Finard & Co. partner William J. Beckeman says grocery-anchored shopping centers remain the top choice of investors.
Apparently, commercial real estate investors have the same instincts as anyone when storm clouds gather – they head to the store.
With office and other property sectors in a prolonged slump, and the stock market showing little indication it can mount a sustained recovery over the near term, retail assets continue to garner attention from capital sources of all sorts, including an increasing focus from institutional groups. Needing to invest their money somewhere but fearful of the fickle economy, investors are seemingly willing to trade lower returns if it means securing a stable asset, according to industry observers.
“Grocery-anchored shopping centers continue to be the No. 1 choice of investors,” acknowledged Finard & Co. partner William J. Beckeman, who oversees the firm’s retail investment sales team. “There’s no dearth of buyers and the pricing continues to get more and more aggressive.”
As one example of the clamor for such product, Beckeman pointed to the recent sale of the Milford Square Shopping Center in Milford, a $5.7 million transaction brokered by Finard Vice President Thomas Blakely. Even at just slightly over 50,000 square feet and with no dominant anchor, the offering generated some 60 requests for information and several actual bids. The complex ultimately was purchased by Key Milford LLC.
The disposition of the Milford property was consummated in a matter of weeks, and indicates just how popular such opportunities can be in the current environment, said Beckeman. “If you have a property you can bring to market, it will get a ton of interest,” he said. Activity has been so solid that recent retail sales have seen capitalization rates in the 8 percent range after previously having averaged 9 percent or more. Spaulding & Slye Senior Vice President James M. Koury, a specialist in retail brokerage, said he has even seen instances where the capitalization rate has dipped into the 7 percent level.
Koury agreed that retail is enjoying a rebirth of late, harkening back to the mid-1990s when investors also clamored for such assets. Not only have power centers been gathering investor momentum after falling out of favor in recent years, Koury said strip centers also have been popular targets. By Spaulding & Slye’s estimates, there were about 30 shopping center sales in New England last year involving properties of 50,000 square feet or more. That total excludes portfolio sales, such as last year’s deal in which Konover traded 36 retail properties in Massachusetts and along the East Coast to a joint venture that included Boston-based Samuels & Assoc.
‘Aggressive’ Tenor
The individual properties tracked by Spaulding & Slye for 2002 each typically traded at $5 million or more, with the overall sales price of the assets averaging $110 per square foot. That rate was about $10 per square foot above the mark seen in 2001, when a similar number of retail properties also changed hands in the region. According to Koury, the average sales price for that property type has climbed steadily in recent years. In 1996, for example, the average was about $60 per square foot, Koury said.
Even with such continued appreciation, Koury said he believes buyers of retail properties are not making irrational decisions. While agreeing that the tenor is “aggressive,” Koury said he has seen little indication of any pricing bubble, or of investors overpaying for a property.
“Nobody is being over exuberant,” he said. “It hasn’t gotten ridiculous.”
Koury, who has been brokering retail assets locally for the past 15 years, said the appreciation in pricing has generally been for the most stable and best-situated properties. Given the recent attention paid to the retail sector, he concurred that there are some owners who unrealistically think an older or poorly positioned asset should also get top dollar. As has been the case in the office market and for other real estate, investors are not as interested in value-added opportunities or risk-taking, Koury explained.
“Some sellers need to realize that the best pricing is for the best locations, but not for all locations,” he said. “Buyers are not going to be paying A prices for B product.”
Koury said he has seen a definite increase in institutional ownership of retail, estimating that the percentage of such ownership is now at about 25 percent. For the most part, however, he said retail remains primarily a privately funded industry, and should continue to be so in the future.
Regardless of the overall profile, retail is expected to see continued capital in the coming year, said Beckeman, although he added the biggest challenge is on the supply end of the equation. Coupled with low interest rates that have spurred refinancing opportunities, owners have more equity in their properties than in the previous down cycle, resulting in far fewer distressed sales. Given the health of that market, owners will only sell if they can reap a substantial return, said Beckeman.
“We’d be selling a lot more [retail assets] if owners would free them up,” he said. “There are far more buyers than there are sellers right now.”
Koury said he is currently working on two deals he hopes to close on within a few months. “By and by, I think we are going to be on par with last year,” he said of 2003.
