IRVINE, CA—Retail investors are keeping a watchful eye on the grocery-store category, and historically low interest rates are dictating pricing for investment opportunities. GlobeSt.com spoke with president Edward Hanley and managing director Bill Asher of locally based Hanley Investment Group to discuss how these two topics are impacting the retail sector as a whole and where the smart investments are.
GlobeSt.com: How are interest rates affecting the retail investment market, and how long will this wave last?
Asher: It’s really fostering premiums paid on retail investments as a whole that we didn’t see in the last height of the market between 2005 and 2007. That was the last time we were at that level. We’ve surpassed that level now, but there’s less velocity. The biggest difference is the single-tenant retail sector. Here, we’re seeing cap rates at an all-time low and pricing at an all-time high—in some instances 75-100 basis points less in cap rates than the last run in 2005-2007—even with the interest-rate spike we experienced in the spring of 2013. However, the lack of inventory in the marketplace is the big difference. Any property we put out for sale that’s formally listed is getting a lot of activity and multiple offers. Even off-market opportunities are attracting record pricing as buyers are scouring the market seeking the right property in which to invest. There’s definitely much more traction now than there’s ever been because of the lack of supply and increased volume of 1031 exchange requirements. And I think all active investors and owners are wondering how long it’s going to last. We keep hearing interest rates are going to go up at some point, but the timing continues to get stretched out due to macroeconomic factors such as unemployment rates and consumer confidence.
We see the rest of this year continuing on the same path. Investors will continue to pay a premium, especially if it’s a single tenant leased to corporate tenants such as a Walgreens, CVS, Chase Bank, McDonald’s, AutoZone or Dollar General. For multi-tenant properties, the returns are starting to compress further because it’s an alternative for the investor who doesn’t want to pay a 4% cap rate for a McDonald’s and can do better buying a multi-tenant strip center; especially when the tenant mix is secure and they feel their tenants are not going to be affected by online retailing. Food, restaurants, dry cleaning—there’s always going to be the service-related part of retail that investors will focus on as longer-term tenants as the Internet continues to put pressure on other major retailers.
How long will this wave last? It’s in the hands of the Fed. At the beginning of the year, there was speculation that interest rates might move up to 50 basis points by the end of the year, but now it appears that we have another year of this environment. We’re in this unique period of time where, because interest rates are at historic lows, it provides property owners and investors some great options: sell at the highest price they’ve ever seen or lock in low interest-rate debt for a long time, whether you continue to hold an asset in your portfolio or acquire a new property.
GlobeSt.com: How is anchor consolidation/downsizing affecting investor purchasing decisions?
Hanley: Since grocery-anchored shopping centers remain the number-one retail investment choice in today’s market, the latest news of Albertsons acquiring Safeway is creating a lot of buzz in the retailing world for a couple of reasons. First, there’s already a lot of consolidation transpiring in the grocery-store arena, and a lack of competition allows companies like Albertsons to control a lot of the locations. They can’t keep all of them, so we will see stores closing because you can’t have an Albertsons on every corner. This equals opportunity in the retail-investment arena because the grocery-anchored product type in Southern California is so highly sought after from a large pool of buyers/investors. Whether it’s a stabilized center with above-average sales volumes or a reposition opportunity, these centers are the number-one choice for an investment vehicle in the retail segment right now.
Second, if there’s any opportunity to improve the revenue stream in the shopping centers, one preferred way to do it is to back-fill large vacant box spaces with a grocery store. In today’s market, you can refill it with Sprouts, Trader Joe’s or stores geared toward a particular demographic such as Hispanic grocers – Cardenas, El Super or Northgate. This is what we expect to see with the consolidation.
Consolidation and downsizing are also affecting smaller inline shops like Radio Shack that have been around since the 1980s. The Internet has impacted Radio Shack significantly—you can buy any of their products online —so they’re rebranding themselves as well as closing stores, which is creating opportunity to re-lease those stores to more service-related categories with projected longer term sustainability as a retailer.
In regard to the home-improvement category, the merger of Lowe’s and OSH will leave big box space that may be more difficult to lease and co-anchor space that won’t be immediately filled. Hobby Lobby and Stein Mart are candidates to back-fill that space, but there is not an abundant group of new box tenants coming into the market to fill these larger spaces. It will take time, but there eventually will be new tenants that will take these.
The last recent group to consolidate and downsize is the office-supply segment. Staples, OfficeMax and Office Depot are having their challenges trying to figure out how to compete with the Internet in order to provide customers with an experience in the office-supply market. How do you do that? Why wouldn’t you order all of your office supplies online? One direction is to add more product, such as office furniture and knickknacks for an office, attempting to bring the consumer in by competing in some aspects with Walmart. The angle here is that consumers don’t need to go to a 60,000-square-foot building like Walmart to get what they need—they can get it at their office-supply store.
These opportunities are what investors are considering when making decisions on their next investment. Today’s historic low-interest-rate environment, combined with the opportunity to fill vacancies, is the formula investors are using to determine what they will pay, projected timing, and how they will add value to a shopping center in the future.
GlobeSt.com: What impact is Internet pressure from e-commerce having on traditional brick-and-mortar retailing?
Hanley: Watch for brick-and-mortars to continue to evolve. Checkers and check stands may be a thing of the past. Consumers may swipe a product, pay with their iPhone and walk out the door—something that will morph from PayPal. The self-checkout in a grocery store may transition into other experiences, from hard goods to soft goods. It’s only getting better and is driven by the consumer need for satisfaction and no long lines. It still has a long way to go, but so did the first iPhones.
Also, on the retail side, it hasn’t taken hold yet, but they’re putting the infrastructure in place in an attempt to get people to shop for groceries on Amazon. From a retail standpoint, companies like Amazon are setting up more distribution centers to keep a warehouses stocked with fresh items to get them to your door quickly and conveniently. This also has a long way to go, but we expect that the grocery industry will continue to focus on providing delivery services.
There’s a lot of opportunity in the retail market because of overall retail consolidation. Some people can look at it as a kind of menace or threat, but I view it as an opportunity. People are finding ways to be creative, and putting new retailers in the space. It leads to opportunity for the owner, tenant and consumer—it trickles down the entire way.