GlobeSt.com is providing wall-to-wall coverage of ICSC's RECon show in Las Vegas May 19-22. Retail Ticket will provide coverage of the event through the end of May, featuring pre-event articles, live video interviews on site and post-conference analysis. Contact Scott Thompson at [email protected] about how your firm can participate.
One of our Thought Leaders during the month of RECon is Faris Lee Investments (at booth C150M). Dennis Vaccaro, a senior managing director at the firm. He spoke with us about retail real estate property evaluations and what it takes to get a deal done in this market.
GlobeSt.com: What is happening with the valuation of retail property these days?
Dennis Vaccaro: Retail property values continue to increase. In fact, at the beginning of the current recovery only Class A product was experiencing strong value increases. Now, however, over the past six to 12 months, that momentum has trickled down to all classes of retail property. While the darlings of retail still remain long-term corporate net-leased single tenant properties, other assets such as Class B product and multi-tenant properties are being purchased at increasing pricing.
GlobeSt.com: What forces are driving the current run up in retail property values?
Vaccaro: In what I have been observing, the overall sentiment of the industry is that rents and tenant sales bottomed out in 2010 and are now both increasing once again – albeit very slowly. Other factors include lack in confidence in the currently overheated stock market, all time low interest rates and a strong influx of foreign capital seeking hard assets in the United States.
The net effect is that investors are willing to take on some amount of risk … this is something they weren't willing to take on for several years previously.
GlobeSt.com: How does retail real estate compare to other forms of commercial property when it comes to the complexity of the trade?
Vaccaro: I think trading retail is by far the most complex type of commercial property. The factors that can affect the value of a retail property are practically infinite. Physical and trade area underwriting including quality of construction, useful life of the improvements, strength of tenant mix, tenant uses, length of leases, comparable lease rates, accessibility, visibility, traffic patterns, competing projects, and trade area trends are just the beginning. After underwriting the physical make up of the center and its real estate, the individual leases need close examination. Categories including co-tenancy clauses, exclusive uses, CAM shortfalls, parking provisions, signage rights, sales thresholds, and early termination rights are just a few of the aspects that can affect value.
GlobeSt.com: There are still a lot of properties out there that have low vacancies – how do you advise the seller and market such properties to potential buyers?
Vaccaro: It starts with top tier advisory services. As I touched on above, the complexity of a property's value components needs to be evaluated prior to determining if it should be sold or held. If the best course of action is deemed to be a sale of the property, then a marketing approach to the logical buyer profiles that fit that particular asset is crafted. In other words, an institutional grade property should be marketed differently than a mom and pop-type asset. Those buyer pools have different goals and risk tolerances, therefore, the marketing of an asset needs to be custom-crafted to speak to the appropriate buyer pools. One size does not fit all.
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