IRVINE, CA—Retail investors are keeping awatchful eye on the grocery-store category, and historically lowinterest rates are dictating pricing for investment opportunities.GlobeSt.com spoke with president Edward Hanley andmanaging director Bill Asher of locally basedHanley Investment Group to discuss how these twotopics are impacting the retail sector as a whole and where thesmart investments are.

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GlobeSt.com: How are interest rates affecting theretail investment market, and how long will this wavelast?

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Asher: It's really fostering premiumspaid on retail investments as a whole that we didn't see inthe last height of the market between 2005 and 2007. That was thelast time we were at that level. We've surpassed that level now,but there's less velocity. The biggest difference is thesingle-tenant retail sector. Here, we're seeing cap rates at anall-time low and pricing at an all-time high—in some instances75-100 basis points less in cap rates than the last run in2005-2007—even with the interest-rate spike we experienced in thespring of 2013. However, the lack of inventory in the marketplaceis the big difference. Any property we put out for sale that'sformally listed is getting a lot of activity and multiple offers.Even off-market opportunities are attracting record pricing asbuyers are scouring the market seeking the right property in whichto invest. There's definitely much more traction now than there'sever been because of the lack of supply and increased volume of1031 exchange requirements. And I think all active investors andowners are wondering how long it's going to last. We keep hearinginterest rates are going to go up at some point, but the timingcontinues to get stretched out due to macroeconomic factors such asunemployment rates and consumer confidence.

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We see the rest of this year continuing on the same path.Investors will continue to pay a premium, especially if it's asingle tenant leased to corporate tenants such as aWalgreens, CVS, Chase Bank, McDonald's, AutoZoneor Dollar General. For multi-tenant properties,the returns are starting to compress further because it's analternative for the investor who doesn't want to pay a 4% cap ratefor a McDonald's and can do better buying a multi-tenant stripcenter; especially when the tenant mix is secure and they feeltheir tenants are not going to be affected by onlineretailing. Food, restaurants, drycleaning—there's always going to be the service-related part ofretail that investors will focus on as longer-term tenants as theInternet continues to put pressure on other majorretailers.

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How long will this wave last? It's in the hands of theFed. At the beginning of the year, there wasspeculation that interest rates might move up to 50 basis points bythe end of the year, but now it appears that we have another yearof this environment. We're in this unique period of time where,because interest rates are at historic lows, it provides propertyowners and investors some great options: sell at the highest pricethey've ever seen or lock in low interest-rate debt for a longtime, whether you continue to hold an asset in your portfolio oracquire a new property.

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GlobeSt.com: How is anchor consolidation/downsizingaffecting investor purchasing decisions?

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Hanley: Since grocery-anchoredshopping centers remain the number-one retail investmentchoice in today's market, the latest news ofAlbertsons acquiring Safeway iscreating a lot of buzz in the retailing world for a couple ofreasons. First, there's already a lot ofconsolidation transpiring in the grocery-storearena, and a lack of competition allows companies like Albertsonsto control a lot of the locations. They can't keep all of them, sowe will see stores closing because you can't have an Albertsons onevery corner. This equals opportunity in the retail-investmentarena because the grocery-anchored product type in SouthernCalifornia is so highly sought after from a large pool ofbuyers/investors. Whether it's a stabilized center withabove-average sales volumes or a reposition opportunity, thesecenters are the number-one choice for an investment vehicle in theretail segment right now.

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Second, if there's any opportunity to improve the revenue streamin the shopping centers, one preferred way to do it is to back-filllarge vacant box spaces with a grocery store. In today's market,you can refill it with Sprouts, Trader Joe's orstores geared toward a particular demographic such asHispanic grocers – Cardenas, ElSuper or Northgate. This is what weexpect to see with the consolidation.

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Consolidation and downsizing are also affecting smaller inlineshops like Radio Shack that have been around sincethe 1980s. The Internet has impacted Radio Shack significantly—youcan buy any of their products online —so they're rebrandingthemselves as well as closing stores, which is creating opportunityto re-lease those stores to more service-related categories withprojected longer term sustainability as a retailer.

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In regard to the home-improvement category, the merger ofLowe's and OSH will leave big boxspace that may be more difficult to lease and co-anchor space thatwon't be immediately filled. Hobby Lobby andStein Mart are candidates to back-fill that space,but there is not an abundant group of new box tenants coming intothe market to fill these larger spaces. It will take time, butthere eventually will be new tenants that will take these.

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The last recent group to consolidate and downsize is theoffice-supply segment. Staples,OfficeMax and Office Depot are havingtheir challenges trying to figure out how to compete with theInternet in order to provide customers with an experience in theoffice-supply market. How do you do that? Why wouldn't you orderall of your office supplies online? One direction is to add moreproduct, such as office furniture and knickknacks for an office,attempting to bring the consumer in by competing in some aspectswith Walmart. The angle here is that consumers don't need to go toa 60,000-square-foot building like Walmart to get what theyneed—they can get it at their office-supply store.

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These opportunities are what investors are considering whenmaking decisions on their next investment. Today's historiclow-interest-rate environment, combined with the opportunity tofill vacancies, is the formula investors are using to determinewhat they will pay, projected timing, and how they will add valueto a shopping center in the future.

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GlobeSt.com: What impact is Internet pressure frome-commerce having on traditional brick-and-mortarretailing?

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Hanley: Watch for brick-and-mortars tocontinue to evolve. Checkers and check stands may be a thing of thepast. Consumers may swipe a product, pay with theiriPhone and walk out the door—something that willmorph from PayPal. The self-checkout in a grocerystore may transition into other experiences, from hard goods tosoft goods. It's only getting better and is driven by the consumerneed for satisfaction and no long lines. It still has a long way togo, but so did the first iPhones.

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Also, on the retail side, it hasn't taken hold yet, but they'reputting the infrastructure in place in an attempt to get people toshop for groceries on Amazon. From a retailstandpoint, companies like Amazon are setting up more distributioncenters to keep a warehouses stocked with fresh items to get themto your door quickly and conveniently. This also has a long way togo, but we expect that the grocery industry will continue to focuson providing delivery services.

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There's a lot of opportunity in the retail market because ofoverall retail consolidation. Some people can look at it as a kindof menace or threat, but I view it as an opportunity. People arefinding ways to be creative, and putting new retailers in thespace. It leads to opportunity for the owner, tenant andconsumer—it trickles down the entire way.

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Carrie Rossenfeld

Carrie Rossenfeld is a reporter for the San Diego and Orange County markets on GlobeSt.com and a contributor to Real Estate Forum. She was a trade-magazine and newsletter editor in New York City before moving to Southern California to become a freelance writer and editor for magazines, books and websites. Rossenfeld has written extensively on topics including commercial real estate, running a medical practice, intellectual-property licensing and giftware. She has edited books about profiting from real estate and has ghostwritten a book about starting a home-based business.