In advance of the 2018 ICSC RECON expo in Las Vegas, it's an opportune time for our annual “Analysis Without Paralysis” retail market predictions. As we've done in the past, our analysis takes a qualitative view of the unique insights we've obtained with over 90,000 commercial properties placed in our marketplace. We hope you enjoy our views and find them interesting if not accurate and we are always grateful for feedback.

YEAR OF THE HIPPO

2018 is what I'm calling a “Hippo Market” – not quite bull or bear but a massive animal that can hard-charge when opportunity arises or shy away when danger approaches. Primitively put, there are two factors which directly affect value: yield (cap rates) and net income. Yields are expanding with interest rate and resulting costs of capital increases in addition to an increase in bond yields pushing cap rates up with them. Increasing yield requirements bring deflation (to get the greater desired return at the same income you must pay less). However, net incomes – often a function of the economy (occupancy, rates, inflation/operating expenses) – are still growing in this low vacancy environment offsetting some of the yield-driven deflation. The net result is flat value, and in many instances, modest deflation. We'll see deflated values up to 15% (an approximate 100bps of cap yield expansion) or more in some secondary and tertiary markets. Values for strong assets in strong markets will remain stable, and in some instances up, as a glut of sidelined capital continues to chase good deals.