Lack of Quality Suburban Retail Lingers

ORANGE COUNTY, CA—Opportunities to buy in the high-barrier-to-entry Orange County retail market are few and far between, perpetuating investors' pent-up demand to own in this region, Cushman & Wakefield's director, southwest retail capital markets group Glenn Rudy tells GlobeSt.com exclusively. We spoke with Rudy about the sales climate for suburban retail properties and the capital-markets view of this sector.

GlobeSt.com: What is the sales climate like for suburban retail properties in Orange County?

Rudy: Scarcity of quality product remains the defining term. The pickup demand that is out there for quality core opportunities in high-barrier-to-entry markets remains very competitive. We're in a historically low-interest-rate environment, and we will likely stay there for a prolonged period of time—certainly through 2015, and some are predicting it will be into 2016. We will continue to experience compressed cap rates and peak values going back to, and if not better than, the peak levels in 2005 and 2006.

The biggest problem today is transaction volume. Most aggressive investors need to find new ways to place allocated funds, whether that means redefining their geography or moving from core infill to core secondary to core tertiary markets. There is increased activity in the secondary markets as investor demand drives them to markets they may not have been interested in in the past. The highly scrupulous investors are highly focused on the best of the best in those secondary markets. The most-sophisticated institutional investors, public REITs and pension-fund advisors, and even high-net-worth and private investors are all seeking core infill coastal-type opportunities, and it's very difficult to tie those loops.

GlobeSt.com: What types of properties are typically sought after by investors in this market?

Rudy: Coming out of the Great Recession, the focus has primarily been on grocery and/or drug-anchored centers in the suburban space. Daily-needs drivers in those shopping centers are the lynchpin there. You can count on the fact that consumers always need to get groceries and prescriptions filled. At the end of the day, disciplined, scrupulous investors today are seeking tenant sales performance. The most significant drivers for investment today are high barriers to entry, demographics and affluence. Extremely well-located grocery/drug-anchored centers are outperforming regional and lifestyle centers, and these are the bread-and-butter for most investors today, albeit very hard to find. The single-tenant investor market is very high now because of pent-up demand from institutional investors and private investors seeking to place capital and being active in the single-tenant triple-net space.

GlobeSt.com: What is the capital markets view of suburban retail in Orange County?

Rudy: Our team sold $550 million in 2014, and we're on contract to surpass that through June of this year. When we talk about that power-center product, it's usually the institutional investors with pent-up demand seeking it. The capital-markets' perspective for Orange County is that scarcity of product is driving values and we will continue to see cap-rate compression. There are not a lot of opportunities to point to—there are a couple of properties on the market in Orange county—the Rancho Santa Margarita center will get quite a bit of attraction, and it's broken up into three pieces. We still expect high activity from high-net-worth individuals, and the larger institutional investors do have an under-allocation of funds to retail. On a go-forward basis, many are coming out of the apartment and office sector. There's a flight to high-quality core infill suburban retail to make up for that under-allocation to that sector.