January 18, 2019
By Dennis Kaiser
Connect Retail West is just around the corner on Tuesday, January 22, 2019 at The Resort at Pelican Hill in Newport Coast, CA. Leading up to the event, Connect Media asked one of the participants, CBRE’s Philip Voorhees, to share insights on the changes he’s seeing across the retail sector, what advice he has for companies, and the opportunities and challenges he sees ahead in our latest 3 CRE Q&A.
Q: There’s been a tremendous amount of change throughout the retail industry. How have those shifts affected retail investors?
A: For most active retail investors, many of the “big changes” taking place were in play years ago, coming out of the bottom of the last cycle. The shift from retailers selling “stuff” to selling services, light medical, dental and other uses is old news. Accordingly, grocery-anchored “neighborhood” shopping centers selling perishable goods to repeat patrons, and strip centers with food, beverage, service, medical, fitness and alternative retail uses, “internet resistant tenancy,” are very in favor, with limited movement in cap rates and unlevered returns over the past few years. Cap rates are higher, potentially much higher, for power/box shopping centers, and centers without grocers or necessity-focused tenants in secondary and tertiary markets.
Q: How are you advising clients today compared to a year ago?
A: Adjustments in market conditions create opportunities, and when some investors move back, pricing adjusts and others can move in. We presently have a number of listings with tremendous value-add potential, deep discounts to replacement cost and nice going in cap rate yield. Paired with low-cost financing, these opportunities are compelling. With the pullback in the U.S. 10-Year Treasury yield to about 2.7%, we’re advising clients with near-term loan maturities to pursue refinancing strategies now to lock-in rates. Though, our posture was the same last year as the 10 YT was just starting to rise.
Q: What do you see on the horizon for the retail sector in terms of opportunities and challenges?
A: Retail construction and delivery of new product remains very low. The amount of retail per capita will soon be declining, potentially quickly as vacant box spaces are decommissioned to make way for multifamily and self-storage uses. We’re also seeing more medical, health and lifestyle uses entering retail formats. For example, we have a fantastic center with a hospital branch taking over a former soft goods retail space. The tenant has BB-rated credit, and invested more than $10 million in its space. As I’ve said before, this is perhaps the most exciting and dynamic time for retail ever. Retail is here to stay, and more relevant for many consumers than ever.
For comments, questions or concerns, please contact Dennis Kaiser