Rates Play Havoc With Single-Tenant Sector
Catch the region's top minds at RealShare ORANGE COUNTY on August 21 at Hotel Irvine Jamboree Center. Meet the region's CRE-leaders.
IRVINE, CA—Retail investors are keeping a watchful eye on the grocery-store category, and historically low interest rates are dictating pricing for investment opportunities. GlobeSt.com spoke with president Edward Hanley and managing director Bill Asher of locally based Hanley Investment Group to discuss how these two topics are impacting the retail sector as a whole and where the smart investments are.
GlobeSt.com: How are interest rates affecting the retail investment market, and how long will this wave last?
Asher: It’s really fostering premiums paid on retail investments as a whole that we didn’t see in the last height of the market between 2005 and 2007. That was the last time we were at that level. We’ve surpassed that level now, but there’s less velocity. The biggest difference is the single-tenant retail sector. Here, we’re seeing cap rates at an all-time low and pricing at an all-time high—in some instances 75-100 basis points less in cap rates than the last run in 2005-2007—even with the interest-rate spike we experienced in the spring of 2013. However, the lack of inventory in the marketplace is the big difference. Any property we put out for sale that’s formally listed is getting a lot of activity and multiple offers. Even off-market opportunities are attracting record pricing as buyers are scouring the market seeking the right property in which to invest. There’s definitely much more traction now than there’s ever been because of the lack of supply and increased volume of 1031 exchange requirements. And I think all active investors and owners are wondering how long it’s going to last. We keep hearing interest rates are going to go up at some point, but the timing continues to get stretched out due to macroeconomic factors such as unemployment rates and consumer confidence.
We see the rest of this year continuing on the same path. Investors will continue to pay a premium, especially if it's a single tenant leased to corporate tenants such as a Walgreens, CVS, Chase Bank, McDonald’s, AutoZone or Dollar General. For multi-tenant properties, the returns are starting to compress further because it’s an alternative for the investor who doesn’t want to pay a 4% cap rate for a McDonald’s and can do better buying a multi-tenant strip center; especially when the tenant mix is secure and they feel their tenants are not going to be affected by online retailing. Food, restaurants, dry cleaning—there’s always going to be the service-related part of retail that investors will focus on as longer-term tenants as the Internet continues to put pressure on other major retailers.
How long will this wave last? It’s in the hands of the Fed. At the beginning of the year, there was speculation that interest rates might move up to 50 basis points by the end of the year, but now it appears that we have another year of this environment. We’re in this unique period of time where, because interest rates are at historic lows, it provides property owners and investors some great options: sell at the highest price they’ve ever seen or lock in low interest-rate debt for a long time, whether you continue to hold an asset in your portfolio or acquire a new property.
GlobeSt.com: How is anchor consolidation/downsizing affecting investor purchasing decisions?
Hanley: Since grocery-anchored shopping centers remain the number-one retail investment choice in today’s market, the latest news of Albertsons acquiring Safeway is creating a lot of buzz in the retailing world for a couple of reasons. First, there’s already a lot of consolidation transpiring in the grocery-store arena, and a lack of competition allows companies like Albertsons to control a lot of the locations. They can’t keep all of them, so we will see stores closing because you can’t have an Albertsons on every corner. This equals opportunity in the retail-investment arena because the grocery-anchored product type in Southern California is so highly sought after from a large pool of buyers/investors. Whether it’s a stabilized center with above-average sales volumes or a reposition opportunity, these centers are the number-one choice for an investment vehicle in the retail segment right now.
Next: INTERNET PRESSURE
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