The retail market could be heading toward a stalemate between sellers and buyers. A new report from NAI Capital shows that the retail vacancy rate ticked up in the second quarter, while retail rents continued to increase. The vacancy rate increased a nominal 10 basis points, but rents increased a surprising 3% over the last quarter. We sat down with Fariba Kavian, EVP at NAI Capital, for an exclusive interview to talk about the dynamic in the market. While she wasn't concerned about overbuilding in retail, she said that's sellers and buyers will likely enter a stalemate on pricing through the end of the year.

GlobeSt.com: What is putting upward pressure on retail rents, even as vacancy rates rise?

Fariba Kavian: Retail rents are rising in only the most desirable locations because those locations are not experiencing issues with vacancy. Even if some retailers vacate in those locations, there are other tenants looking to immediately absorb those spaces. In secondary and especially tertiary markets there is an abundance of vacancy still and no pressure on rents. The lack of demand (or transactions) in those markets makes it hard for investors to find a baseline for rents to confidently set expectations for moving forward with an investment.

GlobeSt.com: Are we in danger of overbuilding retail product?

Kavian: No we are not in danger of overbuilding retail product. Developers are not building retail on a speculative basis these days and lenders are not lending on spec developments. So, that's why there is strong pre-leasing activity. New construction has the effect of adding to the vacancy rate as a result financially strong retailers migrating to new class-A product from class B/C locations. Some new retail construction, in non-primary locations, has stagnated and has been slower to lease.

GlobeSt.com: Why are investors beginning to show concern about another downturn?

Kavian: Investors are concerned because they have seen the real estate market cycle previously and the up market cannot be sustained continuously. On average the up cycle consists of 31 quarters and we have now exceeded that by far. There are many positive market indicators such as a growing GDP, low unemployment rate, access to cash, and the stock market being at an all-time high; nonetheless, Investors are worried about unforeseen scenarios and feel a general unease.

GlobeSt.com: Is the retail market becoming more segmented? For example, are certain product types/geographies performing well while others are not?

Kavian: The retail market is absolutely becoming more and more segmented. The old saying of “location, location, location” is always proven essential when the market is going through any challenging momentum and this is one of them. New construction or redevelopment that includes an element of mixed-use, life-style, or destination retail that attracts high volume foot traffic is in extreme demand. L.A. Downtown is a prime example of that phenomenon in retail development.

GlobeSt.com: With this dichotomy between vacancy and rent, what is investor demand like for retail assets?

Kavian: Currently many investors are out there furiously scouring the market looking for deals but are more often disappointed in what they are seeing. There is very little quality product on the market and when product does become available, it is most often priced unrealistically high. So, unless an investor is in an exchange, they are not motivated to acquire either at what they would consider to be a ridiculously low cap rate or in any questionable market area. The demand for retail investment remains in place, but is dissipated by investors not being able to attain a return that makes it worthwhile to deploy fresh capital.

GlobeSt.com: What is your market outlook for the remainder of the year?

Kavian: I believe we are entering a period of stalemate, which will last through the end of this year. After that, either Investors will attain a comfort level with the new highs set in the real estate market or sellers will start to reduce their pricing.

The retail market could be heading toward a stalemate between sellers and buyers. A new report from NAI Capital shows that the retail vacancy rate ticked up in the second quarter, while retail rents continued to increase. The vacancy rate increased a nominal 10 basis points, but rents increased a surprising 3% over the last quarter. We sat down with Fariba Kavian, EVP at NAI Capital, for an exclusive interview to talk about the dynamic in the market. While she wasn't concerned about overbuilding in retail, she said that's sellers and buyers will likely enter a stalemate on pricing through the end of the year.

GlobeSt.com: What is putting upward pressure on retail rents, even as vacancy rates rise?

Fariba Kavian: Retail rents are rising in only the most desirable locations because those locations are not experiencing issues with vacancy. Even if some retailers vacate in those locations, there are other tenants looking to immediately absorb those spaces. In secondary and especially tertiary markets there is an abundance of vacancy still and no pressure on rents. The lack of demand (or transactions) in those markets makes it hard for investors to find a baseline for rents to confidently set expectations for moving forward with an investment.

GlobeSt.com: Are we in danger of overbuilding retail product?

Kavian: No we are not in danger of overbuilding retail product. Developers are not building retail on a speculative basis these days and lenders are not lending on spec developments. So, that's why there is strong pre-leasing activity. New construction has the effect of adding to the vacancy rate as a result financially strong retailers migrating to new class-A product from class B/C locations. Some new retail construction, in non-primary locations, has stagnated and has been slower to lease.

GlobeSt.com: Why are investors beginning to show concern about another downturn?

Kavian: Investors are concerned because they have seen the real estate market cycle previously and the up market cannot be sustained continuously. On average the up cycle consists of 31 quarters and we have now exceeded that by far. There are many positive market indicators such as a growing GDP, low unemployment rate, access to cash, and the stock market being at an all-time high; nonetheless, Investors are worried about unforeseen scenarios and feel a general unease.

GlobeSt.com: Is the retail market becoming more segmented? For example, are certain product types/geographies performing well while others are not?

Kavian: The retail market is absolutely becoming more and more segmented. The old saying of “location, location, location” is always proven essential when the market is going through any challenging momentum and this is one of them. New construction or redevelopment that includes an element of mixed-use, life-style, or destination retail that attracts high volume foot traffic is in extreme demand. L.A. Downtown is a prime example of that phenomenon in retail development.

GlobeSt.com: With this dichotomy between vacancy and rent, what is investor demand like for retail assets?

Kavian: Currently many investors are out there furiously scouring the market looking for deals but are more often disappointed in what they are seeing. There is very little quality product on the market and when product does become available, it is most often priced unrealistically high. So, unless an investor is in an exchange, they are not motivated to acquire either at what they would consider to be a ridiculously low cap rate or in any questionable market area. The demand for retail investment remains in place, but is dissipated by investors not being able to attain a return that makes it worthwhile to deploy fresh capital.

GlobeSt.com: What is your market outlook for the remainder of the year?

Kavian: I believe we are entering a period of stalemate, which will last through the end of this year. After that, either Investors will attain a comfort level with the new highs set in the real estate market or sellers will start to reduce their pricing.