Prices for retail assets are climbing in the Inland Empire. Spruce Plaza, a new construction class-A shopping center, recently traded hands for $1,005 per square foot and a 5.32% cap rate, a record in the market according to industry sources. While this is record-breaking pricing, the trade wasn’t an anomaly. Pricing has been steadily escalating in the market as other asset classes—especially industrial—have helped to fuel job and population growth.
“This higher pricing, and particularly higher per square foot, is a trend we’re seeing with quality assets in well-located markets,” Matthew Mousavi, group managing principal at SRS National Net Lease Group who brokered the Spruce Plaza deal, tells GlobeSt.com. “This is due in part to the increasing costs of land and construction borne by developers in higher quality locations. This is also a reflection of the increasing rents that certain tenants are now more willing and able to pay.”
While the population growth has helped to drive investment activity in general in the Inland Empire, retailers’ success has also played a major role. The retail tenants in the market are seeing increasing sales activity, and that has translated into increased investor interest. This is especially true for quality assets with Internet-resistant tenant rosters. “There is this overly negative dialogue today regarding retail about the increasing retail vacancy and e-commerce’s impact on brick and mortar,” says Mousavi. “However, what the headlines don’t highlight as colorfully are the tenants doing very well, particularly food and lifestyle-oriented tenants, and those retailers who are paying the highest rents we’ve seen in the Inland Empire for the right locations. Spruce Plaza is a reflection of that next generation of retail trend we’re seeing in healthy markets where retailers are eager to expand.”
For class-A assets with the right tenant mix, Mousavi expects assets values to continue to climb. “For the right project, in the right location, yes, we do expect to see continued demand for high quality retail property and a willingness from investors to accept a higher price per square foot and compressed cap rates,” he says. “Due to the interest rate environment and increasing in treasuries, we do expect there to be a limit to the cap rate that investors are willing to accept. But from a per square foot perspective, we’re noticing that investors are more focused on location and tenant line up.”
For class-B assets, however, pricing has not seen the same upward trajectory. Luckily, there is enough new construction retail activity to drive the average per-square-foot price up. “For top tier investment opportunities, we’re seeing investors willing to pay premium pricing for the class-A product, while there is more of a gap on the class-B and -C inventory,” explains Mousavi. “As there is less overall supply of newly developed centers, and/or property in high quality locations, investors continue to remain competitive on strong locations, including submarkets within the Inland Empire. Investors will continue to seek Southern California opportunities, particularly newly built projects that feature e-commerce resistant tenants.”