IRVINE, CA—Retail’s first half was a study in contradictions. While some segments of the sector were stable or thriving, other segments were wracked by high-profile closings, like Toys ‘R’ Us. Meanwhile, malls and power centers continue their uncertainty as major retailers enact more “rightsizing” measures.
It’s led some capital to scale back or back off from the sector, says Jay Quinn, senior managing director of capital markets of Orange County, CA-based real estate advisory firm Faris Lee Investments. GlobeSt.com caught up with the industry veteran to get his take on what the fourth quarter might hold in the sector, and
GlobeSt.com: What is the retail investment mood as fourth quarter begins and which players are still most in the mood for US assets?
Jay Quinn: Overall, the market is scrutinizing deals a lot more than before, with investors looking for charter or credit tenants. They’re not taking a lot of risk at this point because of where we are in the market and the cycle. Underwriting is getting a little more stringent; when we take a deal to market we need to have the complete package.
As for capital sources, CMBS is still active and looking for deals. For life insurance companies, it’s a little late in the year so their allocations are starting to dry up. They’ve filled their retail bucket at some point and are becoming a little more conservative as well. Banks are still lending, but they’re also looking at deals a little more conservatively with lower LTVs of 60 to 65 to maybe 70 percent. CMBS stands at 75 percent LTV maximum.
We still see strong Canadian interest in US assets, but Chinese capital has backed off. They’re way off from where they were even last year. I haven’t seen any South American money and very little European money.
GlobeSt.com: What’s hot and what’s not in terms of retail investment product?
Quinn: Grocery-anchored assets still are the darling of retail in the capital markets as well as for buyers. Everyone is looking for a grocer. Big-box power centers are tough; they’re being underwritten very tough. The leverage point has gone down from 70 to 75 percent LTV to now 60 to 65 percent LTV. With cap rate compression, it’s getting more and more difficult to get the returns on capital, the cash-on-cash returns, that the sponsors need or want. Those types of retail assets are typically where you see a lot of 1031 buyers coming in, but they’re not seeing the returns that they want.
A very interesting trend we’re seeing is a lot of multifamily buyers selling out their assets and moving to retail because the multifamily space is very long in the cycle as well. Cap rate compression in the apartment sector is ridiculous as we’re seeing sub-3 percent cap rates. A lot of the sponsors are taking their multifamily money off the table and moving over to retail where they can get a better return. And obviously with retail hurting a little bit right now, they can get better buys in that sector than they could with multifamily.
GlobeSt.com: What are some key economic indicators and other big picture trends that you’re keeping an eye on?
Quinn: We crossed over the 3 percent range [in September] for the 10-year Treasury. We’ve heard some prognosticators even talk about a 5 percent 10-year Treasury next year – Jamie Dimon at JPMorgan Chase, for example – and I think we’re probably going to get there. The economy is doing very well with the quarterly numbers good, 4 percent GDP and low unemployment. The economy is chugging along, but my concern is that this recovery, I think, is built on debt. Debt is at an all-time high, and corporate debt is high. Obviously, our deficit is very high. I’m concerned about the strength of this recovery fundamentally.