among the key metrics. REITs, fund managers and other large investors have for the past two years been selling off weaker assets, keeping the strong ones and strategically buying other shopping centers likely to boost total average rent in a portfolio.
“While most organizations might have a bias one way or the other — to be net sellers or net buyers — everyone is looking to optimize their portfolios,” observed Michael Podboy, chief investment officer of InvenTrust Properties Corp., based in Oakbrook, Ill. Indeed, as Alison Lies, senior vice president of asset management and investments at New York City–based Olshan Properties, put it: “We are all buyers and we are all sellers right now.”
There is certainly a strong argument to sell while the selling is good. Valuations, particularly those for ‘A’ properties, have recovered. Cap rates for the six major U.S. metro areas dropped to 6.7 percent last year, slightly higher than the previous low mark of 6.5 percent, set in 2007, according to Real Capital Analytics.
“Pricing is at premium right now,” pointed out Lies. “I don’t think anybody has a crystal ball telling them how long this will last.”
Olshan Properties, which had a portfolio of shopping center, multifamily, office and hotel space, has been moving in both directions. Last year the firm sold a few of its hotel properties but also bought The Shoppes at Webb Gin, a 365,000-square-foot mixed-use center in Snellville, Ga., outside Atlanta. The company has a couple of offers out for deals in the retail and hotel space. In regard to retail, Olshan is looking at properties in the category of ‘A’ to ‘B’-plus, particularly in growth markets. “We are seeing opportunities in the Midwest,” Lies said.
InvenTrust Properties owns a portfolio of student housing and multitenant retail properties with in excess of 15 million square feet of retail space. Last year net dispositions across the multitenant retail portfolio exceeded $176 million. This year InvenTrust Properties could be a net buyer. “We are going to be more focused on where the jobs are, more active in markets where there is job growth and household formation,” said Podboy. On the retail side, Podboy says he is expecting an “increasing acceleration of open-air properties coming to market in 2015.”
CBRE says the six largest buyers of retail centers over the past two years have been DDR Corp. (with about $5 billion worth), Starwood Capital Group ($4 billion), The Blackstone Group ($2.3 billion), and Kimco Realty Corp., Macerich and Simon, each of which purchased about $2 billion worth.
Rose suggests looking at open-air centers and single-tenant net-lease space to see where the activity will be through this year, but even here the big boys will be a factor. In the $1 million to $10 million range for open-air centers, the buyers are private investors, but once the deals start ranging from $10 million to $50 million look for a consortium of institutional buyers that include pension funds, insurance companies and fund managers, Rose notes.
Historically, in the single-tenant net-lease space, the buyers have been private investors. But the institutional world has made inroads here as well, with fund managers like American Realty Capital Properties, Realty Income Corp. and even Inland American consuming a larger portion of this space — although “they will remain second-tier to the private client,” according to Rose.
Foreign institutional investors, too, were very active buyers last year, and they are expected to be again this year.
The capital markets have been very aggressive to enter every real estate asset class, but mostly for the best properties. The key to 2015 will be capital moving to secondary markets, something we are already seeing, says Levy. Investors want the secondary locations and ‘B’ properties as well, because yields are better. As Levy points out, you get the same rooftops in a very good shopping center in Washington, D.C., as you do in St. Louis, but the cap-rate differential could be 100 basis points. “If you put leverage on that in St. Louis, you can get a 200-to-400-basis-point-higher cash-on-cash return than in the gateways,” he said. “We are very active in those markets outside the gateway cities.”
