CREJ - Retail Properties Quarterly - September 2015
Investor 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 occurring over the past year are indicated in the table. The market data sets were limited to centers with stabilized occupancy and those for which the confirmation of transaction details were attained. The market survey focuses on three general types of retail shopping center – power centers, grocery-anchored centers and non-anchored 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 categories. 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 identified as a 50,000-sf grocery store, King Soopers for example, surrounded by smaller retail service providers. The final asset category is non-anchored 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 different transaction value, size and cap rate range. Cap rates effectively provide an indication of return on investment, which can be an accurate measure of current investor demand. Although each center is made up of varying types and sizes of retailers, there are many common 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 transactions 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 pending 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 transactions were in the 6.2 to 9.25 percent range. Shadow-anchored strip centers (those that are in proximity to a grocery store or large general merchandise 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 interest 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 categories favored by smaller investors and value-add investors who may require a mortgage component as part of their investment strategy.