CORONA DEL MAR, CA – When we last met with Bill Asher, he was optimistic about single-tenant net lease, but cautioned the overall frothiness might be slowing. Has that changed in the intervening months? Yes and no, says the EVP at Orange County-based Hanley Investment Group, but it’s only part of the overall retail investment landscape that still has some legs in spite of the perceived tightening.
We sat with Asher in advance of the ICSC Western Conference and Deal Making event to get his EXCLUSIVE update on what investors and property owners need to know for today’s shifting market.
GlobeSt.com: What is the current market environment for retail assets?
Bill Asher: It remains a great time to sell at peak pricing or refinance at historic low interest rates. Supply of available product for sale has substantially increased in 2016, but investors have become more cautiously selective in their pursuit of acquisitions that meet their criteria. The depth of overall buyers and offers have thinned out compared to the last two years of hot market conditions mainly because sellers continue to push aggressive pricing based on recent record sales. However, there is still a small group of buyers that are paying premiums for well-located properties and keeping pricing and cap rates close to a mirror image of last year. 1031 exchange buyers continue to be a significant driver to the retention of peak pricing, while the majority of other interested investors are becoming increasingly frustrated as they find it challenging to locate the right property that offers their desired return. Current market conditions (as of the 3rd quarter 2016) continue to slowly soften compared to the run-up of the last two to three years. For example, according to CoStar, over the last six months single-tenant, net-leased properties over $1.5 million in California sold at an average cap rate of 5.50%. Properties, which sold under the same criteria during the previous six-month period (August 2015 to January 2016), sold at an average cap rate of 5.30%.
GlobeSt.com: What is hot and what is not?
Asher: A flight to security for stabilized NNN properties in major metro markets across the country remains hot. Single-tenant investments leased to credit retailers are continuing to trade at record pricing. Grocery-anchored shopping centers with reported successful sales and a complementary mix of internet resistant retailers are still in high demand and commanding top of the market pricing. Record pricing for unanchored multi-tenant retail has started to plateau based on future projected macro-economic changes in the market such as interest rate volatility, stock market instability, and the upcoming presidential election. GlobeSt.com: What buyers are in the market for retail assets?
Asher: The majority of buyers driving today’s market for retail assets are motivated 1031 exchange buyers seeking capital preservation. A large group of those 1031 exchange buyers have recently sold apartments at record pricing and are seeking a more passive investment at a similar or better return. Additionally, with significant uncertainty globally including negative yields in other countries, the US retail market is attracting foreign buyers with roots in the US. These buyers are becoming more frequent investors in today’s market and are deploying fresh equity into retail.
GlobeSt.com: What do the next 12 months look like for buyers and sellers?
Asher: Interest rates are at an all-time historical low and retail property owners are taking advantage — whether buying, selling or refinancing. July 5, 2016 marked the lowest 10-year Treasury bill rate in nearly 150 years – the Treasury bill fell to 1.36%, approximately 106 basis points less from where it was the same time last year. The next 12 months for buyers and sellers will continue to be a similar environment compared to the last two to three years until interest rates dramatically increase.
GlobeSt.com: What advice can you give to both buyers and sellers?
Asher: If you’re contemplating selling, now is the time to do it to maximize price. Once interest rates increase, grocery-anchored properties with the right fundamentals, along with single-tenant NNN investments, will take the longest to adjust pricing. Unanchored strip centers and multi-tenant retail (even shadow to a grocer, for example) will be the types of assets that will experience price softening the fastest. If you’re buying, stick to basic real estate fundamentals; good location with daily needs and internet-resistant tenants at sustainable market rents. Combine that with there has never been a better time to lock-in long-term historical low interest rate financing to maximize cash flow.
Visit Hanley Investment Group at Booth #1521 at ICSC Western Conference & Deal Making in San Diego.