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LOS ANGELES—In an exclusive GlobeSt.com interview withAlex Kozakov and Patrick Wade,first vice presidents with CBRE and co-leaders of a retailinvestment sales team based in Downtown Los Angeles, the teamdiscusses the increasing convergence in pricing between stabilizedcore and value-added retail assets. The team tells GlobeSt.com thatin the past, they have seen a much larger cap rate spread betweenstabilized retail assets and those that present an opportunity forthe buyer to add value. Over the last few quarters, however, theyhave noticed a narrowing of the gap between the cap rates andprices per foot for these assets. As a result, owners of “troubled”or value-add properties are receiving similar prices to owners ofstabilized properties.

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GlobeSt.com: What have youbeen seeing in the retail market during the last six monthsregarding various retail properties in the greater Los Angelesarea?

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The CBRE Team: There has been a lot ofactivity so far in 2014, as there is significant demand and notenough supply for retail properties in dense infill locations. Newconstruction has continued to center on multi-family product forthe time being, so there is very little new retail construction onthe market at the moment. Most of the big and junior box vacancieshave been back-filled, and rents are trendingupward. Additionally, cheap debt and an abundance of cashcontinue to aggressively pursue infill sites. Stabilized coreassets have been trading at record cap rates and prices per squarefoot, even surpassing the 2006/2007 peak pricing. However, we havealso seen an increase in the perceived value and pricing of assetswith vacancies or shorter-term leases with no options or plans torenew. Investors are beginning to purchase assets with “seller rentguarantees” in place - a tactic that has not been too widelyaccepted since the last peak of the market. In effect, the spreadbetween stabilized core assets and value-add retail properties isdiminishing. The “juice” that value-add investors are seeking isgetting squeezed out by aggressive buyers willing to pay for aproperty's future potential today. Sellers are finding thatthey do not necessarily need to do the work required to add valueprior to listing their property, and buyers are jumping on thelimited opportunities in the market.

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GlobeSt.com: What are some specific examples of thisthat you've seen in the market?

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The CBRE Team: Our team has marketedand sold several properties in the last six months with rentguarantees, short-term leases and vacancies that have achievedsimilar pricing to the “turn-key” assets we have sold over the sameperiod of time. We recently sold two 7-Eleven-anchored stripcenters at similarly aggressive cap rates and prices per sq. ft.,one of which was a typical value-add center with 27% of the GLA(gross leasable area) vacant that is located in a dense infill area(over one million people in a five-mile radius) in Huntington Park.We received more than two dozen offers and sold the property at a3.8% in-place cap rate (approx. 6% pro-forma) at over $440 persquare foot. In contrast, we had another 7-Eleven-anchored centerin Pasadena, located in a highly affluent community. It was fullyleased at the time of sale and sold quickly at over $887 per squarefoot at a sub-4.7% cap rate. In this instance, there was only a100-130 bps difference between stabilized and value-add. Wecurrently have a 7-Eleven and Subway-anchored center in the MiracleMile area with 23% of the GLA vacant and a seller rent guarantee onthe market. It's listed at a 5.22% cap rate with a rent guarantee,priced at over $664 per square foot, and we expect it to sell closeto the list price. All three properties have two things incommon: They are located in dense infill areas and benefit fromstrong anchor tenants with excellent credit. However, two ofthe three properties fall under the “value-add” category, but areachieving similar pricing to the stabilizedasset. Nonetheless, values for each are converging together,and we are seeing a market in which the spread in return forvalue-add and stabilized retail are narrowing.

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GlobeSt.com: What are your predictions for thefuture? Will buyers continue to pay higher prices forvalue-add properties in decent locations?

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The CBRE Team: We believe they will.We currently have a repositioning retail opportunity under contractin Eagle Rock, one of LA's most sought-after and trendy retailmarkets. In this case, the leases are expiring, but the location isfantastic and provides investors with an excellent opportunity toreposition. It's currently under contract close to list price, atmore than $662 per square foot. While vacancy and short-term leaseswere once considered negative and far more risky, today they areviewed as opportunities. The demand and optimism surroundingretail in Southern California is forcing buyers to make moreaggressive stabilization assumptions in order to be competitiveenough to win the deal. Until more supply hits the market orinterest rates substantially increase, we believe this trend willcontinue.

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Natalie Dolce

Natalie Dolce, editor-in-chief of GlobeSt.com and GlobeSt. Real Estate Forum, is responsible for working with editorial staff, freelancers and senior management to help plan the overarching vision that encompasses GlobeSt.com, including short-term and long-term goals for the website, how content integrates through the company’s other product lines and the overall quality of content. Previously she served as national executive editor and editor of the West Coast region for GlobeSt.com and Real Estate Forum, and was responsible for coverage of news and information pertaining to that vital real estate region. Prior to moving out to the Southern California office, she was Northeast bureau chief, covering New York City for GlobeSt.com. Her background includes a stint at InStyle Magazine, and as managing editor with New York Press, an alternative weekly New York City paper. In her career, she has also covered a variety of beats for M magazine, Arthur Frommer's Budget Travel, FashionLedge.com, and Co-Ed magazine. Dolce has also freelanced for a number of publications, including MSNBC.com and Museums New York magazine.