NEWPORT BEACH, CA—With retail property values back up to 2006/2007 levels, lenders and owners are more positive than they were a few years ago, Philip Voorhees, SVP of CBRE, tells GlobeSt.com. This bodes well for retail investors looking to sell.
As GlobeSt.com reported last week, Voorhees and his team aided in the sale of Rancho Temecula Town Center, a 165,486-square-foot community shopping center in Temecula, CA, for $60 million to Jones Lang LaSalle Income Property Trust, a non-listed, daily valued perpetual-life REIT. The seller wasa partnership between an affiliate of Walton Street Capital LLC, a Chicago-based private equity firm, and Colorado-based Alberta Development Partners. Voorhees says the transaction represented the first sub-6% cap rate for a large grocery-anchored shopping center in the Inland Empire since the recession.
“There have been plenty of these sub-6 cap deals in the coastal markets, but not yet in the Inland Empire,” says Voorhees. “The fact that there was a lot of institutional interest in the property—75% of the potential buyers were REITs, pension funds or advisors—sends the message that the institutional buyers are back in the Inland Empire now.”
One of the reasons for the pricing push is the genuine lack of product for sale right now. “We usually have quite a bit of inventory, but it’s really low. There’s just not a lot of grocery-anchored shopping centers being marketed in the Western US, putting additional pressure on the owners to make deals on the properties that are there. Also, the 10-year Treasury has pulled back, and the economy is showing signs of recovery. The lack of properties and renewed optimism are producing exceptional pricing.”
Voorhees says he’s not sure what’s going to happen next and that cap rates are as likely to compress as rise between now and the end of the year. “If you think about the market of ’06 and ’07, the very best grocery-anchored shopping centers were selling for a 5.5% cap rate and the 10-year Treasury was at 475, so there was a 75-point spread between the Treasury and cap rates. Right now, the Treasury is at 250, and if we went 75 points over that, I could see cap rates come down into the mid-3s for grocery-anchored shopping centers, which is crazy. If that metric held true, if 2014 is like 2004, we could see positive things happening price-wise.”
The overall market trend in retail investment is a preference for quality, Voorhees adds. “Whether it’s a 20-year McDonald’s ground lease, a completely leased strip center in a coastal market or a high-performing grocery-anchored shopping center, there’s not enough product to satisfy the demand. There’s plenty of capital ready to make purchases.”
Because the economy has recovered and interest rates have stayed low, lenders are optimistic and we’re either well ahead of or back to property values of 2006 and 2007, Voorhees says. “Folks are more positive when they have equity than when they don’t. There’s investor optimism for good-quality products right now.”
The fundamentals also seem to be good in the retail sector, with most of the current development being led by tenants. “I’m not seeing a lot of spec development, if any, so inventor is still really tight,” says Voorhees. “We’re at record-low development levels, and as occupancy levels increase, this should put upward pressure on rents. We’re on a good run for retail that should coincide with the larger economic recovery.”