The retail sector may have lagged behind its commercial real estate cousins during the economic recovery, but that is changing. In fact, with just shy of $10 billion in retail property investment sales in first quarter 2013, it would appear that happy days are near again.
That was the consensus of a panel of experts on the “Commercial Real Estate Show” radio program.
Home-improvement stores, auto retailers and fast-casual restaurants are paving the way for retail’s recovery. “One example is that a couple of weeks ago Noodles & Company went public, and they had some of the best returns from their public offering of any company that went public in the last 12 years,” said John Neville, partner at Arnall Golden Gregory. “That’s a great snapshot of the market’s demand for that type of fast-casual restaurant.”
Mitch Roschelle, a partner at PricewaterhouseCoopers (PwC) and the leader of its U.S. Real Estate Advisory Practice, added that while we haven’t gotten back to pre-recession sales levels, “The steepness of consumer retail sales growth is very encouraging.”
Sales on the Rise
One of the strongest parts of retail’s recovery has been in the investment sales arena. In fact, Dan Fasulo, managing director at Real Capital Analytics, said sales of strip centers are up 30 percent on a year-over-year basis. “A couple of years ago, it was the institutional quality strip centers that were changing hands and seeing the value increases,” he added. “Now the market is starting to spread out to all [retail] properties.”
PwC‘s first quarter survey indicated that retail cap rates, on a national basis, are hovering between 6 and 7 percent, said Roschelle. Regional malls have the lowest cap rates at around 6.5 percent, and strip centers have the highest at around 6.95 percent, while power centers fall somewhere in the middle. The panel expects cap rates to continue to compress.
Distressed assets may still become available in some areas, but troubled retail properties have mostly been resolved through a sale or recapitalization. “Anyone that’s still waiting for this wave [of distressed properties] to come is going to be waiting an awfully long time,” said Fasulo.
Foreign investors have exhibited a hearty appetite for retail properties in a variety of markets throughout the United States, guests added. “[Foreign investors] are very interested in retail because historically retail has been a fairly elastic way to invest in real estate and enjoy economic growth at the same time,” Roschelle said.
Secondary markets — including Atlanta, Phoenix, Minneapolis and Denver, as well as parts of Florida and Texas — are experiencing big increases in retail investment sales, Fasulo noted. Dallas has been one of the big standout markets, said Roschelle.
Retail sales may be heating up, but new construction remains sparse. “It still seems that the only new construction that’s going on is construction of projects that were started before the recession that now are being picked up by another group,” said Neville.
While lenders are getting more active in commercial real estate again, speculative retail is still the toughest kind of property for which to get financing, added Roschelle. “That absence of financing is creating opportunities for existing properties and landlords,” he said.
The stall in construction has had a positive effect on retail’s recovery, allowing for an increase in rent growth and occupancy, I remarked. “The lack of new construction has really helped retail recover. Some tenants are finding it difficult to locate in the best areas. This demand is causing higher rents and occupancies in highly desirable locations and centers. On the B and smaller centers we are beginning to see more tenant and investor interest as the recovery lumbers forward.”
Dan Fasulo’s closing tip on the show was to consider buying private-equity-sized local properties.
Real estate always cycles, and buying at the beginning of recovery has historically been the best time to buy. So is it time to buy retail? With prices below replacement costs in many areas, NOIs improving and interest rates favorable, I say yes.
Michael Bull, CCIM, is founder of Bull Realty Inc., a U.S. commercial real estate sales and advisory firm headquartered in Atlanta, and the host of the nationally syndicated "Commercial Real Estate Show."