Situs RERC Retail Market Investment Conditions 2Q 2017

Each quarter, Situs RERC surveys both regional and institutional investors across the nation about investment criteria in their local marketplace and trends across the country. The results are collected, averaged and then included in our quarterly report.

Retail

  • During second quarter 2017, the majority of Situs RERC’s institutional investment survey respondents recommended caution when investing in the retail sector. There was opportunity, but investors should be selective when looking at retail properties.
  • For the retail sector, half of the respondents recommended holding onto regional retail mall and neighborhood/community retail properties. With regard to retail power center properties, half of the respondents said that selling was the best option, while nearly 40 percent of respondents recommended holding onto retail power center properties.
  • During second quarter 2017, Situs RERC’s weighted average required pre-tax yield rate for the overall retail sector increased 10 basis points to 7.7 percent. The overall retail sector weighted average required going-in cap rate increased by 10 basis points to 6.2 percent, while the weighted average required terminal cap rate was stable at 6.6 percent.
  • Situs RERC’s expected rental growth rates for the neighborhood/ community retail, regional retail mall and retail power center sectors decreased to 2.6 percent, 2.7 percent and 2.5 percent, respectively. The expected expense growth rates for the regional retail mall and retail power center sectors were stable at 2.9 percent, while the rate for the neighborhood/community retail sector declined by 10 basis points to 2.8 percent.

Conclusion:

A lot of malls, especially traditional enclosed suburban malls, are becoming obsolete, but people still want to go out and shop. There has been a major shift in the retail sector toward lifestyle centers (e.g., theaters, restaurants, boutique retailers) with an exterior walkable design. Trophy and Class A retail properties are being built or purchased with relatively low rates of return, while Class B and Class C properties are being sold with distinctly higher rates of return. Major retailers are retreating from Class B and Class C locations and investors are factoring risk into the returns. In general, the turmoil in the industry is leading investors toward quality assets.

For more information, please contact Ken Riggs.