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Page 10 — Retail Properties Quarterly — May 2015
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A re you in search of a low-risk
yield in the 6 to 8 percent
range? You are not alone.
Strong investor demand
for investment-grade retail
assets continue to fuel a highly
competitive market environment.
And Denver continues to be viewed
with a favorable outlook by real
estate investment trusts looking to
acquire $500 million power centers,
1031 exchange investors chasing
$1 million to $5 million net lease
investments and several categories
in between. To gauge current market
pricing, I took a quick look back at
investment activity over the past
12 months. As many of you know,
there has been a significant amount
of market activity over the last year.
To illustrate investor demand, let’s
examine implied capitalization rates
from several recent transactions.
This article will focus on three gen-
eral types of retail shopping centers
– power centers, grocery-anchored
centers and neighborhood strip cen-
ters. Our market data set has been
limited to centers with stabilized
occupancy where confirmation of
transaction details could be attained.
Power Centers
Power center assets tend to be
larger in size and will have an array
of large format stores that special-
ize in specific merchandise cat-
egories. Think of a center with a
15,000-square-foot pet store, 20,000-
sf electronics store and 30,000-sf
soft goods store – this is the perfect
example of a power center. In the
past 12 months there have been
several transactions in the $50 mil-
lion to $500 mil-
lion range. Implied
capitalization rates
for the four trans-
actions in question
were in the 6.2 per-
cent to 7.2 percent
range, averaging
6.41 percent. Note
that the follow-
ing characteristics
were identified
with lower implied
capitalization rates:
• A substantial
remaining lease
term for the pri-
mary anchor tenant;
• Market-dominant large-format
retailers with multiple soft goods
retailers;
• A higher ratio of tenants with
credit ratings near or above the
investment-grade tier;
• Location in a trade area with
high incomes or high population
density levels;
• Location with high levels of traf-
fic exposure;
• Average remaining lease term
that exceeds five years;
• Evidence of strong tenant sales
activity; and
• Less than 10 years old.
Grocery-Anchored Centers
Most people already know or
are able to guess what a grocery-
anchored center retail asset is all
about. Think of the retail center with
a grocery store and all the smaller
retailers and service providers that
make life easier – assuming a good
haircut, nutrition supplements and
a paycheck loan make life easier.
Overall size and configuration may
vary, but you should have a good
idea by now as to what centers
in this category have in common.
Recent transactions included in our
market data set fell in to the $10
million to $50 million range. Implied
capitalization rates for the six trans-
actions in question were in the 5.5
percent to 7.9 percent range, with an
average of 6.53 percent. The capital-
ization rate for a grocery-anchored
center largely is driven by the
anchor tenant. Following are some
of the characteristics that were iden-
tified with lower implied capitaliza-
tion rates:
• Market-dominant grocery chain;
• Substantial remaining lease term
for grocery anchor tenant;
• Average remaining lease term
that exceeds five years;
• Established center with evidence
of strong tenant sales activity;
• Location in a trade area with
high incomes or high population
density levels;
• Location with high levels of traf-
fic exposure;
• Less than 10 years old; and
• Additional 1 percent commission
for buyer agent (only kidding on this
one).
Retail Strip Centers
Retail strip center sales are more
common and involve a more diverse
group of assets. Recent transactions
included in our market data mostly
fell into the sub-$10 million range.
Implied capitalization rates for the
transactions in question were in the
6.2 percent to 9.25 percent range,
with an average of 7.51 percent. The
characteristics identified with lower
implied capitalization rates for this
asset category mirror those of power
centers and grocery-anchored cen-
ters, and are as follows:
• Shadow anchored;
• Location in a trade area with
high incomes or high population
density levels;
• Location with high levels of traf-
fic exposure;
• Average remaining lease term
that exceeds five years;
• Established center with evidence
of strong tenant sales activity; and
• Less than 10 years old.
In addition to looking at market
activity over the past 12 months,
I reached out to several brokers
who specialize in retail and asked
two questions. First, has inves-
tor demand and market pricing
changed much over past 12 months?
Second, are investors concerned
about interest rate changes in the
future and is that impacting pricing
at this point?
Broker feedback consistently
suggested that demand has
increased slightly over the past 12
months. One broker reported that
several institutional groups are
underweighted in retail and are
having difficulty sourcing acquisi-
tion opportunities. This increased
demand is expected to push cap
rates down slightly in the near term.
Investors are concerned about inter-
est rates and they are watching
trends, however, near-term demand
is not impacted by investor concerns
for rate movement at this time. s
Property Assessment
Reagan
Hardwick
Vice president,
National Valuation
Consultants,
Denver