Retail RE Market Lacking Product, Not Demand

By Gill Warner, Senior Director, Stan Johnson Co.; There are many signs indicating the retail real estate market is rebounding quickly, with strong interest demonstrated across the country.

There are many signs indicating the retail real estate market is rebounding quickly, with strong interest demonstrated across the country. A slow uptick in construction business, however, has left many buyers unfulfilled, as supply continues to lag behind demand. As consumer confidence slowly rebuilds and prices continue to stabilize, many investors interested in entering the single-tenant, net lease market will likely face some competition until builders are able to return to the pace seen before the 2008 economic downturn.

Glen Kunofsky, expert panelist at the Penn Club and senior director of the net-leased properties group at Marcus & Millichap, underscored this sentiment and how strong the investment options are in the short term, until supply has been absorbed. More capital is available to investors in the market, opening doors to larger acquisitions. The number of properties on the market, however, is significantly less than the volume of buyers looking to close deals soon. Many builders had to stop projects during the recession due to restrictions in lending and a drop in demand. After the commercial real estate market started to rebound, builders stayed cautious about restarting developments until there was strong signs of market stability to minimize losses. As a result, builders are just now starting to catch up with strong demand.

Altered Landscape 
At the panel discussion, experts analyzed the retail real estate market now and compared conditions to those seen in 2007 at its peak. While the economic rebuilding remains consistent, the retail real estate landscape has been altered due to the disconnect between the demand recovery and the builder recovery. Furthermore, many properties that were once viewed as safe investment choices now have their returns more dependent on local competition and sales figures. As more retailers are launching ecommerce platforms to cater to the growing population of online buyers, the success of physical retail outlets has become less of a given. Therefore retail real estate investments require increased research and consideration before being finalized, Globe Street reported.

For investors interested in the sector, working with an expert consultancy group can simplify the buying or selling process by connecting the client with an extensive network of interested and highly qualified participants. The expert guidance can also prove valuable when maneuvering an uncertain and ever-changing market environment.

Market Insights
The Boulder Group has been tracking the retail real estate market performance throughout the first quarter of 2013 to gain helpful insight into sector trends and investor or buyer behaviors. The collected data suggests cap rates for net lease office and industrial properties dropped from the fourth quarter of 2012, while cap rates for single tenant net leased properties hovered at historic lows for office, industrial and retail assets. The great compression was reported in properties with long-term leases, as more owners with short-term leases are looking to extend their agreements and cater to investors interested in longer lease terms.

Net retail properties were priced at a 45 basis point premium over office and 77 basis point premium over industrial properties despite these sectors reporting a decline in cap rates. Property supply for the net retail for lease sector decreased by more than 17 percent between the fourth quarter of 2012 and the first quarter of 2013. Furthermore, about 37 percent of active net lease participants predict 2013 cap rates to remain stagnant or decline by up to 24 basis points through the end of the year. The national single tenant net lease market is expected to sustain activity in light of stabilizing prices and greater financing availability for investors. These figures underscore the value of entering the sector this year, as well as the importance of working with experts in the field to ensure the highest return on investment is achieved.