It looks like this will be a merry holiday season for sellers of retail properties, as both transaction volume in the sector and price per sq. ft. continued to increase in the fourth quarter.
Year-to-date, retail investment sales have already reached $42.7 billion, according to data compiled by Washington, D.C.-based research firm CoStar, up almost 13 percent from $37.8 billion in sales recorded last year. CoStar’s real estate economist Ryan McCullough estimates that based on historical levels of activity, sales volume in the fourth quarter of this year will total approximately $16.8 billion, an uptick of $3 billion compared to the fourth quarter of 2013.
Real Capital Analytics (RCA), a New York City-based research firm, reports similar patterns in the investment sales market for retail properties. Although sales volume this November dipped 14 percent below last year’s level, at $5.9 billion, that was likely due to a shorter month in 2014, RCA researchers report. The sales volume from January through October was already above the total for 2013, they write. RCA estimates that year-to-date in 2014 retail investment sales volume reached approximately $73.1 billion.
“We have seen real estate investors rotating back into retail due to its higher yields relative to other property types, and also due to improving fundamentals,” says CoStar’s McCullough. “This has boosted both liquidity and pricing. In dollar terms, the market has never been as liquid as it is today. With fundamentals tightening and lending standards loosening, we expect 2015 will come in even more aggressively. We anticipate that 2015 will be a record year for retail investment.”
What’s more, prices on retail assets have continued to increase in 2014 while cap rates have remained low. According to CoStar data, average price per sq. ft. for retail properties currently stands at $186, up $40 compared to price per sq. ft. at the end of 2013. RCA figures show that the average price per sq. ft. in November was $195, compared to $180 per sq. ft. at the end of last year.
Using a Repeat Sale Index, which analyses transactions involving the same property, the average price of retail assets went up 9.7 percent this year, after spiking 15.4 percent in 2013, reports McCullough.
“We are seeing a sustained increase in the market,” he notes, adding that by the end of 2014, the year-over-year price increase may reach the mid-teens once again.
The average cap rate on retail transactions this year has stayed below 7 percent, dipping to 6.7 percent in November. The last time cap rates on retail properties were this low was in February 2008, according to RCA data. The new average is 20 basis points below the level recorded at year-end 2013.