A Mixed Bag for Retail
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Shopping center rents and tenant sales are headed in the right direction, but there are still reasons to be concerned (no good rent goes unpunished), according to the panelists at yesterday's Bisnow Retail Real Estate Summit. The first of our two all-star panels talked transactions.
Over 225 attended the event, held at Santa Monica's elegant Casa del Mar.
Cushman & Wakefield's Western US Retail Advisors director Glenn Rudy (with Capital Lending Resources' Mike Poyer) says the market's getting a bit overheated and is eerily similar to 2007 in terms of values, cap rates, velocity, and competition. Despite a significant lack of supply versus demand, volume is up. SoCal accounted for 20% of all retail sales in the country through June, with LA's $1.8B representing a 20% increase year-over-year.
While there's not much new supply from development, one of Paragon Commercial Group principal Erwin Bucy's biggest concerns is that retail operators in a variety of categories—from office supply to Kmart—are shrinking their footprints. There's going to be more supply from second-gen space.
According to BIG Shopping Centers USA president Stan McElroy, the company's initial wave of acquisitions came in 2010 and '11, when the pricing structure was much different than today. Since then, BIG has invested in smaller markets (think Salt Lake City, Pittsburgh, and Nashville) to find better yield, but even in those markets he's seeing cap rate compression.
Noting that 67% of Donahue Shriber's income stream comes from shop space, president Larry Casey says the shopping center developer is turning leases that were done in 2009 when things were ugly. After five years of same store rental decreases, the company's seeing same store rental growth of 6% in 2014, and '15 is looking even better. Additionally, he's seeing upticks in tenant sales.
US Bank SVP Scott McPherson notes the economic recovery nationwide is uneven, with an abundance of capital heading toward Class-A properties and locations, creating bubbles in some areas. His advice to developers and investors is to be disciplined: Just because there's a capital provider doesn't mean your deal is good.
Our moderator, Faris Lee Investments president Rick Chichester, says the retail investment firm has done 287 transactions the past two years in 39 states. His tidbit on the economy: We don't have full employment, and of the employment numbers that we get, 50% are part-time or minimum wage.
Erwin wishes he owned stock that did as well as Internet sales. If Sears had put all the consumer data from its catalog into an Internet-driven company, he says, it would be a completely different company right now. Stan says the No. 1 property in BIG's portfolio is a lifestyle center in Omaha, Neb. (Maybe Warren Buffett shops there.) According to Larry, when you have tenants who feasted on vacant space at $9/SF and you tell them it's going to cost them $14/SF and above to come into new development, they're not there yet.
Noting that Hispanic and other ethnic grocers' performance generally is significantly above that of mid-market grocers—$1,000/SF versus $500/SF—Glenn expects to see some institutional investment in this space. Larry cautions that consumers in lower-income areas may spend all their money at a center's grocery anchor without cross-shopping other merchants. Scott says he's not seeing discipline in the CMBS market, and it's stirring the cycle again. Stay tuned for even more coverage tomorrow.