CREJ - page 8

Page 8
— Retail Properties Quarterly — September 2015
I
nvestor demand for core retail
assets continues to remain
extremely strong. Denver still
retains a favorable outlook for
most retail asset categories.
Investment price points including
average transaction value, average
size and capitalization rates from
transactions occur-
ring over the past
year are indicated
in the table. The
market data sets
were limited to
centers with sta-
bilized occupancy
and those for
which the confir-
mation of transac-
tion details were
attained.
The market sur-
vey focuses on
three general types
of retail shopping
center – power centers, grocery-
anchored centers and nonanchored
strip centers. Assets in the power
center category tend to be larger
in size and include an array of
large format stores that specialize
in particular merchandise catego-
ries. Power centers include big-box
retail; for example, a 40,000-square-
foot home improvement store like
Lowe’s located next to a pet supply
store like PetSmart at 18,000 sf, with
smaller retail filling in.
Assets that fall into the grocery-
anchored centers are easily identi-
fied as a 50,000-sf grocery store,
King Soopers for example, sur-
rounded by smaller retail service
providers.
The final asset category is nonan-
chored neighborhood strip centers.
The smaller retail centers fill gaps
in 1- to 3-mile trade areas and often
include a restaurant, quick-serve
food options, convenience stores
or other established retail concepts
that can draw traffic on site.
Each type of center has a differ-
ent transaction value, size and cap
rate range. Cap rates effectively
provide an indication of return on
investment, which can be an accu-
rate measure of current investor
demand. Although each center is
made up of varying types and sizes
of retailers, there are many com-
mon characteristics that often are
identified with lower implied cap
rates. As with most retail, location
matters. Being positioned in an area
with high incomes, high population
density and high levels of traffic
exposure is the main characteristic.
Established centers that are under
10 years old, with strong tenant
sales, and that have an average
remaining lease term that exceeds
five years are other common traits
that are associated with lower
implied cap rates.
Power center transactions are in
the $50 million to $500 million price
range. Implied capitalization rates
for recent transactions ranged from
5.5 to 7.2 percent. Power centers that
are made up of market-dominant,
large-format retailers with multiple
soft goods retailers, and have a high
ratio of tenants with credit ratings
above or near the investment-grade
tier have lower implied cap rates.
Grocery-anchored center trans-
actions included in the market
data set had sales prices in the
$10 million to $50 million range.
Implied capitalization rates for
these transactions range from 5.5
to 7.9 percent. There are two pend-
ing transactions, which are priced
with implied rates near the low end
of the range, and if the pending
transactions were considered in the
previous data set, the average rate
would be lower.
Strip center transactions typically
have sales prices under $10 million.
Implied cap rates for recent transac-
tions were in the 6.2 to 9.25 percent
range. Shadow-anchored strip cen-
ters (those that are in proximity to
a grocery store or large general mer-
chandise store) are identified with
lower implied cap rates.
I have also gathered some broker
feedback. In addition to looking at
market activity over the past 12
months, I solicited feedback from
market area brokers who specialize
in retail.
Feedback from retail brokers
about current market trends and
pending transactions consistently
suggests that demand remains
exceptionally strong and investors
are willing to accept increasingly
lower yields for core retail assets.
Investors are concerned about inter-
est rates and are watching trends,
however, near-term demand is not
currently being impacted. Returns
still exceed underlying mortgage
return requirements, in most cases,
and many institutional investors are
placing equity into an investment
that requires no debt. Rising interest
rates are anticipated to impact cat-
egories favored by smaller investors
and value-add investors who may
require a mortgage component as
part of their investment strategy.
s
Investment Update
Reagan
Hardwick
Vice president,
National Valuation
Consultants,
Denver
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