NREI Research Series
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Retail Real Estate Trends 2017, Part 2: Buyers Retreat

The majority of respondents anticipate that cap rates in their markets will rise in the coming year, a notable shift compared to the previous two surveys.

Investment sales volume on retail properties has fallen. During the first quarter of 2017, Real Capital Analytics measured $18.7 billion in retail sales. That volume then dropped further to $13.7 billion in the second quarter. The figures for both quarters represented the lowest volumes in those respective quarters since 2013.

The majority of respondents anticipate that cap rates in their markets will rise in the coming year, a notable shift compared to the previous two surveys.

Overall, 59.6 percent expect cap rates in their region to increase over the next 12 months, up from 41.8 percent in 2016 and 43.7 percent in 2015. Only 12.7 percent expect that cap rates will decrease in their region over the next 12 months—down from 20.7 percent in 2016 and 21.1 percent in 2015.

 

The expectations for national cap rates were slightly more bearish. Nearly two-thirds of respondents—63.8 percent—said they expect retail cap rates to rise nationally—up from 47.5 percent in 2016 and 43.7 percent in 2015. Only 19.5 percent expect they will be flat and 16.7 percent expect them to fall. 

Retail cap rates stayed largely flat in the second quarter of 2017, according to data collected by commercial real estate services firm CBRE. On the national level, cap rates average 6.8 percent—a one basis point increase from the first quarter of 2017 and a one basis point decline from the same period last year.

Quarter-over-quarter, cap rates declined in the East, West and South. They rose in the Midwest by 29 basis points, to 7.39 percent. Year-over-year, retail cap rates rose in the East and the Midwest, but declined in the South and the West.

Where buyers do see the potential for yields given the current market conditions is the necessity retail space.

“Grocery anchored and community shopping centers appear to be in period of stability and (are) enjoying improving demand from consumers,” one respondent wrote. “Investors are recognizing this. Of course, location matters and there is a premium for areas with expanding population, household growth and income growth.”

Another echoed that sentiment, “I think service-oriented, urban infill high street and … grocery-anchored shopping centers in secondary markets are the three most compelling risk-adjusted yield opportunities,” the respondent wrote.

An additional frequently cited response was single-tenant net leased retail properties.

“These centers typically have service related tenants that you can’t buy online,” a respondent wrote. “So they typically pay better rents and are safer.”

Research Methodology: In July, NREI emailed commercial real estate professionals requesting participation in an online survey about retail real estate. Overall, the survey received 410 responses, half of whom identified as Owner/Partner/President/Chairman/CEO/CFO. In addition, 42 percent of respondents operate in the East, 42 percent in the South, 45 percent in the West and 36 percent in the Midwest. (Respondents could select all regions that applied.)

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