Investors Are Getting Cautious About Power Center Deals

Retail investment has focused on grocery-anchored shopping centers—but what is the market like for larger power and regional shopping centers? We sat down with John Read, first VP with CBRE’s National Retail Partners, West team, to talk about the demand for these centers. He says that while there is still interest, investors are becoming more critical of these retail assets. In this exclusive interview, we talk to Read about the demand, market opportunities and where retail investment, in general, is heading.

GlobeSt.com: Demand for grocery-anchored centers has been highly talked about. What is investor demand like for power centers and regional centers?

Read: The demand for power centers and regional centers is still there but investors are looking at them with a more critical eye for obvious reasons given their box-oriented tenancy. Generally speaking, pricing on these centers has pulled back when grocery-anchored center pricing has remained strong and stable. Power and regional centers have offered more attractive yield plays for investors due to the pricing pullback with higher cap rates compared to other centers. However, tenant sales performance, co-tenancy clauses, in-place rents compared to market rental rates, box configuration/scalability, competing centers, and depth of replacement tenant pool are primary considerations for investors active in this space. GlobeSt.com: Are you seeing more of these types of assets come to the market?

Read: We have seen some of these centers come to market. Reasons for selling may include getting in front of a near-term or pending loan maturity as well as near-term lease rollover given the number of years that have passed since they financed the center and/or leased the center. Other reasons include the internet susceptibility of the center’s box tenants in the future as well as the threat of a higher interest rate environment.

GlobeSt.com: What is your advice to owners looking to sell?

Read: If owners of these types of centers are considering selling, they must strategize on positioning the center for the buyer pool on the other end, resulting in a successful sale execution. Stabilizing the rent roll prior to sale with longer-term leases and renewals is important but owners should also consider a break-apart or “parcelization” strategy if the center is comprised of multiple parcels consisting of inline and pad portions. Smaller deal sizes equate to a larger buyer pool so there is more liquidity and improved pricing with smaller multi-tenant and single-tenant properties than there is with one sale of the larger center. Our National Retail Partners-West team has successfully executed a number of break-apart/ parcelization sale strategies of larger centers, yielding the sellers with more value than selling the entire center shopping center in a single transaction. Two of the most recent examples in Southern California include Town Center Marketplace in Menifee and Stoneridge Towne Centre in Moreno Valley.

GlobeSt.com: Overall, how do you expect investment sales this year to compare to last year? 

Read: While national retail property transaction volume continued to decline in February, falling to the lowest level in nearly five years according to Real Capital Analytics, our team is experiencing a significant uptick in listing activity as 2018 progresses. Many of our listings are also seeing increased buyer activity compared to 2017. This activity could be a function of our team’s western U.S. focus with a number of our listings in Southern California and the corresponding investor demand for centers in these regions, but I suspect that transaction volume will continue to increase across the board as 2018 rolls on. Given current market conditions with broader scale retail property fundamentals improving and low-financing rates, investors are looking to do something with their proceeds from a property sale and/or refinance as well as cash reserves from other investments or business endeavors.

Additionally, 1031 exchanges continue to drive a significant portion of the buyer pool to make purchases when they otherwise wouldn’t have to. Pricing for other asset types such as apartments are at a near all-time high as well and we are seeing a significant portion of the 1031 exchange buyer pool making cross-property type purchases into more passive, less management intensive retail properties while achieving better returns. For these types of investors who don’t typically invest in retail, the shopping center tenants’ credit, performance, brand recognition, and overall familiarity to the buyer are even more important. As long as there is transaction activity within other asset types, we should continue to see 1031-exchange activity into retail properties.