Plaza 114 in Lawrence, a 103,000-square-foot community shopping center, was sold a few weeks ago to a private buyer for $10.3 million.
Recession-proof retail? As incongruous as that concept might appear, seemingly akin to a Galbraithian Catch 22, many observers insist that retail has been one of the few bright spots during the country’s latest economic tailspin.
“The consumers never really went away,” William J. Beckeman, head of the investment sales division at Burlington-based Finard & Co, said in an interview last week. “Retail continues to be very strong.”
Figures released last month by Boston-based Property and Portfolio Research would seem to bear that out. Store-based sales rose 5.2 percent in March, with consumers especially focused on discounters, PPR Chief Executive Officer Susan Hudson-Wilson told a gathering of the National Association of Realtors in Washington, D.C. Hudson-Wilson reported that consumer demographics look positive for the next eight years, with an increase in the number of people aged 45 to 54 expected to keep demand for retail space solid throughout that period.
Beckeman and other commercial property sales specialists say interest in buying retail assets has been equally buoyant, with that sector much preferred over hospitality and office product, and even competing with multifamily for the top spot on investor shopping lists. Ironically, however, New England has not seen a spurt of retail sales in 2002, said Beckeman, largely because existing owners are not motivated to trade in the current environment.
“There is lots of buyer interest, but very few willing sellers,” he said. Beckeman just returned from the annual International Council of Shopping Centers trade show in Las Vegas, and said he was amazed at the din of investors clamoring to acquire retail assets. “It could be a great opportunity to sell right now,” he said, but thus far, the message does not seem to be reaching retail owners.
The situation represents a role reversal of sorts, according to the Summer 2002 Retail Investment Outlook produced by Grubb & Ellis. The overview notes that, prior to the recession, many investors ignored shopping centers in favor of office, multifamily and industrial opportunities. Some of the reasons cited included “cutthroat competition among retailers,” lower returns than that garnered from other property types and lingering concerns over the impact the Internet might have over so-called brick-and-mortar shopping offerings. Almost overnight, however, it appears those concerns have all but disappeared.
“Retail is finally getting some respect,” said James M. Koury, a senior vice president at Spaulding & Slye Colliers whose investment team focuses on brokering retail properties. “Everybody is trying to get into the game.”
Koury lists five reasons why retail is gaining popularity, including a soft office market and stock market, providing fewer options for investors. Historically low interest rates are driving investors to seek areas to place their money, as are a number of well-heeled investment vehicles that need to get the funds out. Combined with the lack of product available, it all adds up to impressive pricing for retail assets.
“I’ve never seen buyers so aggressive in pricing,” said Koury, who has brokered retail properties for the past 17 years. Although it is still primarily a sector dominated by private owners, institutional investors are keying in on grocery-anchored shopping centers, with location a primary drawing card. Regional malls are also in demand, Grubb & Ellis adds, while Class B locations are being targeted primarily by value-added investors looking to revitalize tired or poorly positioned retail centers. Capitalization rates have remained relatively constant for retail transactions, with average cap rates for all retail investment sales ending the first quarter at 9.3 percent. That is essentially where it has been for the past three years, according to Grubb & Ellis, although top-performing grocery-anchored centers have even seen cap rates dip to the low 8 percent range.
‘Huge Issue’
Locally, Grubb & Ellis estimates that retail rents are down about 10 percent this year, but adds that is significantly better than the discounts seen for office space. Boston ranked in the top 10 out of 48 markets in two Grubb & Ellis surveys, both of which focus on deals being done in new, grocery-anchored neighborhood shopping centers. The Hub ranks eighth for so-called in-line shop space of 5,000 to 15,000 square feet, and ninth for junior anchor space, that being 15,000 to 40,000 square feet. For in-line space, Boston averaged $25 per square foot, triple net, while junior anchor space was averaging $18 per square foot, triple net.
Such results offer compelling reasons to buy into the market, but Beckeman said there are a number of factors limiting retail property sales. Not only do owners also recognize the encouraging performance of the market, the lack of commercial properties on the market makes it difficult to reinvest the proceeds of a sale into other commercial assets. If a seller does not acquire another property upon trading theirs, the tax consequences could be daunting.
“The tax exchange issue is a huge issue for anyone who is going to be a seller,” said Beckeman. “They don’t want to give the government 20 percent to 30 percent of their [sales price], so they may just [choose] to keep getting income from the property until conditions get better.”
Koury agreed that the tax issue has been a roadblock for owners in selling their retail assets, but added he is beginning to see more sale opportunities beginning to roll out, partly due to the bidding frenzy among buyers. “This has been a bit of a slow period, but I think we may be seeing more product hitting the market,” he said. Currently, for example, Koury and partner Geoff Millerd have $150 million either on the block or under agreement, and Koury said the two are evaluating a similar amount from owners who are beginning to test the waters.
Among the Spaulding & Slye-brokered properties working their way through the pipeline is Plaza 114 in Lawrence, a 103,000-square-foot community shopping center that closed a few weeks ago to a private buyer for $10.3 million. In a redevelopment deal, another buyer recently closed on Brockton South in Brockton, a 126,000-square-foot center that traded for $5.2 million. Meanwhile, Twin City Plaza in Somerville was recently placed under agreement, with the Shaw’s-anchored, 269,000-square-foot complex fetching approximately $100 per square foot.
One barometer of retail’s success has been the willingness among buyers to seek a variety of product types. At present, for example, Koury and Millerd are close to completing the sale of the Village Shops in Salem, N.H., a power center. Although that asset is considered “a diamond in the rough,” Koury said it is telling that a power center, a concept that has fallen out of favor in recent years, would attract interest.
“The retail profile really doesn’t matter right now,” Koury said. “A year ago, you couldn’t find anybody to buy a power center, but they are now getting a much stronger look.”
