IRVINE, CA—In their search for yield, many retail-property investors are considering new markets and property genres that they never would have thought about in the past,
GlobeSt.com: What are retail-property buyers seeking most at this time?
Drury: It depends on the buyer. Different people look for different things. Everybody is obviously chasing yield and return, and some are more comfortable with higher risk than others. There's plenty of money out there right now, and retail and multifamily are the highest-profile sectors -- the ones people like the most. That said, the landscape is changing a bit in the major markets, from a distressed environment to a much more stable, expensive, harder-to-find-value environment. And, investors are considering buying things they wouldn't have in the past because of the supply/demand issue: while they seem to have ample capital, there isn't a huge inventory of products that make sense for everybody.
GlobeSt.com: What strategies are buyers using with regard to retail investments right now?
Drury: The more conservative investors who are focused on stability and reduced risk are going for properties with known tenants such as Walgreens, McDonald's or Chase. But the majority of buyers are looking for value and yield, and most are aligning themselves with whatever tenants are in the market, following them around and trying to have those leases in place when they buy these assets. Or, they're making sure that they can backfill from a stable tenant like Whole Foods or L.A. Fitness. They're keeping track of where tenants are going, which allows them to reduce the risk and work on yields and returns. And, some people are buying aggressively because it is tough to find product that fits their criteria, or they have a 1031 exchange requirement to satisfy.
GlobeSt.com: How is the typical retail-buyer profile shifting as the sector becomes more competitive?
Drury: Many investors are selling assets they bought well and are trading into lower-risk, higher-value, higher-quality product. A lot of buyers are looking for long-term leases with tenants and less risk, and they're accepting less value than in the past because they did well in the downturn. These strategic buyers are now into more class-A and less class-B- and -C–type product.
GlobeSt.com: What else should our readers know about the retail-investment sector?
Drury: This segment of the market has become more stabilized in the last 18 months. Cap rates are down, and prices per square foot are up in core markets. It's harder to find value and achieve yield in those markets.
The other trend you may see is buyers going to markets they wouldn't have touched before. For instance, if you're based in L.A., it's very difficult to find anything other than stabilized, low-risk, low-yield investments. To find a bigger upside, you have to go to secondary or tertiary markets that you wouldn't have considered before because you simply didn't need to. About 70% of buyers we see on Auction.com are coming from a different state than where the assets are located. We're seeing a lot of bidders from out of state right now. They're looking at markets they likely never would have considered—like Atlanta, for example—because they can't get the yields they need in the markets in which they live.
People are also considering different product types like mixed use. Some hotel deals have retail attached to them, and people are interested in that. They're considering buying other product types than in the past because of the way the market is.
There's also a lot of infill projects going on right now, especially multifamily or mixed-use projects with retail on the ground floor and multifamily on top. They're getting into product types they wouldn't have considered before -- either because interest rates are low or they did well during the downturn -- and they're putting money into other projects outside their core business.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.