NEW YORK CITY—With the fundamentals of the retail market strengthening and prices appreciating, the investment community is bullish on the sector in 2014. Add to that a strong first quarter, and the momentum is expected to pick up as increased demand for retail assets has created optimal conditions for sellers.
In other words, retail is heating up, and there might not be enough properties to go around. GlobeSt.com spoke with JLL before the upcoming ICSC RECon 2014 to get their take on the sector.
Grocery-anchored, urban high street retail and trophy malls top the list of products prime for the picking as limited supply enters the market: “While the most desired retail asset types remain high-quality grocery anchored centers and trophy malls, many investors are getting outbid in gateway markets and are turning their attention to all different types of retail assets and markets. We're seeing an increased number of sales of strip centers and power centers come to market, receiving aggressive bids and trading quickly,” commented Kris Cooper, Managing Director at JLL.
While tightened coastal markets often offer buyers top-notch product, Cooper explains, JLL expects longevity and performance in a few key secondary markets given Millennials, the generation between 18 to 34, total 80 million Americans and spend approximately $600 annually. By 2020, they are expected to spend $1.4 trillion, with 30% representing retail sales. As retail follows rooftops, Las Vegas, Orlando, Charlotte, Raleigh and Phoenix top the chart of markets anticipating growth from these already savvy shoppers.
The market as a whole is in a healthier state than at any point since the recession. “National rents are inchng up, and most metro areas are back in the black,” added Margaret Caldwell, Managing Director at JLL. Net absorption continues to climb, and landlords are starting to exert some power in tenant selection.
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Caldwell anticipates development to remain limited for now, but as demand rises, sees single-tenant big-box spaces, grocery stores, urban storefronts and lifestyle centers as likely to be delivered.
Not only are market fundamentals positioned in the sellers' favor, there are an increasing number of new buyers entering the market. “The money is burning a hole in investors' pockets. While we've seen private equity remain an active player, recently interest from international investors is on the rise. They're bidding aggressively on power centers, grocery and even some traditional malls by pairing up with a US-based investor who will hold the majority stake,” added Caldwell.
Caldwell cites the fact that cap rates on neighborhood centers and grocery range from 5 to 7 percent, depending on the market, whereas power center spreads are anywhere from 6.5 to 8 percent, depending on the anchor sales performance and demographics.
What it all boils down to is if you are looking to diversify your holdings with retail, chances are you'll need to look beyond a class A mall simply because there aren't as many coming to market – but that's not to say that a power or strip center won't bring hefty returns or steady cash flow.
To see a JLL presentation from Kris Cooper on the sector, click the image at the top of the story.
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Geoffery Metz
Geoffery Metz is the content manager for ALM's GlobeSt.com, Credit Union Times and Treasury & Risk. Before joining ALM, he spent several years overseeing the newsroom at the financial wire service Business Wire, with special focus on multimedia presentation for the web.
