Has the slowdown in retail real estate sales hit bottom?
Not yet, say wavering observers who predict that won't occur until the second quarter of 2009 when cap rates on retail properties could be between 8 percent and 10 percent. In the second quarter of 2008, significant retail sales transactions amounted to only $5 billion, according to New York City-based Real Capital Analytics. That represented a 63 percent drop from the second quarter of 2007. More alarming, the figure is a 30 percent drop from the first quarter of this year, when properties worth $7 billion traded hands.
Over the last 12 months, average cap rates on strip centers moved up 40 basis points, to 7.0 percent, reports Real Capital Analytics. Cap rates on lifestyle centers went up 80 basis points, to 7.3 percent, and on power centers 50 basis points, to 7.0 percent. However, with buyers forced to put more equity into each transaction because of troubles in the credit markets and a grim prognosis on the state of the economy, the increases have not been enough to break the impasse in the sales sector.
Sellers, however, have not yet reached the point where they are willing to accept the notion that cap rates will only continue to rise, says Bernie Haddigan, national director of retail with Marcus & Millichap Real Estate Investment Services, an Encino, Calif.-based brokerage firm. He estimates it will not be before the second quarter of 2009 that the bid-ask gap will finally close and cap rates will stabilize — somewhere around 8 percent for class-A assets and upwards of 9 percent for class-B and class-C properties.