Investor Flight to Safety Drives Retail Demand

Los Gatos Village Square was purchased free and clear of existing debt.

LOS GATOS, CA—The San Jose economy is growing as numerous Fortune 500 companies plan new campuses and hire more workers. This has significantly boosted household formation and retail sales. As a result, retail operations have tightened considerably as tenants vie for the few remaining offerings and investor demand remains high but there is limited deal flow due to lack of listings, says Marcus & Millichap’s recent retail report.

Demand from investors of all sizes is raising property values dramatically, particularly for class-A assets among institutional buyers. The low-yield environment has encouraged a search for centers with positive leverage above the rates of return present in other asset classes. Meanwhile, private investors have shifted acquisition strategies toward value-add opportunities, seeking to mitigate worries about the high cost of retail properties through re-tenanting and building improvements. Exchange buyers will make up a significant portion of capital in the market as the relative value of retail over apartments pulls in additional yield-oriented investors, according to the report.