Shopping Center Business is the leading monthly business magazine for the retail real estate industry.
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INDUSTRY OVERVIEW 192 • SHOPPING CENTER BUSINESS • May 2017 and tertiary metros still offer unique op- portunities as prices offer a discount from their previous peak and provide cap rates that are often 50 to 100 basis points high- er than primary markets. Tertiary markets are especially gaining traction with inves- tors, evidenced by deal volume nearly doubling in these metros since 2007. Another phenomenon this year will be a push among retail investors and landlords to revise their tenant mix at shopping centers and regional malls to address retailers that maybe hindered by e-commerce. Opportunistic investors in search of upside are also taking initiative to re-tenant vacant spaces formerly occu- pied by big-box brands with a variety of smaller format retailers. While the evolving retail sector provides a number of opportunities for investors and landlords to recognize greater upside, the post-election surge in the 10-year U.S. Treasury sparked a re-evaluation of pric- ing and asset yields, more conservative lender underwriting, and slowed transac- tion velocity in the fourth quarter of 2016. Those trends should continue this year. Although broad-based economic and re- tail-property-sector momentum remains intact, higher lending costs could force a repricing of specific assets, and inves- tors have already started adapting their underwriting models to a rising interest rate environment. Still, debt market liquidity remains elevated, offering investors access to a wide range of capital. Debt sources have maintained disciplined underwriting and are cognizant of changes occurring in the retail sector, thereby reducing market risk and diminishing the prospect of a liquid- ity-induced bubble. Leverage on acquisi- tion loans continues to reflect disciplined underwriting, with LTVs typically ranging from 65 percent to 75 percent for most retail properties. Lenders will continue to scrutinize properties' exposure to un- derperforming chains and vulnerability to e-commerce this year. A potential easing of regulations on financial institutions could liberate additional lending capacity and higher interest rates may encourage additional lender participation. Regarding net-leased assets, investors seeking stable returns will remain fo- cused on single-tenant properties and smaller strip-center properties leased to nationally recognized and credit tenants. Strong investor demand for single-tenant properties has squeezed overall initial returns from 7.9 percent in 2010 to 6.0 percent last year. Although the post-elec- tion interest rate surge last year prompted many investors to reconsider their strate- gies, the low-leverage preferences of net- leased investors tempered the pullback in activity. Still, given the pronounced downward pressure on net-leased asset yields through much of this expansion cycle, a modest elevation of cap rates in response to the rising interest rate climate seems increasingly probable. Ultimately, the popularity of these assets, particularly among investors exchanging out of more management intensive assets, will limit any upward drift in cap rates. SCB Bill Rose is first vice president and national director of Marcus & Millichap's National Retail Group. Master Planning Developmen t Operations Desig n Finance Strategic Planning Site Selection Market Research F essel International is focused on shopping centers, real estate development and the restaurant industries. Our team has over forty years experience in proper planning and programming for shopping centers, real estate development and redevelopment projects. We specialize in: Visit us at www.fessel.com