Retail property sales during the first half of the year totaled $36.6 billion, which is down about 20 percent compared to the same period last year, when the retail sales volume reached $45.7 billion. That decline is only slightly behind the pace of the broader commercial real estate sales market, where year-over-year sales declined 16 percent during the first half. “I do think that people are being a little more cautious given where most folks feel that we are in the cycle. We have had significant cap rate compression and for the best assets, yields are as low as they have ever been,” says Chris Angelone, a managing director at JLL in Boston.
Nationally, respondents believe that retail property cap rates are averaging 6.3 percent. Views were more divided on where cap rates stand in the markets where respondents currently operate. In all, 27 percent said that cap rates are averaging between 4.6 to 5.5 percent; 29 percent said 5.6 to 6.5 percent; and 27 percent said 6.6 to 7.5 percent. In addition, 12 percent said cap rates were averaging higher than 7.6 percent and another 5 percent said cap rates were below 4.5 percent.
The majority of respondents anticipate that cap rates in their markets will either remain flat or increase slightly in the coming year. Overall, 43 percent expect cap rates to increase over the next 12 months, while 37 percent think there will be no change. However, about one in five respondents (21 percent) believe that cap rates will decrease further over the next 12 months. The expectations for national cap rates were very similar. Nearly half of respondents (47 percent) expect cap rates to increase; 33 percent anticipate no change; and another 19 percent predict that cap rates will drop. On average, an increase of 13.2 basis points is expected.
Pricing and cap rates on most assets have flattened out in the past 12 to 14 months, says El Warner, national director of shopping centers at Matthews Real Estate Investment Services in El Segundo, Calif. However, cap rates continue to drop for top assets in core markets, he adds. Matthews broke a record last year when it sold a grocery-anchored center in Alameda, Calif. for a 4.9 percent cap rate. “However, we’re still seeing properties trading for less than a 4.9 percent cap level and even lower than 4.5 because of the amount of capital that still needs to be placed,” he says. For example, the Donahue Schriber Realty Group reportedly bought the Safeway-anchored Alamo Plaza in Northern California for a 4.25 cap rate in early January.
Opinions were mixed on the type of retail assets that currently offer the highest yields. Responses varied from auto dealerships and long-term triple net lease properties to dominant class-A enclosed malls, grocery- anchored properties and destination retail and entertainment centers. “In prior cycles, when cap rates move to a point where people believe it is at an all-time low, buyers start to go out on the risk spectrum with secondary market and other strategies to chase yield,” says Angelone. “In this cycle, investors have been very disciplined and have not really participated heavily in the class-B and -C markets for assets.”