Retail Investment Activity Slows in SoCal

Overall, retail investment activity in Southern California has slowed this year compared to last year—but there investors are finding opportunities in outlying markets, like the Inland Empire. This year, $230 million in retail properties have traded hands in the market. The largest single transaction in the market is the Thomas Winery Plaza, a 99,838 square foot CVS anchored shopping center in Rancho Cucamonga, CA, which recently traded hands for $24 million. This property sat on the market for two years before trading for top dollar. Matthews Real Estate Investment Services’ El Warner, national director and EVP, and Lindsay Tsumpes, director and AVP of the firm’s shopping center division, brokered the deal. We sat down with them to talk about the investment activity in the Inland Empire and why this deal was so significant to the market.

GlobeSt.com: What is retail investment activity been like this year in the Inland Empire? 

Retail activity has slowed for Inland Empire as well as Southern California markets as a whole.  Retail velocity is down $768 Million from last year in California, and Thomas Winery Plaza represents $24 Million of the $230 Million sold year to date in Inland Empire.  It is the largest transaction to date.

In general, we are seeing transactions slow because the gap between sellers’ and buyers’ pricing expectations continue to widen. With the exception of truly core or value-add centers, of which there is very little supply in strong markets, sellers are not achieving their desired pricing and thus are not transacting as quickly or frequently; however, as proof with Thomas Winery Plaza, if you truly nail the positioning and marketing you can still achieve strong pricing and meet sellers’ expectations. The goal is to cultivate a story to be the most desirable retail investment within a certain dollar amount.  There is still demand for retail from foreign capital and if you can make the argument that the asset you are selling is the best investment considering its size and location within the region you can achieve good pricing.

GlobeSt.com: What does the sale of Thomas Winery Plaza and its high price tag say about the trends and demand in the market? 

It says that drug and grocery anchored centers have and will continue to be in high demand.  While investors are more cautious with retail in general, certain types of retail with the right synergy and merchandising mix between strong national retailers will command a premium.  Thomas Winery property has a strong tenant line-up with 24% percent coming from ecommerce proof drug and fitness tenants as well as 38% percent coming from restaurant tenants.  These attributes help drive investor demand and ultimately pricing.

GlobeSt.com: Tell me about your marketing strategy for this property, and why this was such a unique deal.

We priced the asset towards the upper end of market so that we avoided overpricing the asset while still generating strong competition from buyers to meet the seller’s very high pricing expectations.  In addition to price, we created the winning story that we felt would be the most compelling in attracting foreign capital.

GlobeSt.com: What types of investment capital are active in the Inland Empire market overall, and was that reflected in this deal?

Inland Empire is similar to other Southern California markets in that the majority of the buyers for larger multi-tenant retail are foreign buyers.  This was the case for the largest transaction we sold in San Diego, Del Oro Marketplace as well as the largest transaction we sold in Orange County, Savi Ranch, both of which set records this year and were sold to foreign buyers.

GlobeSt.com: How does retail investment in the Inland Empire compare to other SoCal markets? 

In this last cycle we are seeing Inland Empire achieve very similar pricing to more infill and historically more desirable markets.  This is because there have and will continue to be a shortage of quality assets in the most infill areas.  Also, investors are becoming less elastic when deciding between California submarkets and more sensitive to the retailer and merchandising mix at these centers.  For instance, a drug and grocery anchored center will get a better cap rate than a non-anchored or big box center in dense urban markets.  So similar assets between these markets with the right merchandising and tenant mix will have similar pricing.