Is Less More in Retail Investment?

IRVINE, CA— Retail asset disposition late in the economic cycle has boosted cap rates and yields, as more expert investment eyes shift their focus from size to stamina. And as Don MacLellan—senior managing partner at Faris Lee Investments, an Orange County, CA-based real estate advisory firm—notes, that significant pricing movement comes from a retail investment retreat from non-strategic big-box power centers in secondary markets.

“REITs are trying to refine or essentially prune their portfolios with regard to non-strategic secondary markets and/or the exposure to the big-box centers,” said the more than 33-year industry veteran. “The cap rates and yields have  increased due to the significant supply and less demand from the larger investors.  Sellers are having to increase their cap rates to attract the smaller pool of investors out there.”

While core retail product like infill grocery drug centers in supply constrained markets  remains in high demand and continues to demand core pricing.  The supply of the larger priced point power centers are struggling to move . To add to the supply imbalance, a flood of community centers continues to hit the market from the various  REIT’s including CIM’s  business plan to unload its 2017 acquisition of anchored retail centers from the legacy 4  Cole REIT’s throughout the US.

“The REITs and other larger institutions selling assets are having to either wait and pull off the market or incentivize a limited amount of investors, who have their pick of the litter,” he said. “We’ve had clients go to market on the $20 million to $60 million power centers and they get little to no offer activity  or they’re out in the market and they find only one credible buyer.”

On the private side of the investment sector, Faris Lee’s senior managing partner said that the newer $5 million to $15 million strip retail product remains popular. Private investors favor the security of new construction with corner pads, outparcels to a Costco or Target and strong service tenants and food operators, such as Jersey Mikes, Panda Express  and Starbucks Coffee.

“Those cap rates have actually been fairly aggressive for what could be said is the core of the private market, that newer strip and daily needs-type of product,” MacLellan said. “Smaller investors still demand the long-term security leases, the daily needs, food, coffee and service tenants, as well as the newer construction, which is less management-intensive from a capex point of view.”

Speaking of smaller, retail downsizing is not a new trend, but MacLellan views e-commerce not as wrecking retail, but making it more agile and efficient. Utilizing both bricks and clicks, retailers realize they’re can be more efficient and in certain circumstances are looking to right size their footprint. . Agility is also evident when a merchant adapts to an urban infill development to, for example, target specialty, daily-needs demand.

Late in the economic cycle, adjustment is the name of the retail game for investors, tenants, portfolio managers and more. And downward just might be looking up.