ORLANDO-Orlando’s retail vacancy rate is declining thanks to new store openings and expansions, but the pre-recession levels still escape the tourist market. At the same time, investors are exploring opportunities in B and C class assets. So says the Third Quarter 2011 Marcus & Millichap Retail Research Market Update.
While the retail sector recovery through the first half of 2011 marks a vast improvement from the recession, tenants are still scarce—and that waters down the market and stymies a stronger turnaround, M&M reports. Projected net absorption in 2011 equals a 0.6% change in occupied stock. That’s a step in the right direction, but well below the average 3.3% annual gain in the four years preceding the recession.
Investors still have healthy appetites for the Orlando metro’s multi- and single-tenant assets, although a recent drop in single-tenant deals underscores a shortage of quality product available for sale. Cap rates for assets net-leased to the highest-rated corporate tenants remain under intense pressure, with most drugstores now trading around the mid-6% mark. That’s one reason why investors are going deeper.
“Investors are starting to come back to the market for B and C class product,” Richard Matricaria, regional manager of M&M’s Orlando office, tells GlobeSt.com. “The pricing isn’t quite what it would be on A type deals or credit deals like CVS. But we are starting to see demand come back for B and C type products.”
In the multitenant segment, Publix-anchored centers are as hot as ever, but a rising number of lender-owned assets are still on the market. Investors are pursuing these assets as long as they have potential to realize greater upsides through re-tenanting, typically within a projected five-year holding period, M&M reports. But there is an appeal toward potential with B and even C class retail.
“Earlier in the year it was still A properties selling at premium cap rates, but as the year has gone on we’ve seen more interest in B and C assets,” Matricaria says. “Investors are realizing the returns are so thin on nice quality products, so they are going down the pecking order to see what kind of yields they can get on the B and C product. The deals are better priced for buyers to invest in the B and C product, but there’s more and more competition in that space too.”