The CBRE Team: There has been a lot of activity so far in 2014, as there is significant demand and not enough supply for retail properties in dense infill locations. New construction has continued to center on multi-family product for the time being, so there is very little new retail construction on the market at the moment. Most of the big and junior box vacancies have been back-filled, and rents are trending upward. Additionally, cheap debt and an abundance of cash continue to aggressively pursue infill sites. Stabilized core assets have been trading at record cap rates and prices per square foot, even surpassing the 2006/2007 peak pricing. However, we have also seen an increase in the perceived value and pricing of assets with vacancies or shorter-term leases with no options or plans to renew. Investors are beginning to purchase assets with “seller rent guarantees” in place - a tactic that has not been too widely accepted since the last peak of the market. In effect, the spread between stabilized core assets and value-add retail properties is diminishing. The “juice” that value-add investors are seeking is getting squeezed out by aggressive buyers willing to pay for a property's future potential today. Sellers are finding that they do not necessarily need to do the work required to add value prior to listing their property, and buyers are jumping on the limited opportunities in the market.

GlobeSt.com: What are some specific examples of this that you've seen in the market?

The CBRE Team: Our team has marketed and sold several properties in the last six months with rent guarantees, short-term leases and vacancies that have achieved similar pricing to the “turn-key” assets we have sold over the same period of time. We recently sold two 7-Eleven-anchored strip centers at similarly aggressive cap rates and prices per sq. ft., one of which was a typical value-add center with 27% of the GLA (gross leasable area) vacant that is located in a dense infill area (over one million people in a five-mile radius) in Huntington Park. We received more than two dozen offers and sold the property at a 3.8% in-place cap rate (approx. 6% pro-forma) at over $440 per square foot. In contrast, we had another 7-Eleven-anchored center in Pasadena, located in a highly affluent community. It was fully leased at the time of sale and sold quickly at over $887 per square foot at a sub-4.7% cap rate. In this instance, there was only a 100-130 bps difference between stabilized and value-add. We currently have a 7-Eleven and Subway-anchored center in the Miracle Mile area with 23% of the GLA vacant and a seller rent guarantee on the market. It's listed at a 5.22% cap rate with a rent guarantee, priced at over $664 per square foot, and we expect it to sell close to the list price. All three properties have two things in common: They are located in dense infill areas and benefit from strong anchor tenants with excellent credit. However, two of the three properties fall under the “value-add” category, but are achieving similar pricing to the stabilized asset. Nonetheless, values for each are converging together, and we are seeing a market in which the spread in return for value-add and stabilized retail are narrowing.

GlobeSt.com: What are your predictions for the future? Will buyers continue to pay higher prices for value-add properties in decent locations?

The CBRE Team: We believe they will. We currently have a repositioning retail opportunity under contract in Eagle Rock, one of LA's most sought-after and trendy retail markets. In this case, the leases are expiring, but the location is fantastic and provides investors with an excellent opportunity to reposition. It's currently under contract close to list price, at more than $662 per square foot. While vacancy and short-term leases were once considered negative and far more risky, today they are viewed as opportunities. The demand and optimism surrounding retail in Southern California is forcing buyers to make more aggressive stabilization assumptions in order to be competitive enough to win the deal. Until more supply hits the market or interest rates substantially increase, we believe this trend will continue.