Less than 10 years after the biggest boom and bust in the U.S. real estate market, retail asset sale prices are reaching pre-recession peaks and demand continues to increase from tenants and investors alike. In 2015, the retail market experienced dynamic growth nationally as sales of retail assets recorded the greatest gains of any product type when compared with the same period in 2014, jumping 64 percent in the first half of the year and exceeding its 2007 pre-recession peak, according to Avison Young. Despite the threat of interest rate hikes, the trend is expected to continue throughout 2016.
However, the needs and strategies of retail investors and tenants for today's market are different than in the past. Prepared investors need to understand where the buying opportunities are as premier supply becomes scarce, why now is the time to buy and sell, and how best to equip for the future.
Where to Invest?
Retailers continue to eye key sectors with strong demographics and multicultural offerings, which provide the perfect environment for retail expansion or new concepts, allowing businesses to better scale.
For many retailers and investors, urban core and high-street real estate maintains its trophy status in 24-hour gateway cities such as New York, Los Angeles, Chicago, and Miami. Retailers value the attraction these locations have for millennials, tourists, and international consumers.
These markets traditionally appeal to institutional and foreign investors from an ownership perspective; however, retail investment opportunities in the prime urban core markets are scarce, and those that are available are trading at record or near-record rates. Meanwhile, secondary markets such as Austin, Texas, Charlotte, N.C., and Nashville, Tenn., as well as quality suburban areas such as those surrounding gateway cities represent nearly double the options of investment opportunities and appeal to a much broader pool of investors.
The suburbs, long known as the hub for big-box retailers, offer great value-add redevelopment opportunities that appeal to both investors and retail tenants. From an investment perspective, rents are rising, and even without redevelopment capital, renewals and new leases can lead to a value-add opportunity.
For example, the “strip mall” of the past can accommodate the streamlined retailer of today, generating increased interest from local, regional, national, and international retailers. Avison Young recently secured joint venture partnership for Delray Square II, a 150,157-square-foot retail community center located in the suburban coastal city of Delray Beach, Fla. This partnership between a national lender in the Northeast and a local operator will result in the redevelopment of one of the few Delray Beach assets positioned to accommodate large, anchor-sized tenants.
Why Sell Now
While the retail landscape continues to shift, investors want to create leaner, more productive portfolios, and sellers are looking to maximize the cycle and their proceeds by putting product on the market that no longer meets desired goals.
Institutional investors, in particular, are selling non-core properties that no longer fit into portfolios or a target asset class. By trading value for quality, many institutional investors are aggressively seeking core retail assets cross-country with ideal complementary tenant mix or location. Within this parameter, property types of optimum interest include strong-anchored shopping centers and outparcel units such as banks, both scarce assets. The smaller, lower-tier portfolios attract buyers looking to invest capital into value-add assets, with private equity investors remaining active in the segment.
Consumer demand for physical points of sale and proven operations are driving retail space owners to invest in existing assets, providing high-potential properties with long overdue improvements. Investors that execute stalled expansions and renovations can profit tremendously from the market's upswing and the ability to re-tenant vacant space, particularly in markets experiencing limited new construction.
For example, over the course of one year, Avison Young executed a new leasing campaign for Flamingo Commons, an 18,000-sf-retail strip center with an outparcel in Davie, Fla. The 30 percent occupied asset went through an extensive capital improvement and management systems overhaul. As a result, occupancy increased 57 percent, a higher-than-average number of prequalified bidders submitted offers, and the property was sold within 60 days of listing.
Like other property sectors, retail development stayed on the sideline for most of the recession. Today, new retail development is following job growth. Secondary cities - especially those with gold-standard hospitals, universities, trade ports, and a strong economic infrastructure - are creating more jobs than more expensive cities by a ratio of approximately two to one, according to a recent PwC report. This is leading investors to markets with lower costs of living and business operations - a benefit to retailers and property owners.
In addition, lenders are a significant part of the retail investment puzzle as they seek retail opportunities to diversify allocation of funds. Savvy investors will take advantage of the liquidity in the capital markets for retail product and readily available debt to expedite new acquisitions and refinancing options that will ultimately increase leveraged returns. Long-term holders of core, stabilized retail assets are realizing that they are in the midst of the ideal time to secure fixed-rate financing and lock in historically low rates. Additionally, floating-rate debt for redevelopment of transitional assets in core to secondary locations is available and being taken advantage of by borrowers.
The market is still below the historic high sales volume levels reached during the last boom cycle. With the lessons learned from the past and knowledge of the opportunities available now, the tools and options are accessible for retailers, investors, and developers to continue leading toward a positive outcome for the retail sector.