RETAIL INVESTMENT A ‘PERFECT STORM’ OF METRICS
IRVINE, CA—Historic low interest rates, scarcity of product and record-high investor demand are some of the metrics fueling investor confidence, Hanley Investment Group’s president Edward B. Hanley tells GlobeSt.com. We spoke exclusively with Hanley fresh off the recent ICSC conference in New York about some of the retail trends he’s noticing and what he predicts will happen in this sector during 2015.
GlobeSt.com: What is fueling the confidence that has led to such a strong transaction year?
Hanley: The past year has been one of our strongest transaction years because the retail investment market has recovered to a point in what could be described as a “perfect storm” of historic low interest rates, scarcity of product and record-high investor demand. The overall velocity of transactions may not be at the rapid pace of the last peak of the cycle, but lower vacancy and sustainable and increasing rental rates, along with select tenant growth and expansion, are some of the metrics fueling investor confidence. I expect the number of retail properties sold in 2014 will set new industry records.
GlobeSt.com: What trends do you see regarding transactions in 2015?
Hanley: Through the next 12 months, we anticipate a steady increase in the number of retail investment property transactions. I do not foresee a drastic increase, but instead a consistent rise coming out of the past years’ success. We know cap rates are still low, which is inviting sellers to bring their properties online. However, that still won’t match the demand from buyers, both foreign and domestic, in 2015. Like 2014, sellers will continue to have a wide selection of potential buyers.
Because California markets are currently one of the highest priced in the country, a number of California investors are looking to place capital outside of the state. Foreign investors continue to deploy capital into the state and country, and are increasingly attracted to net-lease properties due to low maintenance requirements from an owner’s perspective, and I don’t anticipate this changing anytime soon.
Additionally causing an increase in sales is the tremendous amount of maturing debt. Approximately 50% of these owners in 2015 may decide to sell instead of refinance to take advantage of the high demand and low cap rates.
Discussions at ICSC in New York confirmed that many property owners have realized the appreciation of their assets and recognize the opportunity at hand. Though this appears to be a “perfect” stage in the market for a seller, I can’t stress enough how vital it is to confirm a brokerage firm’s pre-marketing due diligence and expertise in underwriting assets. Proper due diligence, paired with solid underwriting, sets the pace and success of all property transactions.
Something else to be mindful of is that there has been chatter about a potential change in the 1031 exchange tax code. Any change may not take effect immediately, but owners that want to take advantage of these tax benefits and current low interest rates should act quickly. As owners identify their opportunity, I anticipate this will also cause an increase in property transactions.
GlobeSt.com: Do you anticipate that 2015 will surpass 2014 in terms of transaction volume and pricing?
Hanley: As we move into 2015, I anticipate prices remaining fairly consistent. Yes, demand is high, allowing sellers to entertain the highest bidder; however, due to the maturing loans and potential change to the 1031 exchange program I mentioned, the supply should increase.
Though we’ve had a strong year both in the sale of multi-tenant and anchored shopping centers, the demand for single-tenant net-lease properties has greatly increased nationwide. As more and more investors recognize the opportunity in these types of properties, we anticipate a strong increase in activity in that sector. There is a bit of fluctuation in the volume and pricing across single-tenant assets, but that varies across different markets nationwide. Across the board, current values of net-lease properties are far exceeding “bubble” pricing of 2005-2007, so it is increasingly important for investors to pay attention to the core fundamentals of each property.
GlobeSt.com: What do you feel will be the most significant overall trends among retail tenants next year?
Hanley: Landlords and tenants alike will continue to focus on providing an “experience” for their shoppers in order to balance the challenges the Internet is presenting to brick and mortar. Also, watch for a new grocer to appear on the West Coast market due to the recent grocery mergers, per the FTC’s rules.