Bernie Haddigan is national director of Marcus & Millichap's National Retail Group, which focuses exclusively on theof retail investment properties. He was interviewed recently by Matt Valley, editor-in-chief of National Real Estate Investor. Marcus & Millichap is leading a panel discussion titled ”Retail Trends 2005” during the annual International Council of Shopping Centers (ICSC) conference in Las Vegas.
NREI: In the May issue of Retail Traffic (NREI's sister publication) you wrote about the continuing drop in cap rates. Can you expound on that point?
Haddigan: Among properties of better quality, pricing is still increasing and cap rates are still dropping. There are almost two tiers to the real estate market. For the better-quality properties, there is so much capital chasing them that I think that trend is going to continue for the next year. We’re also finally starting to see some foreclosed real estate and some REO (real estate owned) listings. We just picked up a regional mall listing in Maryland that basically Bank of America foreclosed on. It was a $100 million mall a few years ago. There was $60 million of debt on it. The buyer went into default, and the lender took it back.
NREI: Ten years ago, everyone told me that grocery-anchored shopping centers were recession-proof. Now, that’s all we hear about is the threat of Wal-Mart. What’s the real reality?
Haddigan: As an investor, all these changes create opportunity. With respect to grocery stores, though, unless you have prime locations and you are the market share leader, you are in trouble. You already have Wal-Mart going into the food business; you have the drugstores offering convenience food products, and you have the gas stations like the BPs and Chevrons that are redeveloping to offer convenience-orient-ed food. You have the warehouse clubs selling food, so unless you have a great location as a grocery store you are at huge risk of having store sales falling off.
NREI: What’s the biggest question on clients’ minds as ICSC begins?
Haddigan:Most investors are asking, “How do I make money in this market.” Most property owners have enjoyed huge appreciation over the last three to five years. In many instances, their properties have doubled in value. There are a lot of wealthy people walking around, saying, “What do I do with my money, if I sell my property? What kind of development concepts are interesting? ”Everybody and their brother is looking for a value-add, something they can re-tenant, or put a coat of paint on, or restripe the parking lot and raise rents. The big shopping center owners are asking themselves how they can get bigger, how they can drive more revenue. Some of my contacts at Kimco [Realty Corp.], for example, indicate they are looking at, among other things, a Toys R Us situation like Vornado. [Vornado Realty Trust bought Toys R Us.] Kimco has got a small group of guys who are out there targeting companies that they can buy just to control the real estate.
NREI: A lot of investors in this cycle seem to think the sky is the limit. They’re pay-ing more for retail, and the debt capital is flowing. There is concern over the prospect of rising interest rates, but the 10-year Treasury yield hasn’t really gone up. You wonder if it will lull investors into the false sense that this will never end.
Haddigan: The 10-year Treasury yield was under 4.1% when I checked a few hours ago. So, interest rates haven’t gone up. One of the big issues is whether this trend is cyclical or secular. Will the markets trade differently going forward? You could make a case that there is so much information and that there is such an abundance of capital now crossing geographic barriers seeking yield that was not doing so in the past. There are more price efficiencies being driven into the marketplace across the U.S. Does that speak to a fundamental shift? I still believe that the markets run in cycles. When will the cycle end? I have no idea.
NREI: Do you think that when it ends it may do so in shocking fashion?
Haddigan: I was in L.A. in the late 1980s when it was white hot, and in 1990 when everything stopped. The real estate market just collapsed between 1990and 1994.As an investor and broker, I don’t wish anyone any harm, but I’d love to see the same thing happen again because that shake-up creates opportunities.