Consumer, Interest Rate Questions Remain
SAN DIEGO-In part one of our pre-ICSC Western Division conference story, we asked industry experts about their expectations at this year’s event, and most viewed the “mood” out there to be cautiously optimistic. In this second installment, we asked our experts for their thoughts for the remainder of the year. Are interest rates the big question? Consumer confidence? Read below for the answers.
GlobeSt.com: How will the retail market fair the remainder of the year?
Matthew Mousavi, managing director, Faris Lee Investments:We expect retail investment properties to generally continue on their trend of strong demand and increasing transaction volume. With ongoing uncertainty in the debt and equity markets, we expect an increasing amount of capital that seeks the security of retail investment properties, this is especially true in the net leased market. However, there continues to be uncertainty surrounding the consumer, particularly consumer demand in light of above-normal unemployment rates, limited household income growth, and the effects of taxes, healthcare and other government related headwinds.
Dennis Vaccaro, senior managing director, Faris Lee Investments: We will see a very vibrant retail market for the remainder of 2013. We are seeing a strong increase in 1031 trade activity and still see an almost limitless amount of capital seeking assets. Although interest rates may continue to increase, we believe that lender spreads are likely to decrease and therefore keep debt costs to investors at or about their current levels.
Shaun Riley, senior managing director, Faris Lee Investments: The supply in retail investment properties remains constrained and we expect that to continue into the New Year. Investor demand is strong across the board for retail investments with an abundance of both private and institutional capital wanting to place money. We are starting to see some pushback from investors on the most aggressively priced single-tenant investments which are typically offerings with long-term leases with the strongest credit tenants.
The market remains strong and although most investors purchasing these types of assets, do so on an all-cash basis, we may be seeing investors reacting to rising interest rates and the fact that these investments typically do not offer upside via below market rents or lease up of vacancies. For investment decisions being made now, investors feel those investments providing some value add opportunity will help offset static cap rate risk.
Dave Mossman, EVP and chief investment officer in the Costa Mesa, CA office of Donahue Schriber: If interest rates remain relatively stable, our markets will follow suit. The biggest positive change from a deal making perspective is our company is seeing an infusion of independent entrepreneurs looking for retail space in the past year. This is a welcome and positive sign for our industry; it was not like that from 2009-2012. In addition to this, savvy national retailers continue to aggressively seek new deals that will increase their market share in highly coveted, high barrier to entry trade areas.
Bernie Labowitz, SVP of Sperry Van Ness/Renaissance Commercial: The Southern California retail market is quickly recovering with retailers gravitating to well located centers. The quick service food tenants are very active in the market. There are a number of competitors vying for the same space, causing rents to rise.The service types of tenants are again active, as the consumer feels more confident, and starts to spend money. The consumer wants more bang for their buck, so the value oriented tenants will do well in the months to come.
Kelly Reenders, economic development agency administrator, County of San Bernardino: Southern California is a big draw, especially when you consider the density of its population centers. Property values are rising—and a number of new neighborhoods are in planning and going into construction based on the demand that the housing developers see in the County. Retail follows rooftops. So as our housing market continues to mend, and more homes are built, you’ll see more retail in the area. Colonies Crossroads, a 1.1-million-square-foot retail center, is a great example of how successful new development can be. It just opened a number of phases this year, bringing retailers such as Target, BevMo, Sports Authority, Chick’s Sporting Goods, and Petsmart among others to the Upland and surrounding foothill communities.
Dave Cheatham, President, Velocity Retail Group, LLC: We are going to have solid sales this fall and holiday season. Expect to see a lot of creativity by retailers both on line and through bricks and mortar to get and keep shoppers. One example we are seeing now is that retailers are displaying the holiday items before summer is even over.
Chris Hite, president of Coreland Cos.: Retail is so closely linked to the health of the consumer that my perspective is that of ‘measured optimism’ for the remainder of the year. Housing has stabilized in many areas, unemployment is going down, and incomes and job growth are nudging up, albeit slowly. However, there are still a number of factors out there, such as stagnant tenant sales in certain categories and higher-than-average unemployment rates in LA and the Inland Empire, keeping my optimism ‘measured.’
Neil Soskin, VP of real estate at Primestor: For our markets primarily in southern California, we expect a strong finish to 2013. Our tenant’s sales are picking up, almost across the board. Our leasing pipeline is strong and we expect a strong finish to 2013, signing more than 125,000 square feet of new leases. We are looking to grow our portfolio and expect to be even more productive in 2014.
Craig Killman, SVP and west coast retail market lead for Jones Lang LaSalle: On the West Coast retailers are most interested in opening stores where there are consumers with a high percentage of disposable income. Post 2008, retailers have retrenched, downsized, and right sized their portfolios the days of “Field of Dreams” development are over. It’s a far more complicated evaluation today where to place a store than it has been in the past. E-commerce is a major part of the equation today along with all of the traditional site characteristics; demographics, co-tenancy, ingress/egress, parking, etc., but it all boils down to two things; first – “Location, location, location…” and second, an enchanting place for them to display their goods and services and one that their customers will want to patronize. The Grove in L.A. and the Marina Marketplace in Marina Del Rey are classic examples of two environments that are both taking care of their retailer’s needs and their customer’s needs. Entertainment oriented retailers; restaurants, movie theatres, interactive technology stores like Apple. These retailers are catering to their customer’s needs because this experience is very difficult if not impossible to recreate on the world wide web.
One consistent product of a recession is people wanting to go into business for themselves; a) because jobs are harder to find and b) because they want more control over their futures. As a result when there once was Subway, there are now five or six sandwich oriented franchises, more pizza guys (artesian style), five or six gourmet hamburger guys, more dry cleaners, etc. While this on the surface can seem great but it further fragments and already fragmented market and it makes it more difficult for any of these categories to really thrive in a market and make a profit. There have been some new “High Street” retailers that have made their way into the US, mostly via NYC and then to the next major metropolitan markets; Los Angeles, San Francisco, Chicago and Miami. The High Street retail space in LA (Rodeo, Melrose, Robertson and up and coming environments like Abbot Kinney in Venice) and San Francisco are all doing well. It’s a fickle business, some retailers like Ralph Lauren who have supremely well established brands are doing better than ever while others who may have been hot, are now gone yet there always seems to be the next best thing waiting in the wings to take their place in the spot light.
Redevelopment opportunities continue to carry the day. They are expensive but the underwriting is much more objective given the quantifiable demographics (day and night) that surround these properties. Some properties are changing hands from retail owners to multi-family developers and mixed use projects are emerging with a very strong component of residential to support the retail. As fuel prices continue to rise, the “work, live, play” environments of Marina Del Rey and Playa Vista for example have never been more popular. People like the thought of parking their car for days at a time. The creative services space that’s being developed in Playa Vista has covered bike parking and bike repair in some of the facilities as an amenity to their employees to encourage biking to work. They are obviously providing shower/locker room facilities so that those athletic employees don’t offend their cube mates.
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