10B— June 22 - July 12, 2012 — Mid Year Review — Mid Atlantic Real Estate Journal
www.marejournal.com
R ETAIL I NVESTMENT
By Michael Fasano, Spencer Yablon and David Feldman, Marcus & Millichap Retail investment conditions improve in Mid-Atlantic I
n spite of current head- winds, economic funda- mentals continue to im- prove, particularly corporate profits, inventory-to-sale ratios, retail sales and the housing market. But the pace of growth has inched forward, frustrating both businesses and consum- ers. Although the recovery has been slow, improving economic conditions over the past six months have elevated the U.S. CRE sector. Retail investment activity has been strong in the Mid-Atlantic States, due to high barriers to entry and ongoing investor interest in best-in-class
ings and intense demand, first- year returns will remain tight. Averaging in the low- to mid-7 percent range, depending on tenant lineup and location, the spread between initial yields and financing rates will offer investors a favorable alterna- tive to other asset classes. Best-in-class centers anchored by investment grade tenants and/or grocers will warrant capitalization rates as much as 100 basis points lower. Local high-net-worth individuals, meanwhile, will compete for well-occupied strip centers as lenders expand access to
financing. Qualified buyers will secure inexpensive debt to reduce equity commitments, while value-add investors will pay cash for strip centers with short-term leases. Once leases rollover, operators will do major upgrades to the property to capture higher rents over the long-term. Stability Draws Investors to Philadelphia The perennial stability of the Philadelphia retail market is at- tracting risk-adverse investors from all along the Eastern Sea- board, which should increase activity this year. Some of these investors migrated from the multifamily sector and are turning to the steadiness of re- tail assets on the upleg of 1031 exchanges. Other buyers hail from more expensive or vola- tile markets, such as New York and Washington, D.C., and are looking for less-management- intensive properties. Cap rates for quality, net-leased proper- ties have compressed into the mid-6% range. Initial yields for nationally tenanted properties are in the low- to mid-5% area, while lesser-quality assets typi- cally start trading with a 7 per- cent cap rate and can climb into the double digits. Activity in the multi-tenant arena should show signs of strengthening this year as local banks now offer nonrecourse financing. In most cases, however, assets must have a credit tenant, as financ- ing is not available for buyers to stretch into lower-quality product. Cap rates for class A properties are in the low-6 to the low-7% range, while class B properties trade with initial yields in the mid- to high-7 per- cent span and assets in tertiary areas or value-add start in the 9 percent area. Single-Tenant Cap Rates Plummet in D.C. As bidding activity intensi- fies for retail assets leased to national credits, buyers are shifting to a location-focused approach to achieve targeted returns. Most product listed in the Beltway will attract atten- tion as re-tenanting concerns subside and investors become more astute to the tenant’s over- all sales and location potential. Single-tenant properties inside the Beltway trade at cap rates starting in the 4 to 5% range for a major bank branch or McDonald’s, and in the high-5 to low-6% for drugstores. Initial yields have little room to move continued on page 12B
Michael Fasano
Spencer Yablon
David Feldman
assets.
in interest rates and capital gains taxes. Private investors will target stabilized shopping centers with national retailers in affluent pockets of the state. Due to the rarity of these list-
NJ Heats Up Retail sales activity will re- main firm in New Jersey as owners look to sell assets in advance of potential increases
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