Troubles in the CMBS market ended up affecting investment sales activity in the third quarter, with retail real estate investors turning their attention back to core assets in primary markets.

During the third quarter, sales of retail properties totaled $8.2 billion, down 46 percent from about $15.2 billion in the second quarter, according to Real Capital Analytics (RCA), a New York City-based research firm. The figure was still ahead of the $6.6 billion in sales closed during the same period a year ago. Blackstone’s $9.2 billion acquisition of Centro Property Group’s portfolio might have skewed overall statistics in the second quarter, but retail sales brokers say acquisition activity has been trending down recently compared to the first half of the year.

In the first and second quarters, greater financing availability and a positive outlook on recovery allowed investors to expand their acquisition criteria from core assets to malls and shopping centers in secondary and tertiary markets, as well as unanchored properties, says Rich Walter, president of Faris Lee Investments, an Irvine, Calif.-based brokerage firm.

As the CMBS market came to a sudden stop this summer, however, investors in properties valued at more than $10 million, for which CMBS is a major source of lending, had to rethink their acquisition strategy. They no longer know if they will be able to secure funding for transactions that involve centers in smaller markets or centers with issues.

"CMBS is starting to re-emerge, but some of the confidence of the market has gone away in terms of financing for tertiary locations,” Walter notes. “Also, what we are seeing is a lack of confidence in the private [investor] market because of the difficulty of where you are going to finance these deals. These investors are very cautious about pulling the trigger and buying anything other than single-tenant, high-credit tenant properties."

The good news is that demand for core retail assets remains high, Walter says. The bad news is that overall sales volume is not likely to show significant improvement before the end of the year.

"It’s going to be more of the same. I don’t see a tremendous amount of confidence emerging," he notes. "However, I see a tremendous amount of opportunity to make a lot of money" for the less risk-averse investors.

Valuation trends

Cap rates in the third quarter reflected investors’ feelings of uncertainty. According to RCA, average cap rates on all retail properties came in at 7.6 percent during the period, roughly in line with the 7.67 percent cap rate recorded in the second quarter. Most of the cap rate compression occurred on transactions involving class-A assets, RCA reports.

Preliminary figures compiled by Richard West, national head of the retail valuation group at brokerage firm CB Richard Ellis, show a similar trend. West’s data shows that national cap rates averaged 8.13 percent in the third quarter, reflecting very little change from 8.14 percent recorded in the second quarter.

"If you look at the numbers, that’s pretty much flat, which has been consistent with what we’ve seen in the last few quarters," West says.

Of particular interest has been the fact that cap rates for institutional grade retail properties in primary markets might have shown a bit of a downward trend, he adds.

"I think that interest may have increased in the infill locations and in primary markets and maybe declined to some degree in the secondary markets," West says.

In fact, there might be 100 basis points to 200 basis points in cap rate difference between product sold in secondary markets and centers in prime locations, according to Bill Rose, national director of the retail group at Marcus & Millichap Real Estate Investment Services, an Encino, Calif.-based brokerage firm. Grocery-anchored centers are particularly popular right now, he adds.