PALO ALTO, CA-The climate for retail real estate in 2012 looks surprisingly sunny, amid rising consumer confidence and growing appetite among lenders for refinancing and investment deals, according to experts in a Marcus & Millichap retail forecast webinar on Wednesday.
Part of the enthusiasm comes from the anticipation of an undervalued market practically begging for investors. The post-recessionary recoveries in 1992, 1998, and 2002 signaled buying opportunities and 2012 will be no exception, according to William E. Hughes, managing director of the firm’s capital markets unit. In his 25 years following retail real estate, he says, “this is most significant buying opportunity I have seen.”
Tempering that enthusiasm are the uncertainties of the global economy, including sovereign debt crises in Europe and political wrangling over the debt ceiling at home. Meanwhile, key economic indicators, including growth in both Gross Domestic Product and job creation, are positive but lackluster.
Despite those caveats, major retailers in major markets—that Marcus & Millichap’s capital markets Hughes calls “the NFL cities” and “Gateway Cities”, with Chicago and Houston as prime examples. Other growth markets include cities with “high barriers to entry,” such as the San Francisco area, San Jose-Silicon Valley and Orange County, CA.
Less attractive for retail investment are cities expected to emerge more slowly from the recession, including Cincinnati, Cleveland, Dallas and Philadelphia, according to Hughes.
Other highlights from the forecast:
–Lenders are jumping back into real estate lenders. The biggest players will be “money center” banks, debt funds and CMBS. Life insurance companies, however, may remain on the sidelines.
–Big-name national retailers like Kroger, Safeway, Target, WalMart and Walgreens will be the most attractive tenants in 2012, although the forecast warns that on-line shopping is taking an increasingly big bite of retail market share from brick-and-mortar locations.
–The capital supply should remain healthy but not for every asset type: Supermarket and drugstore-anchored neighborhood centers will continue to be popular. Pension funds will be one of the leading investors in retail properties, according to Hughes.
–Commercial banks, CMBS, debt funds and life insurers will be the leading lenders to retail owners, according to the forecast. “We’ll need the need full participation by those lenders as we move forward,” says Hughes. CMBS investment, currently leaping forward this year, will be critical, according to the Marcus & Millichap executive.
–One possible lure for developers is the massive $1.77 trillion of maturing real estate debt needing to be refinanced by 2015, according to the forecast.
Despite signs of progress, however, boom times in retail real estate still seem far away. “We foresee progress in 2012, but I don’t think the logjams are going to break,” says Hessam Nadji, managing director of research and advisory services at the firm.