The hottest ticket in investment sales throughout 2002 was the grocery-anchored retail plaza, and as 2003 begins, investors continue to look high and low for opportunities to invest their dollars in retail-focused opportunities. While the demand is high, supply is limited not so much by the overall inventory of grocery-anchored retail sites, but by the lack of other tax-deferred revenue-generating investment opportunities.
Why is retail hot? Americans are shoppers and despite the challenging economic and geopolitical times, Americans continue to shop. According to the U.S. Department of Commerce, retail and food services sales for February were $304.1 billion, this is a 2.6 percent increase over February 2002. The total sales from December 2002 through February 2003 were up 1.7 percent from the same period last year. As retail sales are the only real bright spot in the current economic doldrums, this has led to an increased demand by investors for retail complexes and grocery-anchored shopping centers who see these spaces as valuable equity-generating opportunities.
Such was not always the case. Throughout the 1990s, private investors, REITs and institutions went on an incredible suburban-office buying spree, particularly in the Greater Boston market. This buying spree was spurned on by the high-flying high-tech economy, making Class A, R&D and flex space in the suburbs particularly valuable. As vacancy rates reached record lows, demand for quality office buildings among investors increased and the supply began to dry up.
Once the high-tech boom busted however, investors found that they were over-weighted in office product with a vanishing tenant base and little or no demand for sales. Overall vacancy rates in formerly hot markets like Waltham and Burlington reached 32.4 percent and 39.9 percent respectively. This, in turn, has caused many investor groups to begin to look outside of the traditional office market.
With portfolio yields weakening, investors are now looking for opportunities to stabilize their portfolio cash flow. The typical investment group can be categorized as smart investors with a great deal of cash with little or no high-yield buying opportunities in the office market, and portfolios that need to be diversified into stable, cash flowing assets. When combined with the lackluster performance of the Dow Jones and the NASDAQ, retail has become one of the few viable investments with significant potential returns available today.
All is not perfect in the retail world however. Mid-sized and regional chains, such as Lechmere, Ames, Rich’s, Bradlees and Caldor, and even a large-sized chain such as Kmart have been forced into bankruptcy by mismanagement and a strongly competitive environment from such national chains as Target, Wal-Mart and Kohls. Retail space left behind by these rash of bankruptcies in New England has been snatched up not only by the national department stores, but also by such specialty retail companies as Home Depot and BestBuy and regional chains such as Stop & Shop and Shaws. As a result, every quarter in 2002 registered positive absorption despite many of the store closings, according to a report issued by Reis Inc. in January 2003.
This positive absorption can be attributed to several factors. Along with the consumer spending and national retail chain expansion, retail lenders and developers have exercised a great deal of caution in the current economy. This prudence has slowed the amount of new construction in the retail segment, keeping the potential supply low. According to Reis, construction fell to just under 18.6 million square feet. That is down 28 percent from 2001.
New England has actually created an opportunity for the best national retailers like Target, Kohl’s, Home Depot and WalMart to either enter or fortify their position in the market.
Grocery-anchored shopping centers in suburban markets routinely boast occupancy rates greater than 95 percent. These high occupancy rates are the rule and not the exception. In fact, the top 48 U.S retail markets finished 2002 without the rise in vacancy rates or the declining rental rates that have been seen in the office sector, according to the Reis report. The combination of strong national and regional/local tenants and generally healthy occupancy rates provide investors with the stability they are looking for in a strong investment.
Owners of retail property are currently in a quandary. Currently, their properties are valued higher than in years past. For example, in 2001 the Festival of Hyannis, a grocery-anchored shopping center on Cape Cod, sold for $26.2 million. A year later, with no capital improvements and no new tenants or lease extensions in the shopping center, it sold for $28.5 million. Since 1996 the average cap rate for grocery-anchored centers decreased from 12 percent to close to 9 percent. The price per square foot for the same type of center increased from $63 to $114.
Unfortunately, selling the retail centers has become a challenge for the ownership because of the lack of opportunities to defer taxes by buying other property with similar kinds of returns. With the weak office market and other retail properties also priced high, owners have few options for investing the money from a sale of their shopping center or plaza. As a result, owners are choosing not to sell their property, but instead reap the returns of their investment. This accounts for the fact that despite the currently high valuations of retail plazas, there were no retail sales closed in the first quarter of 2003.
As a result of the limited supply of suburban shopping centers, buyers have started targeting urban and smaller – less than $5 million – suburban retail properties in an effort to widen the potential opportunities to purchase.
It’s likely that the demand for suburban retail plazas will begin to cool and the supply will again return to a more normal level. However, this is not likely to occur for at least another 18 to 24 months, ensuring that owners of grocery-anchored retail plazas are certain to get top dollar for their property, should they choose to sell.
