Phil Voorhees, EVP, CBRE National Retail Partners – West

In the last few years, public REITs and some institutional investors have pulled back their capital allocation from retail assets, leaving behind a thin buyer pool for assets priced above $35 million. It isn't all bad news, though. The shift has opened up space for pension funds and family offices, along with other sources of private capital, to transact in the market, and this buyer pool has been bullish enough on the city's retail market to fuel strong pricing. Last week, for example, the 195,000-square-foot Vista Village complex in San Diego traded hands for $66.2 million—according to industry sources unrelated to the deal. The buyer, CFT Vista, is a Las Vegas-based private investment firm, and a perfect example of the capital bidding on these deals.

“Since 2017, we've seen a pullback from the public REITs, creating an opportunity for pension funds, advisors and family offices,” Philip D. Voorhees, vice chairman at CBRE National Retail Partners-West, tells GlobeSt.com. The exodus of these capital sources has expressly impacted large retail shopping centers with price tags exceeding $35 million—which is generally the retail niche occupied by institutional dollars. “With a pullback in REIT and some institutional interest, the bidder pool for assets over $35 or $40 million gets thin fast,” adds Voorhees. “Thinking of the world as a capital pyramid, there are more investors with $5 million liquid to spend than $10 million, and more with $10 million than $20 million or $30 million.”

Even with fewer buyers eligible to bid on institutional-grade retail product, private capital has seemed to fill in the void just fine. Private capital has been most interested in inland secondary and tertiary market, which are currently offering the best yield profiles, considering the low cost of capital. “This is an opportunity in retail to buy large centers at historically wide cap rate to 10-year-treasury spreads, often producing leveraged cash-on-cash yields in the double digits if not the low-teens, and with fairly modest, conservative leverage,” says Voorhees. “In my career, I've not seen a better time to buy good but not great retail at very fair pricing and exceptional leveraged returns.”

The absence of institutional players also hasn't impacted retail sales volumes. Last year, San Diego had healthy retail investment activity, and Voorhees expects that 2019 will exceed 2018 deal volume. His team's pipeline has already surpassed activity from the same time last year. “The debt markets are favorable, and the more conservative loan-to-value ratios that lenders prefer, seem to mirror more conservative buyer expectations as investors focus on equity preservation and dependable, spendable cash flow,” he says.

While multifamily and industrial have dominated investor interest this cycle—likely helping to drive institutional money out of retail—the retail market is offering better return profiles in some cases, and investors paying attention to underlying fundamentals are taking note. “Compared to industrial and multifamily assets with record or near-record low cap rates, and office assets with tremendous capital requirements necessitating long holds or cyclical timing on the exit, retail shines,” adds Voorhees. “Retail development remains very low nationally. Without new product being developed, existing assets should continue to see strong pricing and compelling rental growth. We're bullish about retail in 2019.”