CORONA DEL MAR, CA—Real estate investors are faced with a high level of uncertainty as they look ahead to Q3 and Q4 2016. Issues such as interest rates, supply and demand concerns, the upcoming election, banking regulations and the wave of over $350 billion in CMBS debt maturing over the next two years are at the top of most people’s lists. With all of the uncertainty, investors are leaning on one major tangible they can control: the location of the real estate, says EVP Eric Wohl of Orange County-based Hanley Investment Group.
“As we begin to see signs that we have reached the peak of one of the hottest retail investment markets in history, many owners are re-evaluating their portfolios to decide which properties they want to hold on to versus sell,” Wohl said. “Buyers, on the other hand, are benefiting from the increased supply of available properties and thus can be more discriminating on the locations they choose.”
Core properties located within major MSAs and/or high demographic areas have always been more desirable, however, over the course of the real estate cycle, investors had moved to secondary or tertiary markets in search of significantly better yields, choosing credit tenancy over location. Wohl notes that investors were able to purchase these retail properties in secondary and tertiary markets at cap rates that were 200+ basis points more than properties located in higher demographic core markets. As a result of the increased demand in the secondary and tertiary markets, cap rates for ‘B and C’-quality locations began to compress closer to the ‘A’ product, Wohl said.
“With the flight to quality, many of these same investors are wanting to move their money back to higher quality markets and locations to help offset some of the risk of owning properties smaller markets,” said Wohl. “From foreign investors to REITs, high net-worth individuals and local commercial investment firms, the ‘flight to quality’ locations have become an investment priority.”
Wohl reports that shopping centers in Southern California’s high-end markets are currently trading anywhere between 4.5%-5.5% cap rates with most buyers purchasing all cash due to the competitive bidding environment. “Buyers are willing to accept a much lower yield on well-located coastal retail properties because they are banking on the long-term appreciation of the property and know there are extremely high barriers to entry in these trade areas,” said Wohl.
“The majority of the investors today are looking for those irreplaceable retail assets located in a great trade area with upscale demographics,” Wohl said. “Location, location, location!”
Wohl points to some of Hanley Investment Group’s recent trophy property sales in Southern California’s high-end markets are great examples of the “flight to quality” concept; five retail properties, totaling approximately $200 million in consideration. They include two shopping center sales in Santa Clarita, both purchased by REITs, Stevenson Ranch Plaza—a 187,000-square-foot shopping center with tenants Ralphs, LA Fitness, PetSmart, Stein Mart and David’s Bridal—and Bouquet Center, a 149,000-square-foot shopping center with tenants Vons, CVS, Ross Dress for Less, Chase and Wendy’s; 20,000 square feet of retail at Ocean Avenue South in Santa Monica featuring tenants Starbucks, Herringbone and Elovate; a newly-redeveloped 24,000-square-foot shopping center at Brookhurst Street and Adams Avenue in Huntington Beach with tenants PetSmart, US Bank and Orangetheory Fitness; and Gateway @ Cedros in Solana Beach, an 8,035-square-foot retail center anchored by Peet’s Coffee.
“The strong activity and number of cash offers procured for these ‘Class A’ retail properties in today’s market exemplifies how investors are, now more than ever, seeking quality,” added Wohl.
Visit Hanley Investment Group at Booth #S381S at ICSC RECON in Las Vegas.