Cap rate compression is causing some concern in the region. With asking prices often out of sync with market fundamentals, Daniel Taub, senior vice president of Pleasanton, Calif.-based Ross Stores, is worried that buyers will not be able to get sufficient returns to justify these purchases. "Rents have not appreciated enough historically in mostto justify lower and lower cap rates," he said.
Taub thinks that lax lending standards are partly to blame. "There is a degradation of discipline in the marketplace because there is so much new, in some cases unsophisticated money, that's compressing cap rates," he notes.
The problem will have the biggest impact on class B and C assets and on markets with less than 100,000, according to Richard Lietz, regional vice president with Tarrytown, N.Y.-based DLC Management. "There, the pressure really makes a retailer re-evaluate the rents because there is not enough return," he said.