Investment Now Looking to Tertiary Markets
As part of our coverage of ICSC RECon 2014, we're bring GlobeSt.com readers the leaders in the retail space of commercial real estate. We talked with Nicholas Coo, senior managing director at Faris Lee Investments to get his take on the investment scene in retail. Join Faris Lee at booth #C150M during the event.
GlobeSt.com: Can you tell me about the retail property market and how its performance is affecting financing?
Nicholas Coo: The market has improved over the last couple of quarters through an increased positive outlook in leasing and tenant demand, as well as the competitive financing environment which has lowered the effective cost of capital. Both forces have placed downward pressure on cap rates as buyers have underwritten multi-tenant retail more optimistically from a vacancy perspective, and the ever-improving capital markets have made lower cap rates tolerable by maintaining cash-on-cash returns. One example in particular is the availability of interest only financing on 3-, 5- and in some cases 10-year increments which is relatively new to the market.
GlobeSt.com: There has been a lot of talk about primary and secondary markets, what is happening with tertiary markets?
Coo: With a renewed outlook in investor and lender optimism, the market has been pushed into tertiary markets that might have had liquidity and sale issues in mid-2013. We are now seeing yield-driven investors and lenders pursuing the tertiary markets as returns continue to become more aggressive in primary markets. By aggressive, I mean that primary markets of Southern California have experienced as much as 100 basis points in downward pressure on cap rates within the last six months for multi-tenant retail.
We are currently marketing a property in a tertiary market in the high desert (Inland Empire area of Southern California) which has been garnering a strong amount of investor interest. This is an example of the renewed liquidity of multi-tenant properties in the tertiary markets that would have had limited interest as little as a year ago.
GlobeSt.com: Asian investment in United States real estate has been increasing – how is this impacting the retail property market?
Coo: As has been the case in the past, the foreign investor has made up a large portion of the winning bidder profile as their underwriting takes into consideration several variables that do not apply to the domestic investor. First, the U.S. is a safe-haven for foreign capital as evidenced by our bond markets, which holds true for real estate as well. Second, currency plays have made U.S. real estate more attractive to foreign money. And third, political uncertainty has placed a premium on U.S. real estate versus the domestic market for the foreign investor.
GlobeSt.com: Where do you see areas of strong investor demand that are more prevalent today than in the recent past?
Coo: Without question, the STNL (Net Leased) category is the most obvious example of investor demand with compression in cap rates across all levels of credit worthiness. In addition to the single-tenant product, the multi-tenant / unanchored market has really come to life as evidenced by Faris Lee’s pipeline of projects under contract throughout the nation. The ability to sell within the multi-tenant unanchored sector has increased to levels which match or exceed those during the highs of the 2007 market. Currently, there is more interest from private capital (whether foreign or domestic) than at any other time during the last 6 years. For this reason, Faris Lee has invested in refining and acting on its private market channels, whether foreign or domestic.