Retail real estate snapshots from industry experts. Alfred Hackbarth from the SRS Phoenix office interview follows:
What is your forecast for the rest of this year’s retail real estate market, in terms of activity and overall health? What about 3-5 years?
We expect the retail investment market to continue to gain momentum throughout the remainder of 2013 and into 2014. Demand for Class “A” investment product is extremely high and currently far out-paces the supply of opportunities. Fueling the lack of the supply are historical low interest rates and a renewed commitment from financial institutions to lend thus allowing current owners to refinance at extremely attractive terms and lowering their motivation to sell.
What has been the biggest change you’ve seen in the retail market in the past six months?
The demand for retail products seems to be shifting for the positive and as the housing industry continues to outperform and consumers appear more willing to return to spending. The result is that current tenants are seeing increased sales and the stronger retail tenants are beginning to look to expand in the near-term. On the investment side the lending market has gained significant momentum and the availability of funds continues to increase at terms that are extremely favorable to current owners as well as new buyers.
How is that affecting your clients and how they’re investing?
Current owners are less likely to sell as they can increase their investment returns by simply refinancing versus selling and competing to find replacement properties. The lack of supply of new investment product continues to force CAP rates to historic lows as demand soar.
What is surprising to you right now about trends related to retail real estate?
The increased demand for Class “A” product continues to soar while the glut of “B” and “C” product still has not had significant movement as the lenders, servicers and owners try to re-lease vacancies lost during the economic slowdown and stabilize operations . Tenants continue to focus on the higher quality properties thus leaving the “B” and “C” properties stuck in perpetual under-performance. The owners of this product continue to hold hope that operations will return versus selling the assets for significant losses in value that are not based on CAP rates but rather on Price/sf.
What is your greatest concern going forward RE: retail leasing/investment and how are you addressing that concern?
The biggest concern in the short term is the lack of quality product coming to the market as demand and investors continue to push for stabilized assets. A larger concern, which will not affect the market in the immediate term but more drastically in the long-term, is the inevitable interest rate risk as the financial markets eventually readjust and rates finally rise to more historic stabilized levels. As interest rates rise thus pushing CAP rates higher properties will need to outperform on the operations level specifically with increases in rental rates and decrease in vacancy to balance the financial market changes. As example for every 1% rise in CAP Rates rental income needs to increase 15% to balance the affect.
Anything else you find particularly relevant or notable as we head into Q3 and Q4?
Demand will continue to rise as alternative investment options for returns remain very slim. We fully expect investors to continue their push to acquire retail investment opportunities especially in the Phoenix MSA as the market continues to be rated as one of the top 2 residential markets in the US further emphasizing the economic recovery and continued expansion.