It’s May, and that means one thing in the commercial real estate world: turning its attention to Las Vegas to see what happens at ICSC’s RECon show and what that portends for the industry at large.
Although the conference focuses on retail real estate, it’s so large and has so many key players attending that it sets a broader tone for our industry. Spirits are higher than they have been in years, with ICSC anticipating more attendees. The show, having taken up less square footage at the Las Vegas Convention Center recently, is expanding again.
What’s got everyone so optimistic is that across the board you can see things improving. Even though U.S. GDP growth is not exactly torrid, it’s relatively better than in many other nations. Moreover, the economy has added jobs for 18 straight months and counting. While the pace is not as brisk as it needs to be to make up for the millions of jobs lost during the Great Recession, the unemployment rate has slowly trickled downwards.
Corporations, too, are doing well. Sitting on a mountain of cash with high profitability levels and goosed by high productivity rates, they have largely been restored to pre-Recession levels. That’s not translated into as much demand for space in the industrial and office sectors as some would like, but gradual improvement is apparent across the country.
Moreover, capital markets continue to improve. As our 21st Annual Top Lenders ranking indicates, many of the biggest players increased originations by impressive margins from 2010 to 2011. Anecdotally, even more capital is available so far in 2012, especially as the CMBS sector continues its slow reemergence. And conditions are gradually easing, meaning better loan-to-value ratios and loans priced at tighter spreads. With interest rates still at all-time lows, the cost of capital is low. And with the Federal Reserve talking of keeping the benchmark federal funds rate at zero percent for a couple more years, the low-interest rate environment will persist for the foreseeable future.
As a result, investment sales volumes are also climbing. Ever since the credit crisis gripped the industry, the dominant narrative has been that financing is only available for the best assets in the best markets. This is where trading of assets has occurred. And it’s pushed prices on those assets increasingly higher and cap rates lower.
Today, lenders and investors—in search of greater yields—have increased their tolerance for risk. And that means we’re beginning to see more action lower down the quality spectrum. It’s making for a more robust investment sales scene as more value-add and opportunistic deals take place and as more class-B and class-C assets trade hands.
When it comes to the retail sector in particular—the whole reason we all trek to Vegas for this annual ritual—interesting trends abound. On the investment sales front, the REITs that dominate the sector continue to focus more on dispositions than acquisitions. Our list of the Top Owners of retail real estate shows that many of the top players have smaller portfolios than a year ago.
On the leasing side, meanwhile, demand is rising and the vacancy rates on most retail formats has stabilized and even begun falling for some sectors.
And there are secular changes afoot as well.
The sector is becoming increasingly globalized. International retailers continue to penetrate the U.S. while America’s most successful chains are building their presence abroad as well. The ownership of retail real estate is internationalizing as well. That’s why another ICSC event, the Retail Real Estate World Summit taking place in Shanghai in September, will be a key conference in 2012.
Additionally, the continued rise of e-commerce and m-commerce is having subtle effects on how traditional bricks-and-mortar retailers operate. It’s changing their merchandising strategies. And on the supply chain side many are building Internet fulfillment operations to supplement their traditional distribution channels.
In all, tracking these trends and seeing how they affect the mood in Vegas should be fascinating. We’ll see you there.