Retail West: Neighborhoods, Break-Ups and Single Tenants Drive Investment Sales

While the Class A trades like Simon’s acquisition of Taubman, and the major investments for the re-imaging of major urban malls into mixed-use entertainment, dining, service and product retail lifestyle destinations are grabbing the headlines, for better and worse, they require institutional deep pockets limiting the players. However, moving into the year ahead, the sales of single tenant/net lease assets and neighborhood centers, break-ups included, will drive an increased volume of retail investment sales.

This is the general consensus following the panel of Investment Sales experts assembled at Connect Retail West, the candid conversation on the trends above that included relevant insights from market leaders like principal-sponsor Festival Companies, and brokerage houses NKF, Marcus & Millichap, CBRE and Colliers International.

The panel indicated that private capital buyers will drive the year ahead, as institutions pull back from major retail allocations, and aside from a few institutional portfolio plays, expect that neighborhood shopping centers and credit tenant single tenant assets will be their major investment targets. It will be demand for the daily needs neighborhood center, and break-ups of larger centers to maximize seller returns, that will fuel the appetites of private capital seeking risk-adjusted returns.

A few relevant comments from the panelists (seated L – R in the photo above, with Allen Matkins’ Amanda Donson seated far left as moderator):

Glenn Rudy, NKF:
“Good resilient real estate will have lasting value. NKF teams sold 120 former Toys R Us locations last year that were all re-tenanted within six months, so there are absolutely viable retailers taking up vacated big-boxes. Portfolio break- up strategies are attracting private capital, today’s active buyer. Private capital is limited to going deep, making break ups an attractive entry into the asset class for these buyers. However, NKF is focused on selling centers in their entirety to leave the break-up strategy for future meat-on-the-bone for the buyers.”

Jonathan Schurgin, Festival Companies:
“Successful retail investments moving forward will require multiple strategies for a property and extensive contingency planning to mitigate risk. An example would be the loss of a single tenant lease on a project that was supposed to be a quick flip, until the tenant left. The plan then shifted into carving out six new restaurant locations, which ultimately improved returns. Investors today need to have a main plan, a back-up plan and even the trampoline plan to make a value ad retial project worth the risk.”

Bill Rose, Marcus & Millichap:
“The buyer pool has changed. If you look at the past 10 years, we went from a pretty heavy investment allocation from institutions to a private buyer marketplace. The private client has essentially replaced the institutional investor in retail since 2016. It is private equity that is making the risk and being the contratian and taking advantage of opportunity. It’s imperative today that when awarding a deal to acquire you understand their debt or capitalization It doesn’t matter how bullish we all are on retail, it’s the capital markets out there that might not have that attitude and Wall Street might not agree.

Philip Voorhees, CBRE:
“Most of the strife and challenge has been in the big box and department store mall space. Of 18 billion square feet of retail space identified in the United States, eight billion covers the traditional retail mall and big box space, leaving 10 billion square feet of single tenants and QSRs and drug stores and other properties that have no bearing on negativity in the media. Twelve percent of all retail is causing all of the problems from a media standpoint. Not a lot of new product coming online, and institutions are not chasing deals.”

El Warner, Colliers International:
“Most assets have been trading at 90% of listed strike price, indicating assets are too aggressively priced in most instances. As price comes down to meet necessary market equilibrium, demand will increase and transaction volumes will accelerate. Retail transaction velocity has gone down, but when you take out large transactions, the volume of trades for assets below $25 million has increased, and expect that transactional velocity will be higher in 2020 than 2019.”

For comments, questions or concerns, please contact Chris Egger