December  2010  VOL. 3

Investment Notes

As consumers ease up on the spending brakes this holiday season and retailers ring up stronger holiday sales, retail real estate fundamentals are approaching bottom and occupancy is expected to improve in 2011, according to Jones Lang LaSalle’s 2011 Retail Outlook.

Increased consumer buying power is expected to lead to greater sales and profits for retailers and renewed demand for store space in malls and shopping centers will further strengthen the retail leasing market and, ultimately, the retail investment sales market.

These stronger fundamentals are fueling new interest in retail investment markets. At the same time, a lack of product on the market is creating fierce competition among both core buyers looking for quality assets and opportunistic investors seeking distressed product, according to Jones Lang LaSalle.
 
Sales of significant retail properties totaled $13.9 billion through October of this year, representing a 62% increase over the $8.9 billion in sales during the same period in 2009.

“More realistic seller expectations combined with pent-up demand is manifesting as a strong pipeline of closed transactions in the fourth quarter,” says Kris Cooper, managing director of Jones Lang LaSalle’s retail investment sales practice. “The number one asset sought by retail investors remains Class A core, grocery-anchored product; however, in the last 45 days, we’ve seen a marked uptick in interest in B and C products.”

Cooper adds: “We haven’t seen the B or C market move for two to three years and today they’re getting investor attention. The return of banks and CMBS lenders to the capital markets will increase velocity in this sector. We expect to see more sales of this asset class as early as the first quarter of 2011.”

Cap rates continue to decline and positively impact retail values. Cap rates are as low as 6% for Class A trophy assets and range up to 10% for non-core distressed shopping centers. Average closed cap rates are approximately 8% and declining—a trend that should drive institutional owners to put quality retail properties on the market for sale.
 
“The decline of cap rates to near historic lows may be pushing more institutional owners to consider selling core assets, but in some cases, the net operating income has deteriorated and potential sellers cannot recover their initial investment,” says Margaret Caldwell, managing director of Jones Lang LaSalle’s retail investment sales practice. “We’d definitely be seeing more sellers if this were not the case.”