The most attractive properties in the Midwest, says Curt Bailey, director of Midwest retail investment for Irving, TX-based Archon Group LP, have been in the tertiary markets where there has been an influx of residential growth, and within the urban core where stores can project volumes of sales based on high-density demographics. "For urban infill, the barrier-to-entry is very high, expensive, risky and takes longer to complete," Bailey tells GSR. "On the flip side, you can get more rent and urban infill will sell for the best cap rates."
Archon Group, the real estate subsidiary of Goldman Sachs, recently purchased phase one of Fairlane Green, Ford Land's one-million-sf "green" retail and recreational center on the 243-acre site of the recently closed Allen Park Clay Mine Landfill in Allen Park, MI. Bailey says the company was interested in the property because of its mature and dense market. Additionally, a number of retailers identified area and were able to project healthy sales based on the location of the site.
According to Chicago-based Marcus & Millichap, one of the strongest sectors of investment demand in the Midwest has been in single-tenant leases, namely drugstores such as Walgreens and CVS, of which medium price climbed 28% from last year to $215 per sf and dollar volume rose by 32% during the same period.
Keeping prices high in this category has resulted from the sheer lack of available properties. According to published reports, only seven of drugstore properties traded in the past 12 months. During that same period, median price per sf for fast-foot restaurants spiked 64% to $440, while the number of transactions skyrocketed 270%.
With an abundant supply of investment cash pushing rates up, Christopher Carroll, director with Chicago-based Cohen Financial worries that there is too much money in the market. "You're seeing a lot of money go into the areas where a ton of rooftops are going up," Carroll says. "Some of these investors do, but some don't, have a basic understanding of real estate and they are unable or unwilling to price risk."
While analysts agree that a hike in interest rates will help dilute the amount of real estate investment capital looking for deals, Carroll says it may take a catastrophic event for investors to tighten their purse strings.
"All it takes is one or two companies to hit the wall and everyone will back off," Carroll says. "You can't afford to not go full speed right now, but until someone runs into a brick wall at 90 miles per hour, this investment market will remain unchanged."
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