Investor Flight to Safety Drives Retail Demand

Los Gatos Village Square was purchased free and clear of existing debt.

LOS GATOS, CA—The San Jose economy is growing as numerous Fortune 500 companies plan new campuses and hire more workers. This has significantly boosted household formation and retail sales. As a result, retail operations have tightened considerably as tenants vie for the few remaining offerings and investor demand remains high but there is limited deal flow due to lack of listings, says Marcus & Millichap ‘s recent retail report. Demand from investors of all sizes is raising property values dramatically, particularly for class-A assets among institutional buyers. The low-yield environment has encouraged a search for centers with positive leverage above the rates of return present in other asset classes. Meanwhile, private investors have shifted acquisition strategies toward value-add opportunities, seeking to mitigate worries about the high cost of retail properties through re-tenanting and building improvements. Exchange buyers will make up a significant portion of capital in the market as the relative value of retail over apartments pulls in additional yield-oriented investors, according to the report. Investments located near corporate campuses or major transportation routes are the most desirable as buyers seek to maximize the value of assets. The resulting environment has dropped cap rates into the mid-4% range for top-tier centers, while non-core properties can drift into the mid-5% range, with yields driven by product quality, along with credit and tenant structure, says the investment brokerage company. However, properties in excellent locations will garner significant premiums. One such location is Los Gatos Village Square , located along Los Gatos Boulevard, which is the most prominent commercial thoroughfare in the city. It is one block southeast of Lark Avenue and Highway 17. Primary access to the center is aided by a three-way traffic signal which provides easy entry as well as increased visibility from passing motorists. The property’s infill, high-barriers-to-entry location and outstanding demographics of the region has driven a very high rate of tenant retention and historical occupancy at the site, presenting an extremely stable cash flow. A 100% leased 46,235-square-foot center anchored by Trader Joe’s , Los Gatos Village Square benefits from outstanding sales productivity from one of the most dominant grocery brands in the country. This type of performance prompted the purchase of the center by Donahue Schriber , which purchased the asset free and clear of existing debt. Holliday Fenoglio Fowler LP (HFF) marketed the property on behalf of an institutional seller. The HFF retail investment sales team representing the seller was led by Nicholas Bicardo, Danny Reddin and Brandon Rogoff . “Los Gatos Village Square generated interest from every buyer profile, both domestic and offshore. Retail properties in Los Gatos seldom come available for sale, making this a truly rare opportunity,” says Bicardo. Other tenants in the center include Pet Food Express and Carl’s Jr. There is also a downstairs restaurant unit with a good window line and front footage near Trader Joe’s. The center has recently received new paint, parking lot improvements and landscaping. Bicardo tells GlobeSt.com: “We continue to see a flight to safety with investors, which is further driving demand for San Francisco Bay Area retail. Los Gatos Village Square appealed to a very large audience consisting of both institutional and private capital, due to its phenomenal location, strong tenancy and deal size.” Marcus & Millichap say builders have responded to intense demand by expanding the number of retail offerings, particularly near the corporate campuses and office parks that dominate the western portions of the metro. While vacancy lifted meaningfully in 2015, the projects slated for delivery this year are heavily pre-leased, reducing the immediate effects of the supply increase. This will allow the market to tighten moderately during the coming year, particularly at the high end as retailers seek the most modern spaces and amenities in site selection. Strength in retail operations will allow for the average asking rent to climb for a fifth consecutive year. “Demand for San Francisco Bay Area retail continues to be at an all-time high,” Bicardo said.