Retail Investors: Now Is The Time To Buy Shopping Centers

Now is the time to scoop up retail shopping center assets. The fundamentals for these property types are strong with good upside potential, and with interest rates still at historical lows, it is a good time for retail investors to strike, according to John Read, first VP with CBRE’s National Retail Partners, West team. We sat down with Read to talk about the market for shopping center properties, and why—despite the chatter—this is a good time for retail investors to buy.

GlobeSt.com: Why is this a good time to buy shopping center properties?

Read: It is an “efficient” market right now where sellers are looking to sell shopping center assets they have likely owned longer term, maximizing value and equity throughout their ownership, and buyers are looking to buy given continuing property level fundamentals improvements with the benefit of locking in low-interest rate financing long-term if they choose to finance the property.

Fundamentals at the property and financing levels remain strong for shopping centers. While the retail industry in recent years has experienced change with retail store downsizing, closures and bankruptcies, most specifically to big-box retailers, overall retail property fundamentals remain healthy and, in many cases, continue to improve. This is particularly true for primary markets like those in Southern California that are supply constrained and lack new retail property development on a larger scale.

GlobeSt.com: What has retail activity been like so far this year? 

Read: As of the end of Q1 2018, the Los Angeles retail market’s vacancy rate stands at 3.7% with over 296,000 square feet of positive net absorption, and rental rates at nearly $30 per square foot per year, according to CoStar. Orange County’s retail market vacancy rate also stands at 3.7% with over 274,000 square feet of positive net absorption, and rental rates over $25 per square foot per year. While the San Diego retail market’s net absorption was slightly negative ending Q1, the vacancy rate and rental rates remain healthy at 3.6% and over $22 per square foot, respectively. These tight market conditions combined with the limited threat of new and competing development due to a lack of available development sites, increasing construction costs, and prolonged entitlement processes, increase the likelihood that the fundamentals for the existing shopping center inventory will continue to improve over the long-term.

GlobeSt.com: Retail has gotten a bad reputation in the last few years, thanks to the explosion of ecommerce. There are opportunities and strong fundamentals, but are there financing opportunities for these properties?

Read: The combination of these strong retail market fundamentals with a robust financing market where interest rates remain near historical lows, lender spreads have compressed to offset some increasing index rate movements, and a variety of debt capital is available through a wide array of lenders, makes for an optimal time to acquire shopping centers. Shopping center investors can take advantage of this financing market to lock in attractive, low-interest rate financing for the longer term, retain asset value due to the arguably irreplaceable nature of the shopping center they are purchasing, and ride the wave of improving market and property level fundamentals which will benefit NOI growth over the hold period. Our National Retail Partners-West team has been marketing a number of Southern California shopping centers of all sizes and types and all are seeing strong buyer activity for these very same reasons. Some of these centers include the +/-100,000-square-foot Santa Fe Springs Marketplace in Whittier, the +/-33,500-square-foot Anaheim Towne Center in Anaheim and the +/-16,500-square-foot MacMain Plaza in Santa Ana.

GlobeSt.com: What are your clients’ biggest concerns for investment in shopping centers, and what is your response to those concerns?

Read: The biggest concern investors voice about investing in shopping centers is how the ever-changing world of retail with the “bad news” that has persisted over recent years within certain segments of retailers and internet retailers such as Amazon will impact brick and mortar shopping centers in general and, of course, the shopping center they are pursuing. My response is that the world of retail is always changing but it’s changing for the better with a number of retailers including new concepts that are actively expanding, particularly within food and beverage, the grocery and discount space, and also within health and medical uses such as gyms, dialysis centers, and urgent care facilities. There is great real estate in every market and active tenants will always be attracted to the best centers in these markets. Investors should be more focused on a shopping center’s location, its tenants’ susceptibility to the Internet, and its configuration and scalability to adapt to active and potential replacement tenants’ needs should the center lose existing tenants. Brick and mortar retail is here to stay. The most dominant internet retailer in the world, Amazon, wouldn’t have acquired the brick and mortar grocer, Whole Foods, if this wasn’t the case.