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Page 16 — Retail Properties Quarterly — February 2018
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R etail real estate continues
to feel the impacts of nega-
tive headlines and shifts in
consumer trends as the ever-
changing landscape works to
find a stable footing. In 2017, there was
a 21.3 percent decrease in total retail
investment sales volume as compared
to 2016, according to Real Capital
Analytics. This follows a 13.7 percent
decrease in volume from levels in
2015. The decrease in sales volumes
is not solely in retail, but has been
felt across most asset types including
office and multifamily. The decrease
in sales volumes year over year is
reflective of a shift in investor senti-
ment. This also signals an opportunity
for those groups willing to wade in
against the current and dive head first
into investing in retail real estate.
The retail industry continues to
evolve as the needs and desires of
consumers change. This is the cycle
of retail. The current shifting of retail
is similar to the introduction of the
regional mall in the 1950s or the
emergence of the discount depart-
ment store in the 1980s.Within the
current shifts are healthy and positive
statistics on actual store openings and
closings:
• For every company closing a store,
2.7 companies are opening one.
• There were more than 4,000 net
store openings in 2017, and another
5,000 are projected to open in 2018.
Financial markets have largely start-
ed to price the associated negative
retail risk into individual asset valua-
tions and investors are still attracted
to well-conceived, well-positioned
retail real estate assets. Through dis-
cussions with investors of retail real
estate, we have compiled a few senti-
ments and trends of
note.
• Buyer-seller
reconciliation. Com-
pared to a decade
ago, commercial
real estate prices
are 20 percent high-
er for all property
types nationally,
according to RCA.
The gap between
sellers’ expecta-
tions of pricing and what buyers
were willing to pay for their perceived
risk gradually lessened throughout
2017. Retail properties remained on
the market longer as the two views
began to gravitate toward each other.
Well-located retail, value-add and
grocery-anchored retail were in high-
est demand, not as subject to longer
marketing periods. In the coming
year, the bid-ask gap is anticipated
to continue to shrink as the market
gains more comfort with retail real
estate headline risk and the changing
retail environment.
• Capital formation. Advisers and
equity funds continue to raise capital
for retail real estate and many are
forming strategies to pursue out-of-
favor retail assets such as power cen-
ters with big-box exposure, and shop-
ping centers in secondary markets.
The deployment of this capital has
been slow to occur but is expected
to pick up over the first half of 2018.
Experts within the real estate industry
are in broad agreement that private
capital will be a principal driver of
new investment in real estate in 2018,
according to a recent report from
PWC. As a percentage of total retail
transaction volume in the United
States, private capi-
tal, consisting of
equity fund advis-
ers, operators with
capital sources and
high net-worth
individuals, has
increased every
year since 2014,
reaching 61 percent
in 2017, according
to RCA. In Denver,
private capital
accounted for approximately 80 per-
cent of all retail transaction volume in
the metro area for transactions over
$5 million, according to HFF research.
With record amounts of capital to
deploy and a growing appetite for real
estate as an asset class, the private
equity sector is set to be the lead play-
er of real estate investment in 2018.
• Real estate investment trusts. Retail
REITs have maintained high occu-
pancy rates, despite retailer bankrupt-
cies and store closures, by attracting
new tenants, including those provid-
ing services and offering experiences,
according to Nareit’s 2018 Economic
Outlook. Overall, occupancy rates of
properties owned by retail REITs was
95.7 percent as of third-quarter 2017
and has remained above 95 percent
since 2013.With healthy retail fun-
damentals, REITs’ focus in 2018 will
be strategic portfolio optimization
through identifying and disposing of
noncore assets. Portfolio optimiza-
tion will focus largely on dispositions
of lower-quality assets or assets with
low-growth profiles. These disposition
strategies represent additional oppor-
tunity for private capital to enter
certain markets and deploy value-add
or repositioning strategies for retail
properties as men-
tioned above.
• Operations and
leasing. Out-of-mar-
ket equity investors
continue to seek
out local operating
partnerships with
best-in-class retail
operators in order
to enter a desirable
market, such as
Denver, without the
need to establish an
office. The ability to attract and main-
tain tenants in this rapidly changing
retail landscape is more important
than ever, so high-quality manage-
ment and leasing teams are in high
demand.
• Financing. Sellers of retail real
estate in 2018 are asking the ques-
tion of how prospective buyers will
finance acquisitions, in the midst
of the challenges of retail.Well-
conceived mixed-use, high-density,
infill, “internet proof” tenancy, and
grocery-anchored centers with qual-
ity sponsorship continue to generate
attractive financing from traditional
banks, life insurance companies and
commercial mortgage-backed securi-
ties lenders. These lending sources
are underallocated in retail and will
compete aggressively to finance the
best centers. Riskier retail centers
with box risk, lack-of-credit tenants,
or significant rollover are being under-
written with those risks in mind, lim-
iting leverage and requiring additional
capital from the sponsor. Capital to
finance retail real estate remains for
those able to obtain the best quality
assets and those with equity to lessen
the risk to the lender. V
Investment Market
Chad Murray
Director, HFF,
Denver
Mark Williford
Director, HFF,
Denver
Andrew Yaroma
Analyst, HFF,
Denver