Internet-Resistant Tenants Rule Retail

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GlobeSt.com

SACRAMENTO, CA—The recent off-market sale of Natomas Shopping Center shows the strength of neighborhood centers. The 50,168-square-foot neighborhood shopping center is anchored by daily-needs retailers such as CVS/pharmacy, Ace Hardware and Dollar Tree.

Hanley Investment Group executive vice presidents Kevin Fryman and Bill Asher represented the seller, a private investor from Bakersfield, CA. The buyer, a private Bay Area investor, was self represented. In this exclusive, Fryman recently shared some insights into the neighborhood center and its advantages, along with the overall retail climate in Sacramento.

GlobeSt.com: With department store retail getting hammered, what advantages do neighborhood centers offer to shoppers?

Fryman: The advantage of neighborhood shopping centers is the tenant mix. The anchors of neighborhood centers are traditional daily-needs retailers like grocery, drug and dollar stores, which are also more Internet-resistant, unlike the large big-box retailers. Furthermore, the inline shop space at a neighborhood center typically includes service-oriented tenants like dry cleaners, hair and nail salons, financial and insurance companies, special medical service providers, such as dentists and chiropractors, and food and beverage. The fact that neighborhood centers provide goods and services that are not purchased online is an important advantage, which is very attractive to both private and institutional investors. The advantage to the shoppers is convenient access on a daily basis.

GlobeSt.com: What is new in the neighborhood center product type?

Fryman: It takes more than a great location. It takes the right tenant mix. In addition to a well-performing grocery and drug store, we are seeing the addition of the mid-size gyms like Planet Fitness, Crunch Fitness, Fitness 19, and niche medical services like urgent care facilities and dialysis centers, i.e., the retailization of the medical category as healthcare providers look to open up locations near their customer base. Food is also a growing category in these shopping centers. Millennials, those born between 1980 and 2000, eat out more than non-millennials and also spend more money eating out. Millennials spend about $174 per month dining out in restaurants whereas non-millennials spend only about $153 per month, according to Restaurant Marketing Labs. Furthermore, due to the aging Baby Boomers who nonetheless refuse to age and are focused on their health, we are seeing the proliferation of a variety of service providers in this category.

GlobeSt.com: What is the retail climate in Sacramento?

Fryman: The demand for well-located high-performing retail properties in Sacramento still remains strong. Comparing the last 12 months ending August 1, 2018, to the previous 12 months, the number of transactions in 2018 versus 2017 increased by 9% and sales volume increased by 10% compared to 2017, while cap rates have compressed from 6.9% to 6.6%, according to CoStar Group. Nearly all of the buyers were based in California (98%) says CoStar, and it takes into consideration all retail sales during those timeframes priced at $25 million or less. Those properties that are under-performing may be eyed for redevelopment to include housing as the state and region deal with the housing shortage.

GlobeSt.com: Are you seeing examples of neighborhood centers going into vacant big-box or mall space? Or perhaps neighborhood centers woven into mixed-use product?

Fryman: The closing of the big-box stores has created development opportunities for owners. As cities have become more comfortable with mixed use, they are asking for neighborhood-serving retail on the ground floor of new residential developments. Other uses besides retail and residential might include hotel and/or office uses. Successful mixed-use properties will typically include neighborhood-serving retail. The residential component will serve as a built-in customer base for the retail and restaurants.

GlobeSt.com: What else is noteworthy about grocery-anchored centers?

Fryman: We expect that grocery-anchored shopping centers with reported successful sales and a complementary mix of Internet-resistant retailers will continue to be in high demand and command top of the market pricing. We also anticipate that we will continue to see sellers using a break-apart investment sales strategy to maximize the pool of buyers and ROI.