The investment sales market for retail properties appears to be in roughly the same place as it was a year ago—with eager investors hoping to buy core assets, but settling for secondary markets and value-add opportunities.

There is no question that both private and institutional investors want to buy real estate today, according to RECon 2013 attendees. The combination of low interest rates, limited new supply of new product and improving sales comps make stabilized retail assets a fool-proof play. But asset availability is limited and competition is fierce. There are no trophy malls coming up for sale in the U.S. any time soon, according to Aaron L. Ahlburn, senior vice president and Americas director of research for industry and retail with Jones Lang LaSalle.

“It’s been a continuing story of interest in core assets,” he says. “There is not any product available, so people are going to secondary and tertiary markets. But the center has to have the right demographics, with population growth and a [strong] labor market.”

Among the smaller markets investors currently find palatable are Denver, Atlanta and Nashville, to name a few.

There is also more interest in value-add opportunities than there has been in the years immediately following the recession.

Core multi-tenant shopping centers now attract as many as 100 qualified bidders, according to Richard J. Kuhle, president of Phoenix-based investment and development firm Vestar. As a result, Vestar, which likes to buy properties that are dominant in their trade region, has been focusing on value-add opportunities, where the pool of potential bidders is 10 times smaller.

“We are also seeing a lot of activity on value-add,” notes Mark Keschl, national director of the retail services group with Colliers International. That has been a true for some time, but “where the change has been is that some institutional players who were looking only at stabilized assets, are now looking at opportunities where they can add value,” he says.

Andrew Graiser, co-president of Melville, N.Y.-based A&G Realty, also says that value-add plays might be the best investment bet right now. "The values right now are so high, it's really got to be opportunistic." 

Too hot?

Another notable consequence of investors’ high degree of interest in core assets has been the sharp increase in values on those properties. When it comes to the best multi-tenant centers and the most coveted triple net leased stores, values are now higher than they were during the boom, according to Neill Kelly, president of DJM Realty, a Gordon Brothers company that offers consulting and advisory services to retailers.

What’s more, “we don’t see that trend decreasing—we see further cap rate compression. There is a lot of buyer demand,” says Colliers’ Keschl.

That's also the view taken by Paul Barile, director of the investment services group with Transwestern. "I never thought I'd say this, but I think interest rates are going to stay low for a long time and cap rates will go lower," he notes.

While there is virtually no new retail supply coming on the market, that shouldn’t present a problem, according to specialists with the capital markets group at Jones Lang LaSalle. But new development is on the table again and Kelly wonders what’s going to happen when interest rates inevitably rise.

“If you are buying a McDonald’s at 4.5 percent, when those other barometers creep up, you’ll be upside down,” he notes. “That is not a natural return on property.”