Retail Traffic: What is the climate of the retail market in California like right now?
McDermott: Well, I think California has taken on the same characteristics as the national retail movement. If you compare the first half of 2006 to the first half of 2005, overall investor sales are down almost 35 percent. Southern California, however, has continued to benefit from relatively low supply and high demand. So people are still willing to buy in southern California because they feel that most of the real estate is irreplaceable and that the barrier to entry is so high. In fact, one thing that you probably want to be aware of is that retail nationwide for investor sales is the only sector that is down year to year. The other sectors — office, industrial and apartments — have a higher value in 2006 than they did in 2005. In fact, hotels have kind of taken over the spotlight this year.
RT: What do you think accounts for a decline in interest in retail properties this year?
McDermott: Private investors have slowed down on acquisitions that are not being driven by exchanges. Those that are just discretionary buyers have kind of backed away from retail. Some of it is concern about the economy and what interest rates are doing. One concern obviously is that gasoline sales are probably approaching between 10 percent and 15 percent of retail sales. … There are probably three retail sectors that will suffer the most — retail properties in tertiary markets, older properties and lower-quality centers. Those centers, in order to be able to compete, will have to offer higher cap rates in order to give investors more return. One other comment, too, if you look at the national marketplace, which is a good indicator of California — 950 strip centers have closed at more than $5 million in the first half of 2006. That's a huge number, but 25 percent less than in the same period in 2005.
RT: What are some of the hottest submarkets in California?
McDermott: I think if you look at the California marketplace specifically, the Inland Empire, which includes Riverside and San Bernardino Counties, continues to do well. Los Angeles has continued to grow. In San Francisco, there has been probably the biggest increase in volume — they closed $229 million in activity in 2006, a 222 percent increase over the first two quarters in 2005. That's a significant market change. Other parts of California that have had a reduction in volume — Orange County is down 50 percent. In the first half of the year in 2006, Orange County did $231 million in sales.
RT: How much has your firm grown?
McDermott: We have 135 markets where we have offices or multiple offices, we are located in 36 states and we just reached 750 advisors. Five years ago, we were at about 200 advisors and were considered a southern California boutique company. The model has been to go into markets where there are superior advisors available and then encourage them to become a franchise of Sperry Van Ness. Usually they are highly credentialed. They've been in the business for an average of at least 18 years, they know the market, they are already involved in all of the local issues, but what they have not enjoyed is a national platform.
RT: Are there any markets where you feel you would like to see additional growth?
McDermott: We are open to looking at some additional corporate presence, maybe bigger offices in markets like Atlanta, Chicago and Washington, D.C. Just to provide our advisors on the East Coast additional support. It allows them to feel like they've got somebody closer than southern California.
John McDermott, senior vice president and national director with Sperry Van Ness