Grocery-Anchored Retail Cap Rates May Actually Fall
While the assumption is that retail pricing will fall, it may not happen in all sectors.
Getting a handle on retail cap rates isn’t easy. As COVID has decimated the sector, few assets have transacted.
In CBRE’s The Weekly Take podcast, Melina Cordero, a managing director who is the leader of CBRE’s retail capital markets business for the Americas, said that because of the decline in transactions, it is hard to draw real conclusions about cap rates in different retail sectors.
There is one exception, though. While COVID has cut into profits in many retail sectors, stabilized grocery-anchored centers have been minimally impacted.
Cordero says that CBRE’s teams on the ground have seen very little price movement, “although there’s this big headline assumption that retail pricing is just going to fall and cap rates are going to rise hugely.”
Cordero thinks the grocery-anchored segments may be “a bulletproof class” that we “may actually see some cap rate compression in the months to come.”
Some of the uncertainty results from the market not knowing how to value retail assets after COVID. Adam Ifshin, founder and CEO of DLC Management Corp., thinks it is in a pre-price discovery phase right now.
“I can’t tell you how long it is,” Ifshin says. “It’s got another six months to go for sure. It may have 12 months. It may have 18 months. It may have 24 months.”
After that period, Ifshin sees cap rates as “the tail wagging the dog in investment sales,” assuming “the economy is still in a period of extremely accommodative rates and very low yields across a wide spectrum of investment opportunities.”
In that environment, Ifshin predicts the ability to maintain and even grow cash flow streams will be more important than cap rates.
Christopher Ressa, EVP and COO at DLC, thinks there has been an overcorrection in the net lease market “that is going to really help open-air value retail.”
Between an anchored center with a Walmart and other Fortune 500 companies and or a triple net lease asset with a franchisee with three locations, Ressa thinks the former’s creditworthiness is much more durable.
“I think there was an overcorrection in some of the large-scale value retail that I think is going to be very positive for value retail,” Ressa says.