Veterans See Promising, Yet Chastened, Retail Sector

Promising yet chastened by recession was the picture of retail real estate’s prospects sketched by five veteran executives at the annual market outlook sponsored in conjunction with RECon by Marcus & Millichap Real Estate Services Inc.

Promising, yet chastened by recession: that was the picture of retail real estate’s prospects sketched by five veteran executives at the annual market outlook sponsored in conjunction with RECon by Marcus & Millichap Real Estate Services Inc.

Left to right: Bill Hughes, Joe Dykstra, Joseph McKeska, Tom Roberts and Hessam Nadji assess the state of retail real estate during Marcus & Millichap’s annual panel discussion at RECon.

The panel’s moderator, Marcus & Millichap managing director Hessam Nadji, set the stage for the Monday evening discussion by pointing to retail’s broad recovery. “The consumer that was supposed to go hide in the corner—and never be back—is back,” Nadji told an audience of several hundred real estate professionals Monday at the Renaissance Hotel in Las Vegas.

Nadji noted that retail sales volume is 12 percent higher than it was at the economy’s pre-recession peak in 2007. Centers of technology, energy and trade are producing growth that is fueling job growth and retail. In another positive sign, forward-thinking retailers are meeting the challenge by embracing technology to complement their brick-and-mortar stores, he said.

Asked to speculate about vacancy trends during the next 12 months, Cole Real Estate Investments’ executive vice president Tom Roberts suggested a modest change. “The pace of vacancy reduction will pick up a bit,” he said. He expects both cap rates and interest rates to remain relatively stable during that period, a view shared by Joseph McKeska, senior vice president of real estate for Supervalu. Bill Hughes, senior vice president of Marcus & Millichap Capital Corp., responded that interest rates will likely rise during the next 12 months. Fellow panelist Joe Dykstra, executive vice president and head of acquisitions and dispositions for Westwood Financial Corp., predicted that interest rates will edge downward.

Panelists likewise commented on evolving retail real estate strategies. Prospects for financing retail are still decidedly mixed. Bill Hughes, senior vice president of Marcus & Millichap Capital Corp. cited the rising profile of securitization in retail finance. This year, CMBS accounts for 64 percent of retail financing by dollar value, a significant increase from 45 percent last year, he noted.

Citing loan terms reminiscent of the last boom, such as multiple years of interest-only payments, Hughes said, “There’s a little bit of froth out there.”  But he added that lenders are largely sticking to the more conservative credit standards that took hold after the recession. Hughes agreed with the widespread perception that many capital sources to keep a tight handle on the retail finance spigot. “Commercial banks and private funds are looking for deals to put dollars into, but it’s got to be a great story,” he explained.

Joseph McKeska, senior vice president of real estate for the grocery wholesaler and retailer Supervalu, urged the audience to view credit standards more broadly. “There’s a lot of emphasis on financial underwriting, but I think it’s also important to understand the grocer’s business plan,” he said. “You are becoming a business partner to that grocer.” In March, Supervalu completed the $3.3 billion sale of five of its grocery brands to a consortium led by Cerberus Capital Management L.P. Part of Supervalu’s restructuring strategy, the sale included $3.2 billion in assumed debt and $100 million in cash.

Other panelists also tempered their generally upbeat outlook with a strong note of caution. “The big value-add plays are really behind us,” Dykstra said. Capital sources, as well as investors, must now carefully weigh their risk tolerance. As a rule, Dykstra added, “We will not buy properties at less than a 6 cap rate. We will buy very, very few properties at less than a 7-cap.”