Investors Still Hot For Miami's Retail CRE
When David Duckworth put Northlake Promenade up for sale, he expected the West Palm Beach shopping center could fetch $12.5M at a cap rate near 6%. Rather than setting an asking price, Avison Young conducted a bid process that became “extremely competitive." Now, the 83k SF Publix-anchored West Palm Beach shopping center is scheduled to close mid-November at a low, 5% cap rate.
But that's the state of retail sales in Florida, a mix of a flight-to-safety mentality and a plethora of capital seeking safe harbor. The retail investment market is “extremely robust, extremely competitive,” David says.
While David also sells office buildings, he says the demand and the numbers don't compete with what he's seeing for retail, especially grocery-anchored centers. Northlake alone had 250 registered prospects with 17 offers, more than a dozen of which David says were very strong.
For buyers, especially foreign buyers, there's an element of acquire and forget with retail. The centers require less day-to-day attention, an attractive prospect for investors living in China or Brazil, David says.
David is part of a lineup of capital market experts on tap for our Capital Markets & Foreign Investment event Nov. 17, including Aztec Group's Jason Shapiro, FM Capital's Aaron Kurlansky and Wells Fargo's Scott Primeau. Jason says David's views on retail demand is on par with what he's seeing from a capital and debt side.
That's because the money is not so much focused on the retail asset—it's in love with the creditworthiness of the anchor tenant. “To me, it's a function of a pursuit of safety, a flight to quality,” Jason says.
But David and Jason say the good times may be slowing down in 2017. Right now, demand for retail in particular is being fueled by 1031 exchanges fleeing high-priced markets like NYC. But once that settles down, David expects the bid-ask gap to widen next year.
“The growth in values we've seen is going to level off,” he predicts. “Right now, with the cap rate compression that we're seeing, we're really getting negative amortization in terms of cash flow with many of these assets.”
And if the Fed increases interest rates, that will further diminish that investor cash flow.
And Jason (here with his wife, Natalia) sees a more fundamental reason for the valuation slowdown.
“There comes a point where the cost of these centers gets so high, it requires a certain level of rent” to justify the price paid for the returns, he says. “But there's only so much money you or I are going to pay for a smoothie or a haircut. So there's a tipping point, in my opinion.”
Come hear more from David and Jay, along with Cervera Real Estate's Alicia Cervera Lamadrid, The Related Group's Carlos Rosso and River Point Development Group's Rodrigo Azpúrua at our Miami Capital Markets & Foreign Investment event 7:30am, Thursday, Nov. 17, at Macy's West in Miami. Register here.